Good morning, and welcome to Otis' First Quarter 2023 Earnings Conference Call. This call is being carried live on the internet and recorded for replay. Presentation materials are available for download from Otis website at www.otis.com. I'll now turn it over to Michael Rednor, Senior Director of Investor Relations.
Thank you, DiDi. Welcome to Otis' First Quarter 2023 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO, and President, and Anurag Maheshwari, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant non-recurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Judy.
Thank you, Mike, and thank you everyone for joining us. We hope everyone listening is safe and well. Starting with first quarter highlights on slide three. Otis delivered a solid first quarter to start 2023, driving strong financial performance and executing on our capital allocation strategy despite continued market uncertainty. We achieved organic sales growth driven by our service business and expanded adjusted service operating profit margins by 40 basis points, leading to mid-single-digit adjusted EPS growth. Our service segment performance, in addition to our maintenance portfolio growth of more than 4% reinforces the strength of our business model. We continued to execute our balanced capital allocation strategy with $175 million of share repurchases in the first quarter. Yesterday, we announced a 17.2% increase to our quarterly dividend.
Since spin, we have increased our dividend 70%, emphasizing the importance we place on disciplined capital management and delivering value to our shareholders. In the Americas, building on our strong track record of major project execution and service across Canada, Otis was selected by the Montreal Metro system to replace escalators at 17 stations while providing units for five new Blue Line stations. In total, 97 Otis escalators will keep Metro passengers on the move daily. In China, Hefei Metro placed a new order of 250 Otis ONE connected escalators and elevators across three new lines. Real-time data insights, remote monitoring, and predictive maintenance will all help bring the Hefei Metro into the future and add to our growing infrastructure installed base. In Germany, Otis has been selected by SIGNA Group to modernize the iconic Düsseldorf department store Carsch-Haus as part of a larger renovation.
Otis will provide 17 units, including our energy-efficient Link escalators and Gen2 Stream elevators with ReGen Drives. The elevators will also feature eView in-car displays. After the modernization is completed in 2024, Otis will service the units as part of our long-standing framework contract with KaDeWe Group, which operates Carsch-Haus and other leading department stores in Germany. In South Korea, we're providing 51 of our signature Gen2 elevators for the Suncheon Churma Jae luxury apartment complex. The campus includes more than 2,000 units in buildings up to 29 stories. We continue to drive progress toward our ESG goals as shared in our 2022 ESG report published earlier in April. Just this month, we announced the installation of solar panels at our Nippon Otis Logistics and Engineering Center in Japan.
This upgrade is expected to reduce greenhouse gas emissions at the facility by 27% compared to 2022 and represents our eighth manufacturing site globally with solar panel arrays. Moving to slide four, Q1 results and 2023 outlook. New equipment orders were up 7.4%, driven by strong growth in the Americas and Asia Pacific. We ended the quarter with adjusted backlog up 10% at constant currency. We continue to drive share gains in new equipment with 70 basis points of improvement in the quarter, led by our outperformance in China, where our orders were down modestly in a market where we estimate was down approximately 10%. We continue to perform well across all other regions. We're especially encouraged by our modernization performance in the quarter with nearly 30% orders growth driven by strong performance in the Americas and Asia.
This growth is driven by our continued rollout of standardized packages for our mod offerings, coupled with improvements in our sales force coverage. Our mod backlog is up double digits in all regions as mod demand continues to remain robust. Organic sales were up 3.6% and adjusted operating profit was up $7 million at constant currency, driven by performance in the service segment. Before I discuss our 2023 financial outlook, let me briefly update you on our global market outlook, which largely remains unchanged.
Entering the year, we expected global new equipment to be down mid-single digits to approximately 900,000 units, largely due to China, which we expected to be down 5%-10%, and our outlook in that key region remains the same. We also expected Asia Pac to be up mid-single digits or better, and both the Americas and EMEA to be flat. With the first quarter in the books, we now expect Asia Pac to come in closer to high single digits, offsetting a reduction in our EMEA outlook, which we now expect to be down low to mid-single digits. Our outlook for global install base growth remains unchanged at roughly 5%, which will add close to 1 million maintenance units, bringing the install base to roughly 21 million units with high single-digit growth in Asia and low single-digit growth in the Americas and EMEA.
