Judy Marks: Hi, Jack.
Unidentified Analyst: Hi, there. Just a quick question kind of just on your perspective on the end market demand kind of back to Judy’s comments on the first question. Just kind of what you’re seeing in the field today maybe by geography and then by end market maybe kind of parsing resi versus commercial or infrastructure? Just anything there would be helpful. And then just if you’re seeing any with the slowing global macro backdrop here, if you’re kind of seeing any municipalities or other customers sort of defer projects or kind of what you’re seeing in 2023 so far?
Judy Marks: Sure. Jack, let me try and respond to both parts. Let me start with new equipment because I’ll break this into new equipment and service, and I’ll actually start with Asia Pacific where the market overall and we’re really expecting solid growth due to urbanization and infrastructure growth in Korea, in Southeast Asia and in India. And we’re not seeing any slowing in that part of the world. It’s really accelerating and expectations should be for solid growth. For 2023 in the Americas, we think it’s going to be a little worse than the market was in 2022. 2022 is an incredibly strong market. First half stronger than second half, but as we saw a really strong market and we’re still seeing the Dodge Momentum Index rising on construction, but the Architects Billing Index for the past three months has been under 50, including December at 47.5. So we’re watching that carefully.
In EMEA, we think flattish. We’re balancing potential headwinds, but I’ll tell you, we have seen Europe become far more resilient in terms of the demand including the residential market in Europe is really strong despite all the challenges consumers are facing. And the Middle East is growing. Middle East, although it’s a smaller part of our EMEA has bounced back nicely so that end market’s going to grow as well. The good news in China, it’s going to be better year-on-year than last year. Second half looks better. Again, segment down, we’re predicting 5% to 10% in 2023, down a little more on the first half, and then we expect to see acceleration through the second half. So, we look at that as we shared in the 2023 outlook slide. And we’re prepared for that because we’ve got this great backlog at 11% on new equipment.
When I turn to the Service business, it’s the end market’s just growing in all regions. It’s solid mid-single digit growth led by Asia and low-single digit really in the developed markets. And I just make you recall that the new equipment market swings really have minimal impact on the service market. It’s going to grow mid-single digit year after year after year. Modernization is up nicely in all regions, and we’re ready for that. We’re going in with a 7% backlog on mod, and we expect mod to continue to €“ from a demand side to continue to grow in 2023. We have not seen a slowing on projects. We’ve also not seen the impact of the Inflationary Reduction Act €“ the infrastructure €“ the Reduction Act in North America yet. We see that later cycle in terms of airports, metros and other infrastructure.
But again, we did see good infrastructure. It was the only positive sector and segment that grew in China in 2022. So we’re feeling good. Our backlog will take us through, again, we’ll watch the book and bill early in the year. But our backlog, we think is going to take us through on new equipment and mod and our Service business is coming in strong. And we’re looking forward to 2023.
Unidentified Analyst: Thanks, Judy. Yes, that’s really helpful. And then just one quick one for Anurag, really quickly just on price cost assumptions in 2023 and sort of the backlog margin converting here. Just kind of what your assumptions are snapping the line on seeing raw material sort of roll over here in 2023? Kind of just high level, how you’re kind of thinking about price cost in 2023? Thanks.
Anurag Maheshwari: Okay, great. Thanks for the question. So price cost is positive in 2023. I mean, you can see it from the margin expansion as well that’s happening at the midpoint. So in pricing, if you look at this year, I mean, after flattish first half, we started seeing pricing going up 3% in the back half. And our backlog is actually up €“ our backlog margins are up over 100 basis points. And what we have assumed for next year is about 50 basis points of pricing coming through into the P&L, which is roughly about $30-ish million. And the reason it’s 50 basis points not what we have right now is it takes a while for the backlog to convert into revenue, and some of that will come into later years, but still are price positive.
On commodities, we do expect about a $20 million to $30 million tailwind. If we look back over the past two years, we faced about $180 million of commodity headwind. Slightly more than $100 million came from Americas and China, and the rest came from Europe and Asia. In Americas and China, of the $100 million on headwind, we’re seeing about $30 million, $40 million of that come back as prices of steel have started coming down. And though we are 50% locked, we still see some of it coming down over years. So clearly, that is very positive. It is actually in EMEA and in Asia-Pacific where we’re not seeing the tailwinds right now. In Europe, if you look at guide rails, it set up 85% from where it was two years ago. So clearly, there is some headwind over there.
And in Asia, we buy a lot from Tier 2 suppliers, and that’s not yet come down as well. But overall, we see about a $20 million, $30 million tailwind on commodities. So net-net between price and commodities, it’s positive.
Unidentified Analyst: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from Nigel Coe with Wolfe Research. Your line is now open.
Nigel Coe: Thanks. Good morning, everyone. Thanks for the question. Just wanted to monitor some of the puts and take on margins. And I think you called out mix impacts in New Equipment. So just maybe just double-click on that and just to clarify what sort of the mixed headwinds are. But my real question is really on the investments, I mean you continue to invest. I think it’s been very successful on the recaptures and retention initiatives. But maybe just talk about the focus for investment spend going forward?
Judy Marks: Let me start with the investment spend, and then I’ll have Anurag talk to the mix. Yes, we are €“ I think you’ve seen, Nigel, since we became independent, we’ve been obviously focused on our business, focused on our markets, and we’ve been extremely focused on investