Earnings Call Transcript
Otis Worldwide Corp (OTIS)
Earnings Call Transcript - OTIS Q2 2021
Operator, Operator
Good morning and welcome to Otis’ Second Quarter 2021 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 will now turn the call over to Michael Rednor, Senior Director of Investor Relations.
Michael Rednor, Senior Director of Investor Relations
Thank you, Angie. Welcome to Otis’ Second Quarter 2021 Earnings Conference Call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Rahul Ghai, Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted, the Company will speak to results from continuing operations, excluding restructuring and significant non-recurring items. The Company will also refer to adjusted results where adjustments were made as though Otis was a standalone Company in the current period and prior year. 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. With that, I'd like to turn the call over to Judy.
Judy Marks, President and CEO
Thank you, Mike, and thank you everyone for joining us. We hope that everyone listening is safe and well. Before we get into the quarter, I'd like to congratulate Mike on his new role leading Investor Relations, and thanks Stacy for all the great work getting us to this point. We look forward to seeing you both excel in your new positions. Otis delivered an excellent second quarter closing out a strong first half. This included mid-teens organic sales growth, demonstrating the resiliency of our colleagues and business, and our ability to execute on our long-term strategy. Overall, demand in the New Equipment segment was strong. We gained about 1 point of New Equipment share with orders up approximately 24%, in a market that was up low-teens. New Equipment orders grew in all regions and were particularly strong in the Americas, up nearly 50%, with an over four times increase in major project bookings versus the prior year. These orders will support customer projects throughout North America. For example, in Canada, Otis secured an order to outfit a luxury high-rise condominium building in the M City community with several elevators, including custom cab interiors that fit the building’s upscale design. Moving to service, we grew sales in all lines of business, including repair and modernization. Modernization demand was strong with orders up mid-teens versus the prior year. This includes another Otis partnership with Silverstein Properties in the Americas, where we will modernize more than 40 elevators in the U.S. Bank Tower in Los Angeles and integrate Compass 360 and Otis’ eCall app to allow for more seamless customer and tenant access to the building services. The demonstrated strength of the Maintenance business continues, and we achieved 3% growth year-over-year on our industry-leading service portfolio, a key goal we set for ourselves entering this year. We drove profit growth and margin expansion in both segments, largely from the benefit of higher volume as New Equipment and service organic sales grew about 25% and 8% respectively. Since the spin, our consistent performance reflects the power of our strategy and its implementation. I hope many of you were able to join us for 'Welcome To Tomorrow,' where we shared our Gen3 and Gen360 highly innovative platforms that meet the current and future needs of our customers in an increasingly connected world. Gen3 builds upon the proven flat belt technology of Otis’ best-selling Gen2 platform, while adding built-in Otis ONE IoT connectivity and a variety of options such as eCall, eView, Compass dispatching systems, health solutions, and updated aesthetics. APIs allow us to access and leverage data with analytics that drive value for our customers. Upon release, Otis secured an order for more than 100 Gen3 elevators for a new residential project in the Jilin Province in Northeast China. In EMEA, after successful pilots in several countries, Otis officially launched Gen360, a next-generation, digitally native platform that includes all the features of the Gen3 elevator, built around an all-new electronic architecture in a more compact design. Gen360 is enabled with IoT capabilities and online tools; a connected passenger experience, and additional safety features to help limit entrapments and enable maintenance from inside the elevator cab. In France, Otis was selected to outfit a future aquatic center in the Paris suburbs, with the Gen360 ecosystem. In addition to its many digital, safety, and passenger benefits, this platform has a decisive advantage. For the first time, we can eliminate the need to accommodate hoistway projection onto the roof, avoiding interfering with the building's architectural lines, a feature desirable to architects and building owners. All of this strong first-half performance, including robust free cash flow generation in excess of 150% of net income enables us to return additional cash to shareholders. In the second quarter, we completed the previously planned $0.5 billion in share repurchases ahead of schedule and are now in a position to increase our 2021 target to $750 million. In parallel with a strong financial performance, we continue to make progress on our ESG initiatives that are integral to bringing our vision to life. In May, we released additional long-term ESG goals aligning with our four ESG commitments: health and safety, people and communities, environment and impact, and governance and accountability. During the quarter, we made progress on our goal to meet ISO 14001 certification standards in all of our factories. Otis’ manufacturing facility in Brazil became the latest to achieve this certification, meaning nearly 90% of our factories are now ISO 14001 certified. This is part of our ongoing work to operate more sustainably. Initiatives in the factory include implementation of rainwater and water reuse systems, LED lighting to reduce energy consumption by more than two-thirds, and improvements to shipping and packaging materials to reduce waste by approximately 800 tons annually. In