Earnings Call Transcript - OTIS Q1 2023

Operator, Operator

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 Rednor, Senior Director of Investor Relations.

Michael Rednor, Senior Director of Investor Relations

Thank you. Welcome to Otis' First Quarter 2023 Earnings Conference Call. Joining me today are Judy Marks, Chair, CEO and President; and Anurag Maheshwari, Executive Vice President and CFO. Please note that unless stated otherwise, we will discuss results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures is available in the appendix of the webcast. We also want to remind listeners that the presentation includes forward-looking statements that carry certain risks and uncertainties. Details on important factors that could cause actual results to differ materially can be found in Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q. With that, I'll turn the call over to Judy.

Judy Marks, Chair, CEO and President

Thank you, Mike, and thank you all for joining us. We hope everyone listening is safe and well. Starting with first quarter highlights, Otis delivered a solid first quarter to start 2023, achieving strong financial performance and executing on our capital allocation strategy despite ongoing market uncertainty. We experienced organic sales growth driven by our service business and expanded adjusted service operating profit margins by 40 basis points, resulting in mid-single-digit adjusted EPS growth. Our Service segment performance, alongside our maintenance portfolio growth of over 4%, reinforces the strength of our business model. We continue executing our balanced capital allocation strategy with $175 million in share repurchases during the first quarter. Recently, we announced a 17.2% increase in our quarterly dividend. Since our spin-off, we have increased our dividend by 70%, which highlights our commitment to disciplined capital management and delivering value to our shareholders. In the Americas, building on our excellent track record of executing major projects and providing services across Canada, Otis was chosen by the Montreal Metro System to replace escalators at 17 stations and supply units for 5 new blue line stations. In total, 97 Otis escalators will keep metro passengers moving daily. In China, FA Metro placed a new order for 250 Otis ONE connected escalators and elevators across 3 new lines. Features like real-time data insights, remote monitoring, and predictive maintenance will help advance the FA Metro while expanding our growing infrastructure installed base. In Germany, Otis has been selected by Cigna Group to modernize the iconic Dusseldorf Department Store, Carsch Haus, as part of a larger renovation, providing 17 units that include energy-efficient link escalators and Gen2 stream elevators with regenerative drives. The elevators will also feature in-car e-view displays. After the modernization is completed in 2024, Otis will service the units through a long-term framework contract with Cigna Group, which operates Carsch Haus and other leading department stores in Germany. In South Korea, we are supplying 51 of our Gen2 elevators for the Sunshine luxury apartment complex, which consists of over 2,000 units in buildings rising up to 29 stories. We also continue to advance our ESG goals, as outlined in our 2022 ESG report published earlier this month where we announced the installation of solar panels at our Nippon Otis Logistics and Engineering Center in Japan. This upgrade is expected to cut greenhouse gas emissions at the facility by 27% compared to 2022 and marks our eighth manufacturing site globally to have solar panel arrays. Moving to our Q1 results and 2023 outlook, new equipment orders increased by 7.4%, led by substantial growth in the Americas and Asia Pacific, with an adjusted backlog up 10% at constant currency by the end of the quarter. We are gaining market share in new equipment with a 70 basis point improvement in the quarter, primarily driven by our strong performance in China where our orders experienced a modest decline in a market we estimate to be down around 10%. Our performance across all other regions continues to be strong. We are particularly encouraged by our modernization performance in the quarter with nearly 30% order growth fueled by strong results in the Americas and Asia. This growth stems from our ongoing rollout of standardized packages for our modernization offerings and improvements in our sales force coverage. Our modernization backlog is up double digits in all regions as demand remains robust. Organic sales grew by 3.6%, and adjusted operating profit increased by $7 million at constant currency, driven by our Service segment. Before I discuss our 2023 financial outlook, I want to briefly update you on our global market outlook, which has largely remained stable. At the beginning of the year, we anticipated global new equipment to decrease by mid-single digits to approximately 900,000 units, mainly due to a projected decline of 5% to 10% in China, and our outlook for that key region has not changed. We still expect Asia Pacific to grow by mid-single digits or better, and we now expect the Americas and EMEA to be flat. After examining the first quarter, we now forecast Asia Pacific to approach high single digits, balancing a reduction in our EMEA outlook, which we now expect to decline by low to mid-single digits. Our expectations for global installed base growth remain unchanged at around 5%, which will add nearly 1 million maintenance units, elevating the installed base to approximately 21 million units with high-single-digit growth in Asia and low-single-digit growth in the Americas and EMEA. Turning to Otis' financial outlook for 2023, we now project net sales will fall between $13.9 billion and $14.2 billion, representing a 2.5% to 4.5% increase from the prior year, which is a 75-basis-point improvement from our previous outlook at the midpoint, influenced by foreign exchange. We still expect organic sales to rise by 4% to 6%, with new equipment growth at 3% to 5% and Service growth at 5% to 7%. Adjusted operating profit is anticipated to increase between $90 million and $150 million at actual currency and between $130 million and $175 million at constant currency, with adjusted EPS projected to range from $3.40 to $3.50, marking a 7% to 10% increase from the previous year and an approximate $0.03 improvement from the prior midpoint outlook. We expect free cash flow to align with our February guidance, in the range of $1.5 billion to $1.55 billion, with 105% to 115% conversion of GAAP net income. We maintain our disciplined capital allocation strategy, returning the majority of our cash generation to shareholders through dividends and share repurchases, while also advancing our bolt-on M&A initiatives to enhance our expanding maintenance portfolio. With that, I will now turn it over to Anurag to provide a deeper look into our Q1 results and full-year outlook.