Turning to Otis' 2023 financial outlook, w e now expect net sales to be in the range of $13.9 billion-$14.2 billion, up 2.5%-4.5% versus the prior year, which is a 75 basis point improvement from the prior outlook at the midpoint, driven by FX. We still expect organic sales to be up 4%-6%, with new equipment up 3%-5% and service up 5%-7%.
Adjusted operating profit is expected to be up $90 million-$150 million at actual currency and up $130 million-$175 million at constant currency, with adjusted EPS in a range of $3.40-$3.50, a 7%-10% increase versus the prior year and an approximately $0.03 improvement from the prior outlook at the midpoint. We expect free cash flow to come in as we guided in February, in a range of $1.5 billion-$1.55 billion, with a 105%-115% conversion of GAAP net income. We remain disciplined in our capital allocation strategy and will continue to return the vast majority of our cash generation to shareholders through dividends and share repurchases.
We will also continue advancing our bolt-on M&A strategy to add density to our growing maintenance portfolio. With that, I'll turn it over to Anurag to walk through our Q1 results and full year outlook in more detail.
Thank you, Judy. Starting with first quarter results on slide five, w e delivered net sales of $3.3 billion with organic sales up 3.6%. This represents our tenth consecutive quarter of organic growth with better than expected performance in both segments. Adjusted operating profit was down $19 million at actual FX and up $7 million at constant currency. Drop through on higher service volume, favorable service pricing, and traction with productivity in both segments were partially offset by inflationary pressures, including annual wage increases, new equipment mix, and higher corporate costs. Adjusted EPS growth of $0.04 in the quarter was driven by stronger operational performance, continued tax rate improvement, and a lower share count. Accretion from the Zardoya transaction offset the $0.04 of foreign exchange headwind. Moving to slide six.
Q1 new equipment orders were up 7.4%, led by Asia Pacific and the Americas, up 27% and 15% respectively, with modest growth of a point in EMEA, more than offsetting a 3% decline in orders in China. Strong orders growth has contributed to our adjusted new equipment backlog, increasing 10% at constant currency, with growth in Americas, APAC, and EMEA. China backlog was roughly flat. Our strong backlog provides new equipment sales visibility for the balance of the year as well as over the medium term. Globally, pricing on new equipment orders was up mid-single digits, leading to sequential backlog margin improvement in all regions. We benefited from pricing increases of approximately 10% in the Americas and mid-single digits in both EMEA and APAC.
While pricing in China remains competitive, down low single-digits, we are driving material productivity to achieve slight price cost favorability in the region while continuing to increase our share. New equipment organic sales were roughly flat in the quarter, with 22% growth in Asia Pacific, driven by strong performance in India and Korea and high single-digit growth in EMEA, largely from Southern Europe. This growth was offset by a mid-single-digit decline in the Americas due to job site delays and supply chain impacts, and a 10% decline in China as expected, driven by the lower demand environment. Adjusted operating profit declined $24 million at actual FX and $19 million at constant currency as strong material productivity was more than offset by the impact of unfavorable regional and product mix. Turning to service segment results on slide seven.
Maintenance portfolio units were up 4.2%, with recaptured units more than offsetting cancellations. This was the sixth consecutive quarter of accelerating portfolio growth, with China delivering another quarter of its portfolio growth. Modernization orders grew nearly 30%, our third consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of our mod packages, and good momentum in proposal activity from improved sales coverage. Our modernization business continues to perform well across all regions, with backlog up 13% at constant currency. Service organic sales of 6.3% was modestly ahead of expectations. Maintenance and repair grew 7%, driven by solid repair volume, strong portfolio growth, and 3.5 points of maintenance pricing improvement on a like-for-like basis.
Organic modernization sales were up 3.3% in the quarter, driven by EMEA and Asia, partially offset by the timing of major project execution in the Americas. Service operating profit at constant currency was up $40 million and margins expanded 40 basis points. Drop-through on higher volume, favorable pricing and productivity more than offset the headwinds from annual wage increases and higher material costs. Moving to slide eight and the revised outlook. Overall, we are off to a solid start in 2023, delivering strong orders, sales and portfolio growth while expanding service margins to drive mid-single-digit EPS growth in the quarter despite continued macroeconomic uncertainty. This strong start gives us confidence to reiterate our February outlook for organic sales growth, adjusted operating profit at constant currency and adjusted profit margins at both the Otis and the segment level.
We are improving our adjusted operating profit outlook by $20 million versus the prior guide, now expected to be up $90 million-$150 million from a smaller foreign exchange headwind. This FX change results in an approximately $0.03 increase in adjusted EPS at the midpoint. Our free cash flow outlook remains unchanged at $1.5 billion-$1.55 billion for the full year. In the first quarter, free cash flow came in at $253 million, with working capital a use of cash of roughly $125 million, largely due to payables. We expect this to unwind as we execute on our new equipment backlog throughout the year. Taking a further look at the organic sales outlook on slide nine.
Our outlook remains consistent with the prior guide across all regions and segments, with new equipment up 3%-5% and service up 5%-7%, driving total Otis organic sales growth of 4%-6% for the year. New equipment organic sales growth will be driven by the Americas, APAC and EMEA as we execute on the strong backlog built over the past few years. We still expect to achieve roughly flat new equipment sales in China, given the quarter-ending backlog and favorable compares into year-end. On the service side, we expect to build on our performance in the first quarter with growth in repair work moderating and modernization accelerating. Overall, we would expect to see consistent growth at around the midpoint of our guide each quarter.
Moving to our adjusted EPS outlook on slide 10, we now expect 7%-10% growth, reflecting an approximately $0.03 increase from the prior guide at the midpoint. We anticipate second quarter EPS to be flattish year-over-year as strong operational performance is offset by last year's lower tax rate. The continued strong growth in our service segment, coupled with pricing and commodity tailwinds in new equipment, will drive the acceleration in our second half EPS growth. For FX, we are now assuming full-year rates of 1.06 and 6.93 for the EUR and CNY, respectively. Overall, we are encouraged by our first quarter results and well positioned to deliver solid financial performance for the balance of the year by executing on our new equipment backlog, accelerating our service portfolio growth, and focusing on operational execution to offset macro headwinds.
With that, DiDi, please open the line for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Jeffrey Sprague of Vertical Research Partners.
Thank you. Good morning, everyone. Hey, just a couple quick ones here from me. First, just on mods. You know, interestingly, Schindler pointed to soft mods this last week, and you and KONE are saying they're strong. Always thought of a little bit more of a discretionary aspect to kind of mod work. So maybe you could just give a little bit of color on, you know, what's there anything in particular driving the strength there, your visibility beyond kind of the current orders you've booked? Is there sort of a kind of pent-up demand to catch up on mods still from the delays we had back in COVID?
Hey, Jeff, good morning. It's Judy. Listen, the mod business itself, I think you're gonna see sustained and accelerating opportunities. It comes from macro, 7 million of the 20 million units are 20 years or older in the world. It comes slightly from things that didn't happen during COVID, which you called pent-up demand. It's really now coming from a realization that elevators are aging. Repairs, as you've seen, we've had a really strong repair book, people have been putting off modernization, now they are coming to those important decisions. At the macro level, globally, we saw a mod up in all four regions. Strong order book this quarter, 29%. Backlog up 13%. I think you're gonna continue to see that not just quarter-over-quarter, but year-over-year as the mod opportunity becomes larger.
At a micro level, I'll just share a short story with you because part of mod is discretionary, but part of it is a rational decision our customers are making. I'll give you an example. In North America, where we have almost 25-year-old, 2-6 storey hydraulic units installed throughout the country, we have a circuit board there where the parts had become end of life and obsolete. We went out to all of our customers because so many of these customers, they only have one unit, and they can't afford for it to shut down and not have access to an obsolete part. For our customers, we went out with digital marketing campaign and just said, "Listen, for a few hours, we'll pre-plan, pre-schedule this, turnkey, one fixed price.
