Otis Worldwide Corp
NYSE:OTIS
Earnings Call Analysis
Q3-2023 Analysis
Otis Worldwide Corp
Otis has shown resilience and adaptability in a global market that presents its fair share of economic uncertainties. Despite variable conditions affecting new equipment sales, especially in China, the company delivered a commendable performance powered by its service segment. Service revenue outperformed expectations, reporting an 8.4% increase in organic sales growth, with notable contributions from maintenance and repair (up 8.6%) and modernization (up 7.6%). Surging ahead, Otis's modernization backlog rose by 15%, indicating robust demand in this sector.
Looking ahead, Otis is optimistic, bolstering its adjusted earnings per share (EPS) forecast to a growth of 11% or $3.52, reflecting an uptick primarily due to operational excellence and lower-than-anticipated tax rates. Alongside this, investors can take solace in the company's strong cash flow management, with an expected $1.5 billion in free cash flow poised for distribution through significant dividends and share repurchases — a testament to Otis's shareholder-friendly policies.
In an environment where many competitors are struggling to stay afloat, Otis is navigating with an increase in operating efficiency, translating into a noteworthy margin expansion. The service segment adjusted operating profit margin saw an encouraging increase of 90 basis points, reaching 24.8%. Margins in new equipment and services are both projected to rise, with overall operating margins expected to achieve a 30 basis point uplift to 16%. These margin enhancements underline the company's efficient operations and pricing strategies.
Regionally, Otis has had varied performance across the globe. In particular, the Asia Pacific region steamed ahead with low-teens growth, spurred by impressive showings in India and major project wins. The Americas and EMEA also saw high-single-digit growth. Nevertheless, the company has revised its new equipment organic sales growth prospects down to roughly 3%, factoring in the headwinds predominantly from a slower Chinese market, expected to contract mid-single-digits. However, the strength seen in maintenance and repair enables Otis to adjust its service organic sales expectations upwards to approximately 7.5%. These mixed regional influences reveal Otis's ability to capitalize on growth opportunities while mitigating risks in softer markets.
Closing the outlook on a forward-thinking note, Otis's exceptional year-to-date performance and strategic focus on areas within its control have laid a solid foundation poised for success in 2024 and the subsequent years. The company ends the fiscal period on a positive note, expressing the confidence to uphold a strong EPS trajectory in the upcoming fourth quarter, thus affirming its readiness for sustained performance despite the uncertain macroeconomic climate.
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Good morning, and welcome to Otis' Third 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 would now like to turn the conference over to Michael Rednor, Senior Director of Investor Relations. Please go ahead.
Thank you, Michelle. Welcome to Otis' Third Quarter 2023 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Anurag Maheshwari, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring item. 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 thank you, everyone, for joining us. We hope that everyone listening is safe and well. Starting with Q3 highlights on Slide 3. Otis achieved strong results in the third quarter, marking 9 months of solid execution in 2023. We grew organic sales 5.2%, with growth in both segments, expanded operating profit margin 60 basis points and achieved 19% adjusted EPS growth.
This marks the 11th consecutive quarter of Service organic sales growth and the 15th quarter where our Service operating profit margin has expanded, demonstrating the consistency in our execution and the strength of our strategy. With our fourth consecutive quarter of maintenance portfolio growth above 4% and backlog growth in both new equipment and modernization, we have set ourselves up nicely for the future.
Last quarter, we announced the launch of our Gen3 core elevator in North America. And in the third quarter, we sold our first units. This new product addresses the needs of our customers in the 2- to 6-story building segment, the largest by volume in North America. We also continued to drive progress toward our ESG commitments. For the second year in a row, we achieved a gold rating from EcoVadis, ranking us within the top 5% of all assessed companies.
We're also proud to have been named by Newsweek as one of the world's most trustworthy companies and one of America's greenest companies. Let me share a few customer highlights from the third quarter. In British Columbia, Otis is providing 7 SkyRise and 8 Gen3 Edge elevators for South Yards, a mixed-use development by Anthem properties. South Yards will include more than 2,500 residential units and over 60,000 square feet of retail and office space, surrounding a 1-acre community park.
In Hong Kong SAR, were supplied 47 Gen3 units to enhance access to more than 30 elevated walkways. These elevators will provide improved accessibility for the aging population and people with disabilities, a key part of Hong Kong's universal accessibilities initiative. Construction is expected to be complete in July of 2026.
In Saudi Arabia, we secured a contract to modernize 18 elevators at the Saudi National Bank headquarters in Riyadh. As part of the modernization, we'll upgrade the controllers in the high-rise units, while adding our Otis ONE IoT solution. This new project builds on our existing relationship with the Saudi National Bank headquarters, which has 47 Otis units in total.
And in China, we received a contract to maintain 351 units at Shanghai's Pudong Airport, with 271 of these returning to the Otis portfolio as a recapture. Pudong Airport is a critical cargo access point in East Asia, while also serving roughly 80 million passengers each year. We're proud to say we now maintain all Otis units at the airport.
We announced our Uplift program last quarter, and in Q3 we began executing initiatives focused on 3 essential areas: gaining scale across our global organization to unlock synergies, standardizing our processes to generate efficiencies and driving supplier and indirect spend optimization. We are on track to meet our stated expected run rate savings of $150 million by midyear 2025. Taken together, these initiatives drive further value for our customers, organizational effectiveness and sustainable profitable growth.
Moving to Slide 4, Q3 results and 2023 outlook. Organic sales in the quarter grew 5.2%. Service was up $0.84, with all lines of business contributing. And New Equipment up 1%, with growth in the Americas, EMEA and Asia Pacific. Although New Equipment orders declined 10% versus the prior year, backlog was up at 2% at constant currency. Our share in the quarter remained relatively flat, leaving us at approximately 50 basis points of share gain year-to-date.
Order growth in EMEA and Asia Pacific was more than offset by declines in the Americas and China. In Service, modernization orders remained strong, up 13% in Q3, the fifth consecutive quarter of mod orders growth above 10% drove strong performance in EMEA, China and Asia Pacific. Mod backlog was up 15% and giving us line of sight to sales over the next several quarters.
With adjusted operating profit growth of $47 million in the quarter, we expanded margins by 60 basis points, driven by 90 basis points of service adjusted operating profit margin expansion. We generated $272 million of free cash flow, driven by higher net income.
To summarize, we executed our strategy, growing the portfolio above 4%, increasing our New Equipment and mod backlogs, giving us a strong base to execute on for the next several quarters, while expanding operating profit margins as we drive a consistent operating cadence in the business, ultimately leading to just under 20% EPS growth. Ultimately, we believe we're set up well despite the relatively weaker macro picture we're facing, which I'll discuss next.
For global New Equipment unit bookings, Asia Pacific continues to grow, although we now expect it to be up low to mid-single digits, a step down from our prior expectations. We anticipate that EMEA will decline high single digits, in line with our expectations for last quarter. While Americas, we now expect to decline mid-teens, and China to decline north of 10%, both worse than we were anticipating just a few months ago as the macro environment remains challenging. In total, this would leave global New Equipment bookings somewhere around 850,000 units, down approximately 10% versus 2022.
In Service, although global New Equipment unit bookings are smaller than we anticipated, we still expect the Service installed base to grow nearly 5% this year, as units that were booked 2 to 3 years ago,and installed 1 to 2 years ago roll off their warranty periods. This will put the global Service installed base somewhere between 21 million to 22 million units by year-end, of which we currently maintain approximately 2.2 million and expect to end the year around 2.3 million units in our maintenance portfolio.
With that as the global backdrop, let me now update you on Otis' financial outlook. We expect organic sales growth of approximately 5.5%, with net sales of about $14.1 billion. Adjusted operating profit is expected to be approximately $2.265 billion, up $170 million at constant currency. At actual currency, adjusted operating profit is expected to be up $140 million, including a foreign exchange headwind of $30 million. We're raising our outlook for adjusted EPS, now expected to be $3.52, up 11% versus the prior year. We now expect free cash flow of about $1.5 billion or approximately 105% conversion of GAAP net income. We still expect share repurchases of $800 million.
With that, I'll turn it over to Anurag to walk through our Q3 results in more detail.
Thank you, Judy, and good morning, everyone. Starting with third quarter results on Slide 5. Net sales of $3.5 billion grew 5.4% and organic sales were up 5.2%, with growth in both segments. Adjusted operating profit of $52 million at actual FX and $47 million at constant currency, with margins expanding 60 basis points to 16.9%. Drop-through on service volume, productivity and pricing segments and commodity tailwinds were partially offset by inflationary pressures, including annual wage increases and higher corporate costs. Adjusted EPS increased 19% or $0.15, with over half of this improvement coming from strong operational performance and the rest from a combination of our capital allocation initiatives an ongoing effort to reduce the tax rate, which came in at 25.5% in the quarter. Free cash flow came in at $272 million, up $57 million versus prior year, largely driven by higher net income. Year-to-date, we generated $934 million of free cash flow lower versus the prior year, driven by lower down payments on fewer New Equipment orders and the continued outperformance of our repair business as this work tends to be paid in areas.