Paris, we introduced electric vehicles into our fleet and we'll be expanding this pilot over the coming months. Early feedback from our field professionals has been positive and the program will continue to contribute to our CO2 emission reduction targets. Moving to Social. One year ago, in response to the urgent problems of social unrest and entrenched racism, we announced our commitment to change, a framework to ensure all colleagues feel safe, welcome, and heard. While there's still work to be done, I'm proud of the progress we've made on this initiative over the past year. Actions taken include engaging all supervisors worldwide in a training program designed to help them mitigate unconscious bias, increasing access to employee assistance and wellness programs globally, launching our Made to Move Communities signature STEM education program, and awarding not-for-profit grants to communities in each region that support diversity, equity, and inclusion programs. And in June, we began our second annual Season of Safety, reinforcing Otis' strong safety culture, recommitting to our life-saving cardinal rules and prioritizing ongoing training on safety procedures and protocols. We remain committed to a zero-harm workplace. Now, turning to Slide 4, second quarter results and 2021 outlook. In addition to record new equipment bookings in the second quarter, total Otis orders were up 9.4% on a rolling 12-month basis. Organic sales were up 15.4% in the second quarter with 25.4% organic growth in the New Equipment segment and 7.8% organic growth in the Service segment. Adjusted operating profit was up $115 million and margin expanded 40 basis points despite a 60 basis point impact from segment mix, as the New Equipment business grew faster than the higher-margin Service business. Free cash flow was robust at $493 million, with 151% conversion of GAAP net income. This positive momentum, our continued progress on our long-term strategy, and the pace of recovery in our end markets give us confidence to improve our 2021 outlook across all key metrics. We now expect sales to be in a range of $14.1 billion to $14.2 billion, up 10.5% to 11% versus the prior year, and up 7.5% to 8% organically. Adjusted operating profit is expected to be in a range of $2.16 billion to $2.18 billion, up $240 million to $260 million at actual currency, and up $170 million to $190 million at constant currency. We're improving adjusted EPS by $0.10 at the midpoint versus the prior outlook and now expect it to be in a range of $2.89 to $2.93, a 15% to 16% increase versus the prior year. Lastly, we're improving our free cash flow outlook to a range of $1.45 billion to $1.5 billion, with about a 120% conversion of GAAP net income. With that, I'll turn it over to Rahul to walk through our Q2 results and 2021 outlook in more detail.
Rahul Ghai, CFO
Thank you, Judy. And good morning, everyone. Starting with second quarter results on Slide 5. Net sales grew 22.2% to $3.7 billion as the strong growth momentum continued in New Equipment and Service grew for the second consecutive quarter. Adjusted operating profit was up approximately 25% or $115 million, and up $80 million at constant currency, primarily from the benefit of higher volume in both segments. Favorable service pricing and productivity initiatives in both New Equipment and Service helped offset the headwinds from commodity inflation and the absence of temporary cost actions taken last year to absorb the impact from COVID-19. We maintained the focus on cost containment, while continuing to invest in the business, and adjusted SG&A was down 60 basis points as a percentage of sales despite the step-up in public Company expenses. R&D spend and other strategic investments were up approximately $8 million versus prior year, and were about flat as a percentage of sales. This strong focus on execution resulted in 40 basis points of margin expansion in the quarter, and a full point of margin expansion at constant segment mix. Second quarter adjusted EPS was up 41%, or $0.23, driven primarily from $0.18 of operating profit growth and $0.06 from a lower adjusted tax rate. Moving to Slide 6. New Equipment orders were up 23.9% at constant currency with growth in all regions. Orders momentum continued in the Americas and EMEA, up approximately 47% and 19% respectively, as the markets recovered and the investments made by Otis continued to deliver. Orders in Asia were up approximately 17%. And we're up for the fifth consecutive quarter, including strength in China, where the orders were up mid-teens with record bookings during the quarter. Pricing was down 60 basis points, similar to the first quarter. Organic sales were up 25.4%, with Americas and EMEA up mid 30s, driven by strong backlog execution, as the business continues to progress towards pre-COVID levels. Asia was up mid-teens, driven by China where organic sales are up double-digits. Despite strong sales, there was broad-based growth in backlog that was up 10% and up 5% at constant currency. With backlog margin down about half a point, versus prior year including any adverse product mix impact. New Equipment adjusted operating profit was up $64 million primarily driven by higher volume. The strong year-over-year improvement in installation execution and continued focus on material productivity helped offset the unfavorable impact from price mix and commodity inflation. Adjusted operating profit margin expanded 2 percentage points. Service segment results on Slide 7. Year-over-year growth in the number of units under maintenance contract accelerated to 3%, reflecting strong global improvement in retention, recapture, and conversion rates versus prior year. The number of units increased in all regions, and China was up mid-teens after a high single-digit growth in 2020. Modernization orders were strong in the quarter, up 16.8% at constant currency as North America and Europe grew double-digits, a sharp rebound after a decline in 2020. Modernization backlog was