Let us come and make sure you avoid any shutdowns and extend the life of your elevator." Response has been fantastic. Part of mod is aging, part of it is opportunity creation, but you're gonna see it continue to pick up over time.
Great. Just on the growth in service units, great to see, and you're kinda checking the box there on the strategic plan, it sounds like. I just missed, unless you know, didn't say it, the growth in service and maintenance units in China specifically and any other just kinda regional color that you might have on that.
Yeah, we had growth across the board. All four regions grew. China had its seventh straight quarter. They grew high teens, but seventh straight quarter of mid or high teens growth. Asia Pac and China up, more significantly than the mature markets, which we would say is probably low single.
Great. Thank you. Appreciate it.
Thank you. One moment for our next question. Our next question comes from Steve Tusa of Morgan Stanley. Mr. Tusa, your line is open.
Yeah, sorry. Yeah, wrong Morgan. Maybe someday. Who knows? Can you guys maybe just talk about how you're looking at the China market now and maybe just the sequential trends on earnings into the second half of the year. Anything moving around at all on you guys?
Yeah. Thanks, Steven. We fully recognize JP Morgan, let me be clear there. You know, Steve, I had the, and now I'm gonna say honor of finally being on the ground again in China. What I'm gonna share is a little personal, having spent 10 days there, earlier, late last month, early this month, and just really getting a sense of the economy. I can tell you can feel it in the four cities I was in and with our colleagues. It's in a state of recovery, and my view is primed for economic development. No matter whether it was a government official I met with or customers, we do believe this second half recovery will come and will come strongly.
The government's being very supportive in their policies, whether it's mortgage rates or other things. Kinda where we started the year is what we're still seeing. We thought the market would be down 10%. We were down 3% in orders, so clear market share gain by Sally and the team in China. The strengths in the market in the first quarter, just so you know, the segments, infrastructure and industrials were up, industrial buildings. There was weakness in resi and the commercial market. We are still expecting the market recovery, and I'm feeling good about the health of our business.
To be able to see the progress our team has made throughout the COVID years, whether it's in the automation and Industry 4.0 in our factories, the acceptance by our customers of our new product introductions, the relationships. I got to meet our agents and distributors. I'm very positive on a China recovery in the second half. Obviously we wanna see what the second quarter holds and when that inflection point is gonna happen. All signals look positive for China recovery second half, and then obviously that continuing into the out years.
Did just, did that change at all? I guess I missed the first part of the call, but any of the market outlook you gave on the fourth quarter call, any of those change?
Yeah. You know, as we shared last quarter, we said China would be down 10% the market. Americas would be flattish. We're seeing Asia Pac continuing to grow more to high single digit, and we think that offsets maybe a little more negative now with EMEA down low to mid-single digit.
Okay. Great. Thanks a lot.
Anurag, I'll let you answer the second part.
Yes. Hey, good morning, Steve . Just on the sequential earnings into the second half of the year. You know, second half we have to grow EPS up to about $0.25. $0.05 of that will come from tax because we do face a headwind of $0.05 in Q2, because we had a big benefit in Q2 of last year. That unwinds in the second half of the year. That will give us $0.05. The $0.20 that we have to grow is about $120 million operationally. We are growing service at about, in Q1, $40 million. That runway kinda continues into the second half of the year at a mid-single digit growth. That's about $80 million. The remaining $40 million will come from new equipment.
In the second half, I mean, quarter one new equipment was flattish. Quarter two is returning back to growth. In the second half, we expect mid single digit growth, about 5%-6% on the new equipment side, with volume and some of the price increases that we booked last year will flow through to the bottom line, about twenty-ish million dollars from there. Commodity tailwind of $20 million in the second half. You add that, new equipment should be up about $40 million. That's our sequential roadmap, about $80 million from service, $40 million from new equipment.
Great. Great details as always. Thanks, guys.
Thanks.