Moving to Slide 6. Let me start by giving some color on Q3 New Equipment orders and backlog. In the third quarter at constant currency, New Equipment orders declined 10% versus prior year. Despite this, our New Equipment backlog increased 2%, with mid-teens growth in Asia Pacific, single-digit growth in the Americas and EMEA roughly flat. China backlog is down low single digits. Sequentially outside of China, our New Equipment backlog was relatively stable in all regions.
Globally, pricing on New Equipment orders was up low single digits, building on a similar increase in the third quarter of the prior year. Excluding China, pricing improved by mid-single digits or better in all regions. Although pricing was down mid-single digits in China due to macro challenges, we remain price cost neutral in the region from our continued focus on driving material productivity.
New Equipment organic sales were up 1% in the quarter, with strong growth in all regions outside of China. Asia Pacific grew low teens driven by continued performance in India as well as tracking with major projects. In EMEA, New Equipment sales grew high single digits, underpinned by the significant orders over the past several quarters in Southern Europe and the Middle East, while the Americas region grew high single digits for the second consecutive quarter executing on its multibillion-dollar backlog.
We grew New Equipment operating profit by $10 million at constant currency despite China sales coming in weaker than expected. Driving productivity, pricing flow through from the backlog and tailwinds from commodities more than offset the project in regional mix headwinds, leading to a 7.2% margin in the quarter.
Turning to Service segment results on Slide 7. Maintenance units were up 4.2% with growth in all regions, led by high growth in China for the fourth quarter in a row. We delivered another strong quarter of modernization orders, up 13%, including China mod orders growing double digits from continued success of new product offerings. Asia Pacific also grew double digits due to a number of volume and major project wins, with standout performance coming from North Asia.
EMEA mod orders grew 10% driven by major project wins. At quarter end, our mod backlog was up 15%, with growth in all regions. Service revenue came in better than expected with all lines of business contributing to organic sales growth of 8.4%. Maintenance and repair was up 8.6% from higher-than-anticipated repair volumes, and mod was up 7.6% with growth across all regions, highlighted by double-digit increase in Asia.
Service pricing, excluding mix and churn, came in around 4 points, similar to last quarter's performance, and adjusted for mix and churn, was a net 2 points. Higher volume, favorable pricing and productivity were partially offset by annual wage increases and higher material costs leading to $53 million of service profit growth at constant currency. Service adjusted operating profit margin expanded 90 basis points in the quarter to 24.8%.
Overall, we are pleased with our results in the quarter as well as year-to-date. We've grown our New Equipment and more backlogs, expanded the portfolio at 4% and delivered over 10% EPS growth.
Moving to Slide 8 and the revised outlook. Starting with sales. Total Otis organic sales are expected to be up approximately 5.5%, consistent with the midpoint of our prior guide, including slight adjustments by segment. Adjusted operating profit growth at constant currency is expected to be $170 million, a $5 million increase versus the prior guide's midpoint and the result of strong performance in the Service segment.
At actual currency, we expect adjusted operating profit of $2.265 billion as the better operating performance is offset by a slightly higher foreign exchange headwind and driven by a change in the euro and the weakening of various Asian currencies, such as the CNY. Our margin expectations remain unchanged, with Service margins expected to expand 50 basis points to 24%, New Equipment margins expected to expand 20 basis points to just under 7%. This puts overall operating margins at approximately 16%, up 30 basis points.
We have upgraded our adjusted EPS, expected to be up 11% to the prior guide, to $3.52. This represents a force increase versus the prior guide's midpoint, largely driven by strong operational performance and improvements in below-the-line items, including tax, now expected to end the year at 26%. We have to generate approximately $1.5 billion in free cash flow, a roughly 105% conversion rate and return substantially all of it to shareholders through $1.35 billion of dividends and share repurchases.
Taking a further look at the organic sales outlook on Slide 9. We now expect new equipment organic sales growth of approximately 3% at the low end of the prior range, driven by larger-than-expected headwinds in China, which we expect to be down mid-single digits. The Americas and EMEA are still expected to grow mid-single digits organically.