Anurag Maheshwari, Executive Vice President and CFO

Thank you, Judy. Starting with first quarter results on Slide 5. We delivered net sales of $3.3 billion, with organic sales up 3.6%. This represents our tenth 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 reproductivity 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 Zardoya transaction offsets the $0.04 of foreign exchange headwind. Moving to Slide 6. Q1 new equipment orders were up 7.4%, led by Asia Pacific and the Americas, up 27% and 15%, respectively, with modest growth of 1 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. Our 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 7. 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 high teens portfolio growth. Modernization orders grew nearly 30%, our third consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of our mod packages, and good momentum in proposal activity from improved sales coverage. Our modernization business continues to perform well across all regions, with backlog up 13% at constant currency. Service organic sales of 6.3% were 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 8 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 $0.03 increase in adjusted EPS at the midpoint. Our 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 use of cash of roughly $125 million, largely due to payables. We expect this to unwind as we execute on our 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% and Service up 5% to 7%, driving total Otis organic sales growth of 4% to 6% 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 our 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 lower tax rate. The continued strong growth in our Service segment, coupled with pricing and commodity tailwinds, and 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 our 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.

Jeffrey Sprague, Analyst

I have just a couple of quick questions. First, regarding modifications, I noticed that Schindler mentioned the weakness in modifications last week, while you and your team are reporting strength. Mod work has often been viewed as somewhat discretionary. Could you provide some insights into what is driving this strength? How do you see visibility beyond the current orders you've received? Additionally, is there any pent-up demand for modifications that may still be lingering from the delays we experienced during COVID?

Judy Marks, Chair, CEO and President

The modular business is showing sustained and increasing opportunities. This is driven by macro factors; 7 million of the 20 million units worldwide are over 20 years old. There's also some influence from pent-up demand due to delays during COVID, but significantly, there's a growing awareness that elevators are aging. We have a strong repair book as many customers have delayed modernization and are now making important decisions. Globally, we've seen an uptick in modular services across all four regions, with a strong order book this quarter showing a 29% increase, and our backlog is up 13%. This trend is likely to continue, not just from quarter to quarter but year-over-year as modular opportunities expand. On a more specific level, I'd like to share a story highlighting both discretionary choices and rational decisions being made by our customers. In North America, we have hydraulic units that are almost 25 years old, with some parts becoming obsolete. We've reached out to our customers—many of whom have just one unit and can't afford to have it shut down due to lack of available parts. We offered a digital marketing campaign proposing a pre-planned, scheduled service at a fixed price to prevent shutdowns and extend the life of their elevators. The response has been excellent. So, while aging units contribute to the modernization need, there is also a significant opportunity being created, and we expect this momentum to keep growing over time.

Jeffrey Sprague, Analyst

Great. And just on the growth in service units, great to see, and you're kind of checking the box there on 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?

Judy Marks, Chair, CEO and President

Yes. We had growth across the board. So all 4 regions grew. China had its seventh straight quarter, it grew high-teens but seventh straight quarter high-teens growth. So Asia-Pac and China up more significantly than the mature markets which we would say is probably low-single.

Operator, Operator

And our next question comes from Steve Tusa of Morgan Stanley.

Steve Tusa, Analyst

Yes, sorry. Can you guys maybe just talk about how you're looking at the China market now and maybe just the sequential trends on earnings into the second half of the year? And anything moving around at all on you guys?