Thank you. One moment for our next question. Our next question comes from Nigel Coe of Wolfe Research.
Correct. Good morning.
Hi, Nigel.
Obviously nice job on orders. The Americas was surprisingly strong and, obviously some of your competitors have been highlighting weakness in the Americas. Maybe just talk about, you know, kind of what drove the growth, and what you're seeing right now in multifamily and maybe commercial.
Kudos to Jim and the team. I mean, the Americas, you know, after a really strong 2022 to come in, you know, up 15% this quarter and, you know, rolling 12-month being strong as well over 18% just really highlights. We've got a big backlog to work off in the Americas, our team knows it. Listen, we saw, you know, the Americas itself, the year's playing out as we thought it would. Non-resi is actually better this 1st quarter. Infrastructure and commercial were up, multifamily was down, coming off some really tough compares if you think about where multifamily's been the past few years.
I will tell you, Nigel, that we got a real tough compare in the Americas coming up in the second quarter 'cause last year, second quarter, we were up 54% in the Americas. We're gonna do the best we can to try to match that, but it's gonna be a tough compare. We still expect a flattish market through year-end. We think we're in a really good position. You saw the Montreal program we won, which was a major project in the first quarter, and that'll take us a few years to perform on. Both the volume business and the major projects did really well in the Americas, both Latin and North America for the first quarter.
Yeah, great. That's great color. Thanks, Judy. In terms of China, your comments on China sounded, you know, really constructive. Pricing down low single digits, so I think it was trending pretty flat through to 2022. Just what gives you confidence that we're not gonna see the bottom fall out pricing in China? Then when you talk about the inflection in the second half of the year, are we talking about a break back into positive year-over-year growth in orders, or are we talking about getting less bad in the second half?
Well, let me take the pricing question. We are seeing rational pricing. I know we've shared that about 90% of the new equipment orders that happen in China now happen with the top 10 OEMs, and they're all being rational. We get to see that, especially on public infrastructure bids. Not to say there's not a bid or two someone really wants because of density, and they'll do something, but we're seeing rational pricing in China. It's always the most competitive there in pricing of anywhere in the world, which means we've got to continue to drive our costs down, and that's where, so far, you know, we've seen the material productivity far better in China than we have everywhere else in the world.
Part of that's commodities coming down, but part of that's through great supply chain management, negotiation, and our engineering team continuing to take cost out with our manufacturing team. We're seeing rational. We don't anticipate that changing, but obviously we're keeping an eye on it.
Yeah. I mean, the two levers, as Judy mentioned, that we take a look at is definitely price cost and the share of segment. Far, we're balancing it quite well. The market is disciplined. We continue to look into that and make sure that that is the toggle that we are playing against. Now, in terms of orders, if you look at the market, you know, the market was down in the first quarter. We are guiding it to be down 5%-10% for the year. Clearly the market is gonna pick up from in the second half of the year off a low compare as well from last year.
you know, even if we do assume no share growth in the second half of the year, you should see orders in China picking up in the second half of the year. Of course, we're gonna continue executing the strategy that we are doing right now and feel pretty good about the China orders in the second half of the year.
Okay. Leave it there. Thanks, guys.
Yeah. Nigel, the only thing I'll add is our relationships and our length of those relationships with our 2,200 agents and distributors, you know, continues to mature, and we do expect, you know, those to yield, you know, as we continue to go on for both our brands. We're going to continue to ensure that we have the best products. We introduced a new product in China, a new roped connected product in the first quarter that's picking up nicely in the market. Our team, they've got sales coverage. We know where we need to be on price. We've got the right products and all that we really expect to happen in the second half to show those results.
Great. Thank you.
Thank you. One moment for our next question. Our next question comes from Julian Mitchell of Barclays.
Hi. Good morning. Just wanted to start with the EMEA market outlook. Yes, you and some of your peers sort of lowering the market outlook this year. Just wondered any specific verticals or regions within Europe that's driving that on the new equipment side. You know, how should we think about those EMEA orders playing out over the balance of this year? I suppose, you know, the last time we had a sort of a soft construction market there for any prolonged period, we saw the bleed through into service pricing at some point. Just maybe remind us kind of your confidence this time why even with a softer new equipment market there that the service price should hold up.