In Service, organic sales are expected to be up approximately 7.5%, a 1 point increase versus the midpoint of the prior guide driven by maintenance and repair. Consistent maintenance portfolio growth and pricing, together with another quarter of strong repair volume enabled us to raise the outlook by 130 basis points to up 7.3% versus the prior guide. Modernization organic sales expectations remain unchanged, up 8% as we execute on our backlog, which was up 15% at quarter end.
Moving to Slide 10. We have raised our expectations for adjusted EPS, and now expect growth of approximately 11% or $3.52, a $0.35 increase versus the prior year, driven by $0.30 of operational improvement.
In closing, we continue to execute well on the things we can control, and our resilient Service business is driving profitable growth in an uncertain macro environment. Our strong year-to-date performance gives us confidence to again raise our EPS outlook and deliver a solid fourth quarter, while positioning us well to perform in '24 and beyond.
With that, Michelle, please open the line for questions.
[Operator Instructions] The first question comes from Jeffrey Sprague with Vertical Research Partners.
Judy and Anurag, could you just elaborate a little bit more on your view on both Americas and China New Equipment, kind of the downward tick in the outlook, and maybe just thoughts on kind of even the trajectory as we exit 2023 into 2024 in those particular regions.
Yes. Happy to, Jeff. Let me start with the Americas. So we're now -- we now believe the New Equipment market in the Americas is going to be down mid-teens, and we're really seeing that with the highest impact being the interest rates remaining high. It really is impacting new project starts. We've seen that in the most recent ABI and Dodge data. So we're watching that closely. I would tell you the residential performed the worst in the third quarter, followed by commercial not being great, and infrastructure for the quarter relatively flat. We expect infrastructure to pick up as we go into '24.
We tend to see that a little later in the cycle versus the early construction companies, with all the infrastructure activity that's starting. What I do like about the Americas beyond their performance, and they really had a strong performance in terms of backlog conversion, is we still have strong mid-single-digit backlog on new equipment. That puts us in a really good position, not just for the fourth quarter, but I would tell you with our site in the Americas, it gives us really the sight for the next 12 to 18 months in -- especially in North America, which is the majority of our Americas business.
So we'll wait and see what happens with interest rates. If this does become the new normal, we think people will adjust. Because housing demand is real. It's still there, so we have to wait and see where this equilibrium is going to come out with the developers and when they go ahead with projects. We're not seeing a decline in terms of interest or proposals. So we really -- at this point, it's about people having conviction to start the projects from a development perspective.
In China, the New Equipment market does remain somewhat weak, and it's worse than we saw it a quarter ago, when we told you we didn't see that inflection point for book and ship. We're now saying it's really down. The China market itself is really down north of 10%. So we are continuing to focus on our pivot in China. And I couldn't be more proud of our team in China in terms of what we've done on the maintenance side to offset this, as well as really how we've managed material productivity to be able to drive that cost price neutral scenario in China.
We have picked up share in China for the year. And so we will continue, even though the backlog is down, our team is continuing to fight for all units and execute our strategy, which has been in play, which is focusing on key accounts mainly state-owned enterprises, and continuing new product introduction and expansion on Otis ONE. So our mod is up in China for the fifth straight quarter -- or sorry, for this year, it's up double digits. So far all year. We've had the ninth straight quarter in China on the Service side of mid- to high single -- high teens service growth. So we're finding a nice place there in terms of this pivot to becoming more of a service provider.
But New Equipment is our highest margin in China. And I think what you see with the results is despite China being down, our other 3 regions really picked it up nicely for us to be able to hold margins at 7% on New Equipment for the quarter and grow organically 1%, even with China down fairly significantly. So we'll wait and see what happens in terms of stimulus. Obviously, we've seen certain actions already in China in terms of easing monetary support, postponing property taxes, loosening credit policy for mortgages, but we really do are watching sentiment and liquidity. Those are the 2 items that we're watching.
Great. And just to shift completely in a different direction. You started the conversation, Judy, with Uplift kind of getting off the ground, I guess, pun intended. But maybe just a little bit of color. Is it impacting results in Q3? How do you see kind of the staging of that $150 million that you're talking about?