Judy Marks, Chair, CEO and President

Thanks, Steve. We fully recognize JPMorgan. Let me be clear: I recently had the opportunity to visit China and spent 10 days there late last month and early this month. It was a personal experience, and I gained insights into the economy during my time in the four cities I visited alongside our colleagues. The economy is in a state of recovery, and I believe it is well-positioned for further economic development. This is evident from my conversations with government officials and customers, and I anticipate a strong recovery in the second half of the year. The government is supportive of recovery through policies like mortgage rate adjustments. Initially, we expected a market decline of 10%, but we have only seen a 3% decrease in orders, indicating a clear market share gain for Sally and her team in China. The strength observed in the first quarter, particularly in infrastructure and industrial sectors, remains promising, despite some weakness in residential and commercial markets. I'm optimistic about the market recovery and the overall health of our business. We've seen significant progress over the COVID years, especially in automation and Industry 4.0 in our factories, and our new product introductions have been well received by customers. After meeting our agents and distributors, I have a positive outlook on China's recovery in the second half of the year. We will be keeping an eye on the second quarter to determine when that inflection point will occur, but all signs indicate a positive trend for recovery in China moving forward.

Steve Tusa, Analyst

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

Judy Marks, Chair, CEO and President

Yes. So as we shared last quarter, we said China would be down 10% of the market. Americas 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 digits.

Steve Tusa, Analyst

Okay.

Judy Marks, Chair, CEO and President

And I will Anurag answer the second part.

Anurag Maheshwari, Executive Vice President and CFO

Yes, Steve. Just on the sequential earnings into the second half of the year, so second half, we have to grow EPS after about $0.25; $0.05 of that will come from tax because we do face a headwind of $0.05 in quarter 2 because we had a big benefit in quarter 2 of last year. That unwinds in the second half of the year. So that will give us $0.05. So the $0.20 that we have to grow is about $120 million operationally we are growing service at about in the first quarter $40 million. So that run rate kind of continues into the second half of the year at a 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 1 new equipment was kind of flattish. Quarter 2 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.

Operator, Operator

Our next question comes from Nigel Coe of Wolfe Research.

Nigel Coe, Analyst

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

Judy Marks, Chair, CEO and President

Yes. So kudos to Jim and the team, I mean, the Americas after a really strong '22 to come in up 15% this quarter and 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 the Americas itself, the year is playing out as we thought it would. Non-residential 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 will 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.

Nigel Coe, Analyst

Great insights. Regarding China, your remarks were very constructive. Pricing is down slightly, but it remained relatively stable throughout 2022. What gives you confidence that pricing won't face further decline in China? Additionally, when you mention an inflection in the second half of the year, are we expecting to see a return to positive year-over-year growth in orders, or is there potential for further decline in the second half?

Judy Marks, Chair, CEO and President

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. Not to say there's not a bid or 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, and 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 commodity coming down, but part of that is through great supply chain management, negotiation, and our engineering team continuing to take cost 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.

Anurag Maheshwari, Executive Vice President and CFO

Yes. The two main factors we focus on are pricing/cost and market share within our segments. Currently, we are managing these aspects effectively. The market remains disciplined, and we are committed to monitoring it closely. Regarding orders, the market experienced a decline in the first quarter, and we project it may decrease by 5% to 10% for the year. However, we expect market conditions to improve in the second half of the year compared to last year's low figures. Additionally, we anticipate an increase in orders from China during the latter half of the year, while we will maintain our current strategy and feel optimistic about the orders from China in that timeframe.

Nigel Coe, Analyst

Okay.

Judy Marks, Chair, CEO and President

Yes. Nigel, the only thing I’ll add is our relationships and our length of those relationships with our 2,200 agents and distributors continues to mature. And we do expect those to yield 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.

Operator, Operator

And our next question comes from Julian Mitchell of Barclays.

Julian Mitchell, Analyst

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? How should we think about those EMEA orders playing out over the balance of this year? And I suppose 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 or even with a softer new equipment market there, the service price should hold up?

Judy Marks, Chair, CEO and President

Thanks, Julian. We're now anticipating that EMEA will experience low to mid-single digit declines. We're closely monitoring rates and their impact on building permits and starts. In the first quarter, our team in Southern Europe performed exceptionally well, with Spain and Italy showing great resilience. However, we did observe some weakness in Germany and the U.K., while the Middle East experienced low single digit growth. It’s a mixed picture, and we will keep an eye on it. Reflecting on key metrics, we saw a 3.5-point increase in like-for-like service pricing last quarter, with our European business growing in the mid-single digits. Bernardo and the team have successfully implemented price increases, supported by inflationary clauses, and this is encouraging as many of our European service contracts come due in the first half of the year, particularly in the first quarter. Additionally, we don’t see former construction workers transitioning into independent service providers due to their absence in the labor market, with Spain and other areas in Western Europe showing relatively low unemployment. The situation has changed with the introduction of Otis One; having connected elevators makes it challenging for independent providers to start or expand their business. All of this indicates a different landscape in Europe. Nevertheless, we are being cautious by projecting low to mid-single digit declines for the year.