Thanks, Julian. We're saying EMEA now is going to be down low to mid-single digit. Obviously we're watching rates and impact on building permits and starts. In the first quarter, our team in Southern Europe performed incredibly well. Spain, Italy, extremely resilient. Where we saw some of the weakness was really Germany and the U.K., then, you know, the Middle East was up probably low single digits. It's really a mix. We're going to continue to monitor and watch that. When we think back in time, you know, I look at two key metrics. One is pricing and service pricing like for like. This last quarter, we were up 3.5 points, and our Europe business was up mid-single digits. Bernardo and the team have been passing price through.
We've had those inflationary clauses in, and the team's been passing service price through, which is really good to see 'cause the majority of our European contracts do come due, service contracts come due in the first half of the year, with most in the first quarter. The other part would be, you know, all the constructors from 15 years ago who moved into service and became independent service providers. We don't see that labor. If you look at, you know, even unemployment is at fairly low levels in Spain and in other locations in Western Europe, so we don't see those, that available workforce starting up as independent service providers. The other difference now is what we call Otis ONE.
The fact that when you have a connected elevator, it's not easy to start up as an independent right now or to grow your share. I think all that combines to set us up to a very different Europe. Again, we think we're being responsible looking at the market at low to mid-single, you know, potentially down for the year.
Thank you. Then, just my follow-up would be around the slide 10. You've got that helpful EPS bridge. Just if I look at the operational portion within that, you highlight there kind of wage and material inflation and then mix and churn as headwinds that were not there, on the bridge that you'd given back in January for the year ahead. Just wondered if that's just some extra detail. Did you see something change in your outlook for those two items for 2023? How we're thinking about those two items as you go through the year?
Hey, Julian. Hey, thanks for the question. you know, you know, in February, when we gave guidance, we had a page on each of the segments on new equipment and service, and at that point in time, we had highlighted mix and churn as one of the headwinds, and we just collapsed it into this chart right now. There's been no change in our thinking since the beginning of the year. When we talk about mix and churn, we essentially, in the new equipment side, the mix was coming from, as you know, China is our most profitable new equipment margin market. The other markets are growing faster. On the equipment side, that is the mix on from the regional perspective. Obviously we built a very good backlog.
We won a lot of share, but it's a combination of volume and major projects. These major projects, though they come with a very good portfolio stickiness, they are low new equipment margin. On the mix side, I would say on new equipment, it's more region and project similar to what we had called out in the last call. Nothing has changed from there. In service it's the same thing which you've seen in the past couple of years, China growing faster, and obviously churn is more around the cancellation units, which come with a little bit higher margin. Nothing really changed over there. Same thing for labor and wage inflation, right? It's, you know, so far our labor negotiations are trending really, really well.
You know, we thought it would be low to mid-single digit in most of the European markets. It's playing out that way and same on the material. If I kinda take a step back, if you look at price over gross cost and mix and churn, you know, we should be about $75 million positive for the year. That is, that would contribute to half of the operating profit that you see in the bar. Price minus gross cost of material labor inflation and adjusting for mix and churn.
That's really helpful. Thank you.
Thank you. One moment for our next question. Our next question comes from Jack Ayers of Cowen.
Hi guys. Good morning. This is Jack on for Gotham. I wanted to dig into service, and apologies I joined the call fairly late here, but if you could kinda just touch on the modernization orders up 29% seems extremely strong, which is encouraging. Just piggybacking off that last comment, just the, you know, sort of the maintenance units up 4.2%, obviously really strong. Again, kinda just what's happening there this quarter from, like, a retention conversion mix sort of churn perspective. Just any color there around service would be really helpful. Thanks.