Yes, there is no impact in Q3. We just -- early days for us. We've kicked off the key activities, including the operating model. A lot of education inside the company and a lot of focus now on process redesign and indirect spend. You'll see that start coming through slightly in Q4, but 2024 is when you'll really start seeing that impact, and then we'll achieve the run rate. We're very comfortable with all the analysis we've done, as well as some of the decisions we've taken already that the $150 million is absolutely achievable.
The next question comes from Nigel Coe with Wolfe Research.
So understand the kind of like the weakness you'd update across the globe. I mean are we seeing any product cancellations with the rising rates, some projects now canceled out? Just wondering on that. And then -- but maybe, I just want to dig it a bit more into China with the pricing down mid-single digits. I think that the view was that China would not kind of be as bad as perhaps prior down-cycles because margins there are much lower. So just curious how you see the risk of further deterioration in China. And you mentioned price cost remaining positive or rather neutral in China, are China margins hold in there? Or are we seeing some deterioration in margins?
Yes. Let me start, and then I'll have Anurag. Nigel, we're not seeing project cancellations at any level different than we have in the past. And we can say that everywhere in the globe. There are always a small amount of project cancellations that occur, in which we retain the deposit, the advanced deposit, but nothing unusual there. In terms of China, let me just make sure everyone understands that China now represents about 17% of our global revenue. Now there are several reasons for that.
One is a down China market, but second is with us now outlooking $14.1 billion in revenue and organic growth of 5.5%, you can see the impact and the pickup of the other 3 regions in terms of their growth. So nice call out, Americas, EMEA, Asia Pacific, really good revenue growth, as you saw in Anurag's presentation. But China is now about 17% of our total revenue, down from that traditionally. So that's just the reality of where the numbers are right now. On price cost, Anurag, why don't you comment?
Yes. So on price cost, as you mentioned, Nigel, we are either neutral or positive, right? In China, definitely pricing in the New Equipment side is coming down, but we are driving hard on material productivity. And it's a deflationary economy over there as well. So a combination of that and there's pricing discipline in the market, you put all of that together, right now cost is favorable. And we are able to offset the China mix as you saw in third quarter, with the New Equipment margin being at 7.2%. And even if you look at the fourth quarter implied outlook, New Equipment margin is going to be about 7% even though China is going to be down.
So a couple of reasons. One is obviously the price cost. And second, pricing in all the other markets that has gone up over the past 12, 15 months, which is in our backlog, it started flushing through to the P&L. We again saw this quarter another $10 million pickup of pricing. We're going to see that similar in the next, and commodity is a tailwind. So if I look at pricing in the backlog overall, which is probably up 50 to 70 basis points. And if we snap the line on commodity today, right, we should still see another $40 million or so tailwind next year. You add these 2 things together, I think it more than kind of makes up for the China mix for us to believe that our New Equipment is at a sustainable margin rate.
Okay. Great. And I know there's about 3 questions there. If I can get one more as a follow-on. Just a follow on to Jeff's question on the Uplift program [indiscernible] by this time. So obviously, the $150 million run rate, I'm assuming that exit '25 run rate. What would you feel comfortable in a down FY '24 in terms of cost savings? And what sort of restructuring would be associated with that saving?
Well, we're not going to guide yet for '24 Uplift savings, so we just need to be -- yes, we're not prepared to do that. We'll get back to you, obviously, when we do our '24 guide to let you know what's going to be in that late January. In terms of restructuring, I think we've been...
Exactly. So for us, program is off to a great start, as Judy mentioned, we'll give an update next year. In terms of -- to achieve the $150 million of savings, the restructuring cost is about $150 million. And so one on one, right? It's going to start this quarter. But obviously, we're going to start seeing the savings coming in next year.
The next question comes from Julian Mitchell with Barclays.
Just wanted to start off with the global New Equipment revenue outlook. So you've been feeding off a good backlog there and the organic sales maybe flat to up 1% year-on-year in New Equipment in the back half of the current year. I just wondered though, when you look at the sort of 12 months rolling on New Equipment orders down 4%, year-to-date, down 6%, water down 10%, and then we think about sort of the nature of how quickly the backlog wears off. It's very fast in China, slower the rest of the world. Is it sort of base assumption as we start out next year that New Equipment sales are down then as those weaker orders feed through?