Julian Mitchell, Analyst

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've given back in January for the year ahead. So just wondered if that's just some extra detail? Did you see something change in your outlook for those 2 items for 2023? And how we're thinking about those 2 items as you go through the year?

Anurag Maheshwari, Executive Vice President and CFO

Thank you for your question, Julian. In February, when we provided guidance, we detailed each segment, including New Equipment and Service. At that time, we pointed out mix and churn as one of the challenges we faced. We have now consolidated that information into the current chart. Our perspective has remained consistent since the start of the year. When we discuss mix and churn, on the New Equipment side, the mix is influenced by regional performance, particularly as China is our most profitable market for New Equipment margins, while other markets are experiencing faster growth. We have established a strong backlog and captured significant market share, but this is due to a combination of volume and major projects. While these large projects enhance our portfolio stickiness, they yield lower New Equipment margins. Thus, the regional and project mix in New Equipment remains unchanged from what we discussed previously. The same trends apply to Service, with China growing at a faster pace. Churn primarily relates to cancellation units, which tend to carry slightly higher margins. Our outlook here hasn’t changed. Regarding labor and wage inflation, our negotiations have been progressing quite positively. We anticipated a low to mid-single-digit increase in most European markets, and this is how it is unfolding. In terms of materials, if we take a step back to evaluate price against gross costs, including mix and churn, we estimate being about $75 million positive for the year. This figure would account for half of the operating profit reflected in our presentation, considering the impact of price adjustments against material and labor inflation along with mix and churn.

Operator, Operator

And our next question comes from Jack Ayers of Cowen.

Jack Ayers, Analyst

This is Jack on for Gautam. 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 monetization orders up 29%. It seems extremely strong, which is encouraging. And then just piggybacking off that last comment, just the 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 mix sort of churn perspective? Just any color there around Service would be really helpful.

Judy Marks, Chair, CEO and President

Jack, yes, modernization. Let me emphasize my previous point, which is that it will continue to contribute to our business. The market will grow, not only quarter-over-quarter but also year-over-year as more units age based on their service dates. Out of 20 million units, 7 million are over 20 years old. Therefore, you can expect the modernization market to remain strong and likely become more appealing. We are focused on engaging customers with kits that enhance productivity while providing them with quicker modernization solutions. You will see more discussions around modernization, along with insights from our new equipment strategy and our efforts to grow market share effectively. By combining our service excellence with the productivity improvements we’ve achieved, we believe we can approach the modernization market successfully in a growing landscape, which we anticipate will positively impact us for an extended period.

Operator, Operator

One moment for our next question. Our next question comes from Nick Housden of RBC.

Nick Housden, Analyst

I think you mentioned maintenance pricing was at about 3.5% like-for-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% is a reflection of the agreements that you had last year. So if you could provide some color on that, that would be helpful.

Judy Marks, Chair, CEO and President

Yes. Nick. Go ahead. Go ahead.

Anurag Maheshwari, Executive Vice President and CFO

Yes. Thank you for the question, Nick. I am very encouraged by our strong start in quarter 1 with a 3.5% like-for-like increase. As Judy mentioned, Europe is experiencing mid-single digit growth. This is one of the highest price increases we have seen in Europe in some time, and it's climbing because others are pushing prices up as well. Moving into Q2, we will have more units coming up for renegotiation, so we expect to see further growth from the 3.5%. Overall, we previously guided for an increase of 3.5% to 4% for the full year. Mix and churn will account for about 200 to 250 basis points, leading to approximately 1.5% net. Currently, we feel confident about achieving 150 basis points of pricing adjustments for the rest of the year, factoring in mix considerations.

Judy Marks, Chair, CEO and President

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

Nick Housden, Analyst

Great. That's very helpful. Then my second question, sticking with Service. Great to see that you're up to 4.2% unit growth. So that's been accelerating pretty much for 3 years at this point. You mentioned that the market is growing at about 5%, about 1 million units on a $20 million installed base. So 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?

Judy Marks, Chair, CEO and President

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'll deal with that mix challenge as we get it. But yes, we can and should be closing that gap.

Anurag Maheshwari, Executive Vice President and CFO

Yes. To elaborate, not long ago, we were growing at 1%. The team recognized that as a call to action and focused on improvement. We increased our growth to 4.1% and then 4.2%, and we believe we can close the gap further. We've gained some solid new equipment share, which will be integrated into our conversion cycle. Our conversion rates are improving, and we will continue to utilize IoT to maintain high retention rates. By leveraging conversion and retention, we aim to achieve mid-single-digit growth while ensuring we also uphold profitability. Eventually, you will see margins returning to absolute profit growth, which is our goal.

Operator, Operator

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

Judy Marks, Chair, CEO and President

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.

Operator, Operator

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