up 4% at constant currency, providing a foundation for sales growth in the subsequent quarters. Service organic sales were up 7.8%, with growth in all lines of business. Growth accelerated in Maintenance and Repair to 7.5% from a strong recovery in repair, due to contractual maintenance remaining resilient. Modernization sales were up 9.3% from continued momentum in Asia Pacific and China, and pick up of activity in EMEA. Adjusted operating profit grew $55 million from higher volume and improved pricing, including favorability from the absence of price concessions made last year. Translational FX benefit of $24 million was more than offset by incremental public Company expenses and the snapback of COVID-related cost containment actions taken in the prior year. Adjusted operating profit margin expanded for the sixth consecutive quarter and was up 10 basis points. Overall, the first-half results reflect solid performance across all metrics, with 1.5 percentage points of New Equipment share gain, 13% organic sales growth, and close to $200 million of adjusted operating profit growth. First-half New Equipment and Service organic sales were up 25.3% and 4.5% respectively, with margin expansion in both segments. Free cash flow generation was robust at $1 billion, enabling us to raise dividends and complete a debt repayment and previously announced $500 million of share buyback. As we look forward to the second half of 2021 on Slide 8, we feel confident about growth across all key metrics, given higher backlog, growth momentum in all lines of business, and our focus on operational excellence. This, combined with strengthening demand in our end markets and strong first-half results, gives us confidence to raise organic sales outlook to be up 7.5% to 8% for the year, up 275 basis points versus prior outlook. We now expect adjusted operating profit to grow $240 million to $260 million, up from $55 million in the prior outlook at the midpoint, with sales growth, operating profit growth, and margin expansion in both segments. Adjusted EPS is expected in a range of $2.89 to $2.93, $0.10 higher than prior outlook, and up 15% versus the prior year at the midpoint. The year-over-year EPS increase is driven by strong operating profit growth, a 140 basis point reduction in the adjusted tax rate that is now expected to be 29% for the year, from 29.5% in the prior outlook and a reduced share count. Following the strong cash generation in the first half from net income growth and close to $300 million of reduction in working capital from the end of the year, we now expect free cash flow for the year to be in the range of $1.45 billion to $1.5 billion. This is $75 million higher than prior outlook at the midpoint, from improved net income and better working capital performance. Given the improved free cash flow outlook and the success in repatriation of foreign cash, we are increasing the share buyback target for 2021 to $750 million. In addition, we will continue our bolt-on M&A activities and are always open to other opportunistic investments that can create value for our customers and shareholders. Taking a further look at the organic sales outlook on Slide 9, the New Equipment business is projected to be up 12% to 13%, from 7.5% to 8.5% previously, driven by accelerated backlog conversion and continued recovery in the construction activity in several countries. This 450-basis-point increase from the prior outlook includes improved expectations in all regions. EMEA is now expected to be up high single-digits, and we expect low-teens growth in the Americas and Asia driven by China. We're also improving our service outlook by 125 basis points at the midpoint, now expected to be up 4% to 4.5%. This reflects improvement in maintenance and repair, that is now expected to be up 3.5% to 4.5% from maintenance portfolio growth and stronger discretionary repair demand. The modernization business is now expected to be up mid-single-digits, driven by higher Q2 ending backlog. Overall, the Organic Sales outlook of 7.5% to 8%, reflects growth across all regions and all lines of business. Switching to operating profit on Slide 10. We now expect operating profits to be up $240 to $260 million versus the prior year, including FX tailwind of approximately $70 million from strengthening of their MB, and other currencies against the U.S. dollar. At constant currency, operating profit is expected to be up a $170 to $190 million. Total Company margin is projected to improve by 30 basis points. This outlook reflects the benefits of higher volume, service, material and installation productivity initiatives, and favorable service pricing. It is partially offset by unfavorable New Equipment price mix, headwinds from incremental standalone expenses, and higher commodity prices. The commodity headwind for the year is now expected to be $70 to $80 million for the year, approximately $35 million to $40 million higher than what we communicated in April as metal prices have stayed at an elevated level. Despite this incremental headwind, we are improving our earnings outlook for the business by approximately $55 million with the improvement in both segments. And to help alleviate the incremental commodity cost impact this year and in 2022, we are broadening the price increases announced last quarter to include additional markets. This outlook is not only a sharp turnaround from 2020, but also puts us more than $1 billion ahead of 2019 reported revenue, with 100 basis points of margin expansion. 2021 revenue, earnings, and margins in both New Equipment and Service segments are expected to be higher than 2019. This improvement reflects our confidence in long-term strategy, ability to execute, and the benefits of a solid end market recovery. And with that, may I request Angie to please open the line for questions.
Michael Rednor, Senior Director of Investor Relations
Angie, can we take the first question?
Operator, Operator
Jeff, your line is open. Please state your question.