Yes. Thanks for the question, Julian. Yes, so firstly, our backlog is up 2% on the New Equipment side. We do think that even if orders are down low to mid-single digit the fourth quarter, our backlog is going to be flattish to slightly up. And the reason is because we tend to book more orders than revenue over the past couple of years, some of them in major projects. So our assumption is that backlog should be flattish to up by end of the year. Now within that, Americas, Europe and Asia Pacific, if we put that together, that backlog is up low to mid-single digit, and that represents roughly about 2/3 of our New Equipment revenue. So that should be kind of up low to mid-single digit next year. Let's say, low single digit. The big variable, of course, is 1/3 of the revenue, which is China. Right now, China backlog is down low single digit. It could be down mid-single digit by end of the year. And what happens to the market over there, it could be flattish, it could be down 10%, it could be up, right? So with that, we do not know as to where that's going to happen.
But let's assume that the market goes down next year and then China is probably down 5%, so that would mean that our new equipment revenue could be flattish. So -- but if I put things in all perspective, it could be flattish, it could be up 2%, it could be down 2%. But 2% or 3% New Equipment revenue is about a couple of hundred million dollar revenue. And if we look at our margin, it's about $14 million, $15 million, $18 million of profit, which is $0.02 or $0.03 of EPS. If you look at what we did this year, we more than overcame back to the Service business, which is why we -- and our guide went up every because of the back of Service. So we think we should be able to make that up next year through our service business.
That's very helpful. And maybe just my follow-up would be around the Service margins perhaps. So one element is if I just maybe some incorrect matter, it looks like the Service margin in Q4 in the guide is down sequentially on flat sales and sort of flattish year-on-year despite a big increase year-to-date. Just wanted to check if that's right and if it's just conservatism or what have you. And then secondly, on the Service margin, how are we thinking about sort of price cost or price net of material cost and service wages playing out? Is that sort of getting larger into next year or narrowing as a tailwind context around that, please?
Absolutely. So I'll break it up into 2 separate questions over here. So first is, yes, the guide implies 24% margin for Service in the fourth quarter, which is sequentially down 80 basis points. But we're going to exit the year at what we guided full year. It's a very healthy margin rate. It's -- from last year where we actually -- it's a tough compare because last year, we grew margins by 60, 70 basis points in the same quarter. And the reason there's a difference between the 24.8% and 24% is largely 2 things. It's the mix. We -- I mean, we are very encouraged. I mean the performance in third quarter margin was fantastic. I mean if you look at the portfolio maintenance side, portfolio is growing, pricing is sticking. We are flushing mod backlog into revenue. And the repair business, which we thought after years of very high growth is going to slow down, it's not. And it's because of the strategy of the team of penetrating portfolio, and that mix was high in the third quarter.
And obviously, productivity, which helped us get to the 24.8%. The big difference between Q3 and Q4 is now we're assuming that repair to be flattish in the fourth quarter and mod growing double digit. So that is a mix impact which is leading for the margins to be lower. But we're exiting the year at what we guided, so feel pretty good about it on the Service side.
Yes, Julian, on the second question, we're talking about wages and inflation. Inflation on the Service side, while we have had wage inflation, we know we need to offset that with productivity. And what we've been doing with price has been fairly significant. We've had another quarter where our Service pricing like-for-like is up 4 points. And with inflation staying pretty high, especially in EMEA and in the Americas, we should be able to, as we negotiate the majority of our maintenance contracts first, second quarter next year, which are mainly backward-looking for this year's inflation, we expect to be able to get price again at levels comparable to that for '24. We have line of sight now. The majority of our 23 maintenance contracts are in the books, as our commodity prices and everything else as we go in -- with 2.5 months left to go now. So we're actually feeling pretty good about Service pricing for next year and price cost. And we've negotiated with the majority of our collective bargaining across the globe. Most of our mechanics are represented. And I think I know we've treated them fairly, and we're able to recover that in both price and productivity.
The next question comes from Joe O'Dea with Wells Fargo.
I wanted to circle back to the backlog comments, and could you just expand on how much of next 12 months revenue you generally have visibility into based on backlog. Let's then talk about that in Americas and Europe, and then in China. And in particular, in China, then the mix that would be coming out of backlog and the mix would be booked and shipped, and what you're seeing in some of those book-and-ship trends recently.
Yes. Absolutely. If you look at our backlog, it is significantly more than a 12-month revenue, because we got major projects in there, we have other kind of long-tail projects as well. We very quickly -- the reason why I said earlier, we have confidence of America and Europe kind of growing low single digit next year is -- even if we snap the line today, we have very high visibility of that converting. We enter any particular year with 80%, 90% of Americas and EMEA revenue coming out of backlog.