Hey, Jack. Yeah, modernization, let me just reinforce what I said, which is, it's going to continue to be a contributor to our business, and the market itself is gonna continue to grow, not just quarter-over-quarter, but the market itself will be growing year-over-year as more and more units age, based on when they were put into service. We've got 7 million of the 20 million units are over 20 years old. I think you can look for the modernization market to remain and actually become more attractive. obviously we're very focused on performing that in a more, a way that allows us to approach customers with kits that gives us productivity and that gives them their modernization in a quicker time period.
You're gonna see modernization be talked about more. But also take the best of what we've learned since spin in terms of our new equipment strategy and growing share there and being able to do things at scale, merging that with our service excellence and our productivity we've gained there. When we put those two together and attack the mod market with a growing market, we think that's gonna be a positive contributor for much time to come.
Thanks, Judy. I'll leave it there. Thanks, guys.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for our next question. Our next question comes from Nick Housden of RBC.
Yes. Hi, everyone. Thanks for taking the questions. I think you mentioned maintenance pricing was at about 3.5% like for like. I'm just wondering if that rate should accelerate as we move through the year just on the basis that, you know, you've been implementing the service escalation clauses in Q1, and, you know, maybe that 3.5% is a reflection of the agreements that you had last year. If you could provide some color on that would be helpful.
Yeah, Nick. Go ahead. Go ahead.
Yeah. Hey, thanks for the question, Nick. Yeah, firstly, extremely encouraged by the way we started off in Q1 on the 3.5% like to like. As Judy mentioned, you know, Europe is mid-single digit. It's probably one of the higher price increases we've seen in Europe for a while, and it's sticking because everyone else is kinda driving the price over there. If we move into Q2, obviously more units get converted, come up for renegotiation as well. We should see that kinda stepping up a little bit as we go there on the 3.5%. Overall, what we said in, when we gave the full year guide was that we expect, you know, it to be up 3.5%-4%.
You know, mix and churn would take about 200- 250 basis points, so about 1.5% net. As of now where we stand, we feel pretty good about, you know, under 50 basis points of pricing, adjusting for mix and churn for the rest of the year.
Nick, in China, you know, the margin drivers are less about price. They're really more about productivity, volume, density, and Otis ONE, and all of those are good contributors for us.
Great. That's very helpful. My second question, sticking with service. Great to see that you're up to 4.2% unit growth. That's been accelerating, you know, pretty much for, you know, three years at this point. You know, you mentioned that the market is growing at about 5%, you know, about 1 million units on a 20 million installed base. If I look at that 4.2%, you could still argue that that's maybe slightly underperforming. Do you think that you can actually close that gap, or is there maybe a mix effect that means that, you know, you as, you know, the largest OEM in terms of service units should maybe be underperforming a bit?
I think we can and we should close that gap. That's the challenge we've given to our team, and that's why you see the much higher growth rates in Asia, especially China, for our service portfolio. It creates a mix, but we'll deal with that mix challenge, as we get it. Yeah, we can and should be closing that gap.
Yeah. Just to add to that, right? I mean, just not too long ago, we were growing at 1%. The team has kinda, you know, there was call for action. Team's focused on it. The wheels have started churning. We're also 4.1% or 4.2%. We should close the gap, the gap is, you know, we won some good new equipment share. That will get convert. That will come into the conversion cycle. Our conversion rates are going up, we're gonna keep looking at the, you know, deploying IoT to ensure that our retention rates stay high. It's using conversion as a lever, using retention as a lever to get us up to the mid-single digit growth.
While doing that, we wanna ensure that we also maintain the profitability for it, right? At some point in time, this, you will see from margins, it does come back to absolute profit growth, but that's where we wanna take it too.
That's great. Thanks very much.
Thank you. I would now like to turn the conference back to Judy Marks for closing remarks.
Thank you, Di Di, and thank you all for joining us. Let me also add a thanks to all of our colleagues for your continued excellent performance in quarter one and for serving our customers so well. Our solid first quarter results demonstrate the continued power of our business model and set us up well for the future. We will remain focused on executing throughout the remainder of the year in order to capitalize on our first quarter successes and continue to drive shareholder value. Thank you for joining us, everyone. Stay safe and well.
This concludes today's conference call. Thank you for participating, and you may now disconnect.