Jeff Sprague, Analyst
Hi, it's Jeff Sprague at Vertical Research. I have two questions. Good morning, everyone. First, regarding the revenue outlook, Judy or Rahul, you mentioned an accelerated backlog conversion. I'm curious how that's affecting the top line since the guidance suggests revenues might decrease slightly in the second half compared to Q2. Could you provide some insight into what's happening with the backlog and your thoughts on the conversion?
Judy Marks, President and CEO
Good morning, Jeff. We are very satisfied with the backlog conversion we've experienced in the first half of the year. It was slower in 2020, but the comparisons for this quarter were favorable, and our team performed exceptionally well. The comparisons will become more challenging, but with our orders increasing significantly by 23.9% and our backlog up by 5%, we are not falling behind; we are delivering more for our customers and increasing our backlog. However, as mentioned, the comparisons are expected to get tougher. If you remember, the second half of last year saw stronger growth in both the Americas and EMEA, especially in the fourth quarter. Therefore, we anticipate maintaining similar momentum, although the comparisons will indeed be more difficult.
Jeff Sprague, Analyst
Sure. And then as you noted in your setup and down the line, things are just better than you are expecting and better than certainly the initial Analyst Day early last year. Maybe you can give us some thoughts, an updated outlook and longer-range plans. I wonder if you could give us a sneak peek on what you're thinking about in terms of timing or magnitude and on any of these particular metrics, particularly around margins and growth?
Judy Marks, President and CEO
Yes. Jeff, when we held Investor Day in February of 2020, we presented ourselves as a new independent company, while already dealing with the early impacts of COVID in China. At that time, we were uncertain about the mid-term outlook we shared. However, we had strong performance in 2020 and 2021. EPS increased by nearly 13% in 2020, and our updated guidance at the midpoint indicates a 15% increase this year. We initially discussed high single-digit growth for the mid-term outlook, and we will revisit that as we approach the second half of this year. We expect to provide more details, likely early in 2022, along with a revised mid-term outlook across all metrics. The end markets are looking more positive, and if you check Slide 19 in the backup, you'll see that when comparing adjusted operating profit and organic revenue against 2019, 2020, and 2021, the 2021 outlook significantly outperforms all metrics compared to 2019. Rahul and I have some work to do on that, and we will update you early in 2022.
Jeff Sprague, Analyst
Great. Thanks a lot. Appreciate it.
Operator, Operator
Your next question comes from the line of Nick Housden with RBC Capital Markets.
Nicholas Housden, Analyst
Hi, everyone. Thank you for taking my questions. My first one, excuse me, is just looking at the guidance upgrades. And my sense is that the underlying assumptions for H2 haven't really changed. The raise is more just a reflection of the strong Q2 results. Is that a fair assessment of the situation?
Rahul Ghai, CFO
I think that's a reasonable point. Good morning, Nick. As Judith mentioned in her response, when comparing the first half of the year to the second half, we definitely face tougher comparisons in both New Equipment and Service. In the first half of last year, New Equipment was down about 10%, but we saw a slight increase in the second half of 2020. Service was particularly weak in Q2 last year, and while Q3 and Q4 were down too, they weren't as challenging as Q2. As we look ahead to 2021, New Equipment growth is expected to slow down, while Service is expected to maintain a consistent performance, up around 4% to 4.5% in both halves. On the earnings side, the second half will reflect changes in volume growth expectations and some additional commodity challenges that will impact us more in the latter part of the year. However, our productivity initiatives are paying off, and we've improved installation execution, which helps us navigate various issues, especially those related to commodities. In the second half, we expect our earnings to continue to grow, with margins expanding in both segments. Specifically, we're looking at about a 10 basis point increase in New Equipment margins for the second half and a 90 basis point increase overall for the year. In Service, we anticipate a margin expansion of around 40 to 50 basis points in the second half, and about 40 basis points for the full year. Overall, we believe the second half looks solid, even with the tougher comparisons and slightly different market conditions.
Judy Marks, President and CEO
Yes, Nick. It's Judith. I would like to add to Rahul's points. We are also working to offset some one-time support, including government assistance from 2020, which will benefit us in the second half of the year. We have observed that, for the second quarter, both Repair and Modernization revenues and orders have increased. This reassures us on the Service side and leads to a 40 basis point margin expansion for the full year in that segment. When considering the new guidance, even with the anticipated second half adjustments and our efforts to mitigate the $70 million to $80 million impact from raw materials and commodity challenges, we are looking at a positive outcome. Our profit is expected to increase by $240 million, and our earnings per share will rise by 15%, even when accounting for those challenges, higher stand-alone costs, and an additional quarter of interest expense. This follows a robust 2020, during which we grew both operating profit and earnings per share. For us, it's about growth on growth, and we believe our colleagues understand that this is our guiding principle and strategy.