Followed by that is Asia Pacific, ex China, which is probably a little bit lower depending upon the geography mix. But that backlog is up very healthy, it's probably double digit up, right? Then China is the only one where we have higher book and ship. So when we enter the year, I would say 2/3 of that revenue probably comes from the backlog and 1/3 comes from the book and ship, which is why for 3 of the 4 regions, we feel it's low single-digit growth for next year. China is the only variable that we need to see over the next few months to go.
Got it. That's helpful. And then -- just some perspective on where China volumes are. Can you talk about for the total market where volumes have been over the last several years, where they're trending this year? How you think it's setting up in terms of next year for some perspective on the current softness relative to constraint?
Joe, we would tell you that if you go back to peak years in China, we probably peaked -- the segment peaked New Equipment at about 650,000 units. That's been coming down now for the past 2 years, and we're at about 450,000 currently for this year. Still 450,000 of the 850,000 global units, so still a large, healthy market. And 450,000, you probably have to go back to 2018-ish time frame to where we had, obviously, pre-COVID to having a market like this. And so we still think it's a very attractive market. We've gained share there this year as we look in China, and we will continue to execute our strategies of our agents and distributors, being our partners, which we now have about 2,350 agents and distributors, more than twice since we spun.
We focus on our key accounts. And we've also really focused on the tier cities that are having an impact. So if you look at the third quarter, Tier 1 cities -- Beijing, Shanghai are the best market segments. And then obviously, it trailed off as you got all the way to Tier 5. So we've adjusted our strategy. That's why our agents and distributors are so helpful, as well as our internal sales folks that support them. The key accounts, again, those relationships are strong and they're yielding for us.
The next question comes from Stephen Tusa with JPMorgan.
You mentioned the trends of what's going on in China. I think one of your competitors had some pretty good orders numbers there today. Can you maybe help reconcile that? Because I don't -- I think you guys were obviously -- I think you were down. But maybe you could just maybe help reconcile what the difference might be? Obviously, any quarter, there's some lumpiness. But just curious from a share perspective there, just trying to tie those 2 things together.
Yes. I think you're going to -- I mean, orders are lumpy kind of across the board for both organization and New Equipment. And I would argue, share is also kind of hard to measure on a quarterly basis and something more you'd like to do on an annual level when you really have some fidelity in the information. I can't comment on what our competitors are doing, but I can tell you that we're -- again, our China team is executing our strategy. And in a downmarket, our China team has both driven cost out in terms of material productivity so that.
Again, if you look at and you step back, we're driving growth in all lines of business in Otis, especially in Service. We're seeing good growth in 3 regions outside of China. But our China team has really -- and despite a tough macro environment on New Equipment, has really now added this Service component, which we're 365,000 units in our portfolio in China, more than double from when we spun. And our China modernization business has grown double digits this year. So we're finding -- we're moving mod into the factories. So we're optimizing the cost basis there, and you're going to see that modernization business really, in China as well as globally, take off.
And for us, we need to watch that mix. That's what Anurag commented on for fourth quarter for Service margins. But we think -- we know it's actually worth getting that modernization business because it will bring more units to our portfolio. So we're going to end this year at 2.3 million units in our portfolio. And when you think about 1% portfolio growth throughout the decade before we spun, and now it's 5 -- 4 straight quarters over 4%, we're going to end this year at 2.3 million units, and that is the strongest. But it's still at 2.3 million units of a 21 million, 22 million segment, leaves us lots of room for growth. And that's why we're convinced the Service-driven growth strategy globally is the right answer for us and our shareholders.
Yes. Clearly, the service is very strong. Just a question on cash. I missed the first part of the call, but any reason for that tweak on cash specifically?
Yes, absolutely. It's -- okay. So firstly, on cash, we are at about $934 million, we got $550 million. And I guess your question is tweaking to the low end of the guidance, there's 2 reasons. One is clearly lower downpayments because of new equipment orders, which have been a little bit lower. But second is also a repair business, which is -- we thought in this year would be low single-digit repair, it's growing at a very good rate. Great for sales, great for profit on the P&L side, but we do get paid after we complete our work. So it's a little bit of a receivable drag. I think it's a combination of these 2 reasons why you see a little bit of a tweak in the cash flow guide.
Yes. And for any of our customers listening, Steve, I think it's important they know that when they need a repair, we do the repair. And then we make sure we bill and follow-up to collect. And that's really what happens in that repair world. We know customers if they've gotten an elevator down, we're going to get them back up.
Sorry, one last quick one. A lot of volatility in multifamily in the U.S., kind of hard to tell where that business is going. Any impact on you guys from that? And thanks a lot for the answers to the questions.
Yes. So I mean that the multifamily was our -- from a market perspective, a segment perspective, was the worst performing in the U.S. this past quarter. Now it's down off record highs for multiple years, and there's still demand for it. But we're just seeing the developers slowdown on the start button, which is when we get those advances that Anurag was talking about in his cash answer.
So we'll wait and see. If rates stay where they are, developer will figure out the math for this because demand is still there for housing. So we're in a wait and see. But our backlog in -- especially in North America, is strong mid-single digit, including a lot of multifamily and logs. So we're going to keep performing and then our team will drive them as they come.
The next question comes from Nick Housden with RBC.
So yes, just on that free cash flow point, I mean, it looks like China are going to go back to that 650,000 unit mark. So I'm just wondering if that means that, over the medium term, there needs to be a permanent reset on the expectations for conversion from the current sort of 100% to 110% target that you've already got? That's the first one.
Well, I can take that one. The answer is no. No reset.
Okay.
Theres no reset because the 2 -- the new lower -- definitely lower orders, but also we're executing on high backlog. So all these will normalize. And the repair revenue will also kind of -- will start converting more into cash. So I don't think there's any reason for us to reset the target, yes.
Okay. Great. Very clear. Then just a second question on some of the competitive dynamics in modernization. So it sounds like when you guys or some of your European competitors modernize a unit, especially in China, it's almost always someone else's unit. And very often, it's one of the Asian competitors units that you're modernizing and then moving into your own portfolio. Are the Asian guys just not focused on modernization? Or why does it seem to be the case that you are kind of eating their lunch there?
Well, your hypothesis that most of our modernization is on non-Otis equipment in China is accurate. But remember, our China market share is -- our share of segment in Service is pretty low, because 75% of the -- all the units are maintained by ISPs. So I wouldn't specifically say it's -- some of the units we're getting back are Otis units that are not on portfolio, many are non-Otis units, but they're not necessarily Japanese or European. I can't comment on who they are.
But what we've done a we've created very innovative packages to be able to put our hardware on non-Otis equipment to modernize it, to add new technology and then to convert it into our portfolio.
[Operator Instructions] Our next question comes from Gautam Khanna with TD Cowen.
I had 2 questions. First, Anurag, on your comment about escalators next year being comparable to that of this year, I was just wondering if you could elaborate maybe by region, and why that's so given the level of inflation this year seems below that of last year? And then I have a follow-up.
Sorry. You mean on the Service business, the price escalation?
Yes.
Yes. So yes, listen, let's start with Europe, where we got about half of our portfolio over there. Inflation is still pretty high in Europe. Not as high as last year, but not too far off from there. And most of our contracts are right now in negotiation, and they're obviously linked to an index. So we feel pretty good about the pricing increase in Europe next year could be around the mid-single-digit level again. So that's really encouraging. Inflation in the Americas is also not coming down to a greater extent, so we should see that.
So these 2 definitely give us confidence on pricing going up. The rest of Asia has always been a low to mid-single-digit price increase, that will continue. And China, I think, as I mentioned earlier, there is more price discipline, but it's never been a price escalator market on the Service side. So put all of that together, it gives us confidence that there's going to be another good price increase next year on top of our portfolio growth, which should mean that our maintenance business should grow mid-single digit plus.
Okay. And just a quick follow-up. Could you talk a little bit about any trends in churn coming down in the quarter and maybe year-to-date on Service renewals?
So we will share our statistics at our quarter earnings. We do that on an annual basis, but there's no significant changes that we've seen, but we'll share that next quarter.
I show no further questions. At this time, I would now like to turn the call back to Judy Marks for closing remarks.
Yes. Thank you, Michelle. Our Service-driven business model is working as we approach 2.3 million unit portfolio by year-end, with the compounding life tied to each additional unit. Year-to-date results are indicative of the strength of our strategy as we continue to prioritize value creation for our shareholders for the remainder of 2023 and beyond.
Thank you for joining us today. And stay safe and well.
Thank you for participating. This concludes today's conference call. You may now disconnect.