Nicholas Housden, Analyst
Thanks. And then if I can just add on to that, I mean listening both to your results today and to your competitors last week, it almost feels like you've been taken by surprise by the strength that we've seen in Q2. I'm just wondering when you look at this strength, are there any areas where you feel like it's unsustainable either in particular business lines or particular geographies or anything that should give us a reason to think that there may be a bit more risk in H2 and into 2022?
Judy Marks, President and CEO
Not really, Nick. I mean, the Americas got off to a better start than we expected. The market's up mid-single-digits. EMEA was stable in '20, and we expect low-to-mid single-digit growth in '21, and we're seeing that. We still are watching Asia Pacific, ex-China, because there are still, obviously, India is coming back, but Singapore is in lockdown and several other Southeast Asian countries are in lockdown. So, we’re watching that with caution, and thinking about our colleagues and customers there, but you really know no surprises. The second half on Service, EMEA and Americas are going to continue on a low-single digit. And the New Equipment market is going to continue to feed our Service market. Having the portfolio where we did for the first time at 3% and the backlog up 5% on New Equipment is really what gives us the confidence to drive the sales, and then the orders execution, we haven't seen real drastic changes in the end markets that would give us pause.
Nicholas Housden, Analyst
Okay. Great. Thanks very much, guys.
Judith Marks, President and CEO
Thanks, Nick.
Operator, Operator
Your next question comes from the line of John Walsh with Credit Suisse.
John Walsh, Analyst
Hi, good morning.
Judith Marks, President and CEO
Morning, John.
John Walsh, Analyst
Maybe a question as it relates to price cost. Appreciate all the color earlier around that equation. Wanted to dive a little bit into China. One of the things that we had picked up is, it seems like there are several OEMs trying to get a price in China as we look forward in the back half of the year. Is that something you're seeing? Do you have any plans, any color you can give there on the pricing dynamic on the ground in China?
Judith Marks, President and CEO
Yeah. Sure, John. As Rahul mentioned, one of the three strategies we have to offset the commodity headwinds we're facing is a more broad-based price increase. We started this last quarter very focused in a few countries, and now it will be more broad-based and go across all of our regions. We always look at this in terms of what the market can bear and how the competitors respond. In China, the top 10 OEMs have 90% of the market segment. We heard the same thing you did last week about people raising prices. We are doing similar, but obviously we'll tailor it to the segments in China where we think we can get price and not give up share as well. We're really pleased with China results so far as we came through the quarter. Record orders in the mid-teens, so very pleased with that. Double-digit sales, and the team grew our portfolio mid-teens. We gained share. We think we grew faster than the market. And even if China becomes more stable versus the high single-digit growth we saw in the segment in the first half, it will still be a growth segment. The segment will be a growth for the year, and it will certainly be growth for Otis.
Rahul Ghai, CFO
Just to add to that, John, part of the reason why we feel okay about our situation in China is if you look at the flows rate under construction, that's up more than 10% over last year and 13% over 2019. And the real estate investment in China is up 15%, so there's a lot of activity happening in China. We feel that the overall market growth in China has gone up from mid-single digits when we started the year to maybe mid-single digits plus. And now we think it's high single-digit. The market's definitely growing, and that gives us incremental ability to pass on a little bit of price in China.
John Walsh, Analyst
Thank you for that. I have a question about digital. Are you seeing an increase in customers adopting paid digital services, or is it more about the cost-benefit of upgrading to a digital service? I'm interested in what you are observing regarding customers' acceptance and willingness to use these services.
Judith Marks, President and CEO
Our strategy has been to enhance productivity while providing value to customers by managing the deployment of Otis ONE units. This approach allows us to leverage route density and other productivity measures. Customers gain visibility into this process. We are beginning to see interest in our Otis ONE subscription services, though it is still early. We are confident in this direction, which is why our Gen3 and Gen360 models are digitally enabled with Otis ONE. The IoT capabilities are integrated, and we are now shipping units with Otis ONE pre-installed. This setup provides a solid foundation for over-the-air updates to enhance features and value. While it's still early in the process, we have noticed some customer engagement, although it hasn't yet translated into significant revenue.
John Walsh, Analyst
Great. Thank you.
Steve Tusa, Analyst
Hey, guys, good morning.
Rahul Ghai, CFO
Good morning, Steve.
Judith Marks, President and CEO
Hi, Steve.
Steve Tusa, Analyst
Just a question on the margins again. What do you expect the price to be for this year, and that lever to offset the commodity costs? And then when you look out to the next couple of years, is there any bump in the road when it comes to margins? And ultimately, you guys are performing well here. Is there a potential for a higher entitlement back to where you were before, way back when, in the good old days?
Judith Marks, President and CEO
Steve, I’ll begin and then hand it over to Rahul. With the recent price increases, the order to revenue cycle varies across different regions. Some countries benefit from these increases sooner than others. The price increases we initiated last quarter will start impacting revenues later this year. The increases implemented in July will begin to show results by the end of this year, but most of what we have put in place is designed to protect us throughout the first half and, more importantly, the second half of 2022. While it has been targeted, we are also focusing on driving productivity in installation through our ongoing service productivity initiatives and technology investments. We see significant opportunities for continued improvements in installation productivity. Additionally, our material productivity in the factories hasn’t slowed down; we’ve been achieving a 3% gain every quarter, and we expect this to further help offset challenges, which is reflected in our outlook. Now, I'll turn it over to Rahul to add his thoughts on returning to previous performance levels.
Rahul Ghai, CFO
It's still early, Steve. Judith touched on this earlier, and we are very pleased with the progress made over the past couple of years since Investor Day. Between 2020 and 2021, we achieved more than 100 basis points of margin expansion, which reflects significant progress and a good return to growth. Our numbers exceed 2019 levels, and even though margins may not be where we want them, we are confident in our absolute profit dollars. Revenue is likely $3 to $4 billion higher than it was in 2010 or 2011. While margins might be lower, we are approaching those absolute profit metrics. I haven't reviewed the AFX numbers from that time, but it feels relevant, and it’s an important measure for us. We will keep working hard, as we are doing everything necessary in the business and feel we have good momentum. As Judy noted earlier, we will update our medium-term guidance early next year.
Steve Tusa, Analyst
It was 20%. I can send you the number just in case you don't have it. Lastly, regarding the 3% units under maintenance, what was the primary factor influencing that? You had some good new unit deliveries. Could you provide an update on attrition and recapture?
Rahul Ghai, CFO
The numbers continue to improve across all metrics, Steve. Conversion rates are up, including in China. They are moving towards our 60% target. As we've mentioned before, we anticipate a significant improvement this year in China regarding conversion rates, and we are making progress. The recapture rates are also improving in China, where we see the greatest potential, and retention rates are on the rise as well. Overall, we are seeing positive advancements in all three metrics. As always, we will provide an annual update on our end-of-year results. There has been an improvement in all three metrics for Otis overall, and in China, we are observing strong progress in portfolio growth, with unit numbers increasing in all regions. Overall, we are experiencing positive momentum in the Service portfolio.
Judith Marks, President and CEO
Our retention rate is still at 94% at the round. We can't go up and we certainly, with those actions, wouldn't go down.
Steve Tusa, Analyst
And that 3% unit growth can translate into something a bit higher on the revenue side, right? That's my last question.
Rahul Ghai, CFO
Yeah, absolutely. And if you look at the Service pricing overall, Service pricing has continued to track well. In a part of that, we reflected that in our guide as well. Service pricing continues to track well. The concessions have come down to terminal levels overall. And this high inflationary environment that we're seeing should help us on service pricing. Because most of our contracts in Europe and Americas, have price escalators built-in. They're largely tied to labor inflation. And historically, we've always had that lever, but given the low inflationary environment in the macro market, the prices don't always stick. And now with this inflationary environment, we should have a greater ability to stick to those prices. That should help next year.
Great. Thanks a lot, guys. Appreciate it., Analyst
Great. Thanks a lot, guys. Appreciate it.
Operator, Operator
Your next question comes from the line of Cai von Rumohr with Cowen.
Cai von Rumohr, Analyst
Yes. Thanks so much. To follow up on Steve's question, maybe give us a little bit more color on the 3% service growth. You mentioned China mid-teens, but where was it elsewhere? And give us maybe a little more color also in terms of the conversion and the recapture rates.
Rahul Ghai, CFO
It was broad-based growth, Cai. I mean, Asia Pacific, that's our next biggest opportunity in terms of portfolio growth because that had some developing markets, so that clearly continues to add to our portfolio count as well. Asia Pacific, I would say would be number 2. And then Americas and Europe are obviously more mature markets, so the portfolio growth is lower compared to the other two regions. But again, all regions grew their portfolio. Cai, so that is obviously very, very good. And you see the overall growth accelerated. And as I said in response to an earlier question, I think that all three metrics improved. So we've seen good improvement. Our recapture rates are better, conversion rates continue to edge up. And obviously, China is the main driver there. We made a meaningful step in the right direction. And retention rates have, again, I'm repeating myself, but it just continues to improve. And every little bit helps because we've got, obviously, on 2.1 million units, every 10 basis points helps. And that was up year-over-year, the retention was up year-over-year.
Judith Marks, President and CEO
Cai, I want to clarify a nuance that many people might overlook. As we carry out modernizations, many of these projects are initially off our portfolio, but we reintegrate them through the Modernization process, making them part of our portfolio moving forward. Modernization orders increased by double digits in the Americas, EMEA, and China, contributing to a 17% growth overall. The modernization business is recovering well, particularly in the post-pandemic phase. Some of this increase is due to pent-up demand, but a significant factor is that elevators are aging; many are now over a year to a year and a half old. There are nearly 6 million elevators that are over 20 years old. While not all of them are in our service portfolio, modernization presents an opportunity to not only reclaim them but also to perform upgrades and initiate the service cycle, bringing them into our portfolio.
Cai von Rumohr, Analyst
Great, thanks. And then in terms of rollout of IoT and connectivity, I think your target was 100,000 units. Can you maybe update us there?
Judith Marks, President and CEO
We are on track for the year and expect to finish with at least 100,000 units. Our factories have started shipping, and we have new orders for Gen3, our IoT-enabled platform, available in all regions except EMEA, where we are rolling out Gen360, which is also IoT-enabled. We are fully committed to this transition, and our field professionals are embracing Otis ONE. I've heard several positive personal stories from Chicago and surrounding areas about how this initiative is reducing entrapment and enhancing customer satisfaction by allowing us to proactively repair elevator parts before any shutdown occurs. This initiative is being positively received internally, which is crucial for building momentum. Our field professionals truly appreciate it, and we've managed to reduce installation time to just a few minutes for each unit. The Connected Elevator is a reality, and Otis ONE serves as the foundational platform for this future.
Cai von Rumohr, Analyst
Terrific. Last one. You added to your sales force last year and you added agents in China. Can you maybe update us in terms of what you're doing there?
Judith Marks, President and CEO
In this quarter, we added 150 net, bringing our total to 2,150. We are continuously refining our approach. While you may not notice the same pace of growth, we are carefully evaluating our personnel to ensure optimal performance. For the second consecutive quarter, we have gained market share in Tier 1 and Tier 2 cities, which were previously underperforming for us, and we are also gaining traction with key accounts in China. Our agent distributor network is proving effective. Rahul mentioned our SG&A efforts, which have seen a reduction of 60 basis points this quarter. Although our SG&A expenses have increased in dollar terms due to our investments in the sales area, we are continuing to bolster our sales resources in targeted markets, focusing on key segments and underserved areas in various countries around the world. Our teams are executing well as we aim to reduce G&A while increasing revenue. We are committed to enhancing our sales coverage, whether through direct sales personnel in specific regions or via our agents and distributors.
Rahul Ghai, CFO
We've added about 100 salespeople this year. Between last year and the first half of this year, our sales force has increased by around 6%. This is a positive development. Additionally, our digital marketing efforts are yielding significant results. Our digital sales and bookings have doubled compared to the first half of last year. This reflects that our success comes not only from having more personnel but also from an effective digital strategy.
Cai von Rumohr, Analyst
Terrific. Thank you very much.
Operator, Operator
Your next question comes from the line of Julian Mitchell with Barclays.
Julian Mitchell, Analyst
Hi, good morning.
Rahul Ghai, CFO
Good morning, Julian.
Judith Marks, President and CEO
Hi, Julian.
Julian Mitchell, Analyst
Maybe you just want to clarify on the pricing commentary, because you talked about prices going up more recently, prices going up into next year as well. But there was a comment at the beginning of the prepared remarks about the pricing down 60 bps. So maybe I misheard that, but just wanted to sort of try and square. Was the down 60 a sort of lagging backlog number net or something? And then when we're looking forward to the gross and net price that starts to swing more positively?
Rahul Ghai, CFO
No, Julian. You understood it correctly. Both statements are accurate. Pricing was down in the quarter, similar to what we experienced in Q1. The price increases we implemented in Q2 were targeted in specific countries, and we were very cautious since it was early in the year and we weren't certain about the market recoveries. These price increases were carefully considered. We hope to see the benefits of this in the second half of the year. We expect the absolute dollar terms of pricing headwinds to be lower in the second half compared to the first half, which should help. We also applied incremental price increases in additional markets globally due to better market recovery than anticipated. The Americas are now expected to grow in the mid-to-high single digits, a significant increase compared to the slight growth projected at the start of the year. China is expected to see higher growth as well. Markets are moving in the right direction, which boosts our confidence that they can handle these price increases. This broader price increase should reflect positively in our numbers, particularly in 2022, with more impact anticipated in the second half of the year. Therefore, both statements are accurate, as the 60 basis points price decline observed in the quarter was mainly influenced by the quotes we issued last year.
Judith Marks, President and CEO
And Julian, from our $17 billion of remaining performance obligations, 89% of that is expected to be recognized as revenue in the next 24 months. This provides us time for productivity initiatives and learning curves on that backlog, as well as benefiting from the backlog margin. Looking at this quarter's performance, there was an increase of 2 points in New Equipment compared to our bids from 6 to 20 months ago, which demonstrates our ability to drive those learning curves and enhance productivity.
Julian Mitchell, Analyst
Very helpful. Thank you. And just my second question around capital deployment, and I don't know if that's come up yet in the Q&A. I noticed the decent share buyback increase. Clearly, the very high and stable cash flow levels mean you have a lot of scope for capital deployment beyond this year. Just wondered how you're seeing the M&A environment right now. There is an opportunity to go out there and buy up a lot of service providers locally in different regions, for example. Just wondered how appealing doing that systematically on a large scale would be?
Judith Marks, President and CEO
We concluded the quarter with $1.9 billion in cash on our balance sheet, which is more than we need to operate our business. We are continuing to focus on our negative net working capital. Our strategy includes small service company acquisitions, targeting $50 million to $70 million annually, as we discussed at Investor Day. A key challenge is ensuring these companies are ready for sale. We have a promising list of potential targets, but it requires the owners to be willing to sell and for the acquisitions to align with our goals, ensuring they are accretive and enhancing our operational density. Many of these transactions are private, so not all are reported, but our efforts are vigorous and ongoing. We are open to all merger and acquisition opportunities and continue to evaluate them as they arise. A year and a half ago, we had to manage debt repayment, initiate our dividend, and we had no stock buyback program. Currently, we have repaid debt to what we consider an appropriate level, with our net debt to EBITDA ratio around 1.7, which we view as healthy. Last quarter, we increased our dividend, and we've expanded our share buyback program. Initially, we didn’t plan to do buybacks this year, but we announced $300 million at the beginning of the year, followed by $500 million last quarter, and are now increasing it to $750 million. We are committed to enhancing shareholder value and are ready to pursue M&A opportunities as they arise.
Julian Mitchell, Analyst
Fantastic. Thanks very much.
Michael Rednor, Senior Director of Investor Relations
Thanks, Julian.
Judith Marks, President and CEO
Thanks, Julian.
Operator, Operator
Your next question comes from the line of Nigel Coe with Wolfe Research.
Nigel Coe, Analyst
Thanks. Good morning. Thanks for the question. We've covered a lot of ground already, but I want to go back to the 3% unit growth in maintenance units. That's a pretty big number. Do you think you can maintain that level of growth in units? And what I'm trying to drive at here is, if you do volume growth of that level with price, maybe an acquisition or two, and then maybe if digital starts hitting and getting traction, then we could be looking at well north of 5% service growth. I'm just wondering if that is how you view the world as well. But the main question is, do you think 3% can be sustained?
Judy Marks, President and CEO
I appreciate your assessment of our business. We believe we can sustain the growth we've achieved. Setting a 3% growth target this year was significant for us, as we haven't reached that level in the last ten years. This growth is crucial because our service constitutes 80% of our profits, and it positively impacts the 5% growth you mentioned. We recognized the need to expand our portfolio in China, where the service market is growing rapidly, and in emerging markets like India and Southeast Asia. Our team has embraced this approach, and we're pleased to report we've reached 3% this quarter, up from 2% last year and rounding to 1% in 2019. We have a strategic plan to execute this goal, focusing on improving performance, driving conversions, enhancing customer retention, minimizing cancellations, and delighting our customers. We're also adding a digital layer, specifically through IoT, which increases customer engagement and retention. Our initiatives like eCall and the Compass Dispatch System are set to enhance our services. I'm particularly excited about our Gen3 and Gen360 architecture, which will support our growth. Overall, I think we're on the right track, and I believe this growth is sustainable.
Nigel Coe, Analyst
Thanks, Judy. It was great. Regarding the buyback uplift, I know that the cash flow around the organization hasn't been optimized. Are we now in a position where we've improved the cash flow globally? Also, any thoughts on tax optimization strategies would be appreciated.
Rahul Ghai, CFO
On tax, we are making progress. We have reduced our tax rate to 29% from 29.5% previously and down from 30.4% last year, resulting in a 140 basis point reduction. This is a positive direction, and our medium-term guidance remains in the 25% to 28% range as we continue to work towards that goal. You can expect to see ongoing improvements in 2022 and 2023. Regarding repatriation, the additional $250 million we are able to repatriate reflects the efforts of our teams exploring various strategies to bring cash back to the U.S., where we can invest it. This demonstrates that we are on the right track, but it's a continuous process. We need to keep pushing, as we are building our cash reserves offshore and need to regularly consider how to bring it back to the U.S. This will be an ongoing focus for us.
Nigel Coe, Analyst
All right. Thanks very much.
Rahul Ghai, CFO
Thanks, Nigel.
Operator, Operator
At this time, there are no further questions. I would like to turn the floor back to Ms. Marks for any additional or closing remarks.
Judy Marks, President and CEO
Thanks, Angie. This solid first half of 2021 demonstrates the resiliency of our business, the strength of our strategy, and our ability to execute and innovate. I'm confident that this positive momentum, the dedication of our colleagues, and the pace of recovery in our end markets positions us well to deliver on the improved 2021 outlook. Looking forward to the second half of the year, we'll remain focused on driving value for our customers, colleagues, communities, and shareholders. Thank you for joining us today, and please stay safe and well.
Operator, Operator
This concludes today's conference call. You may now disconnect your lines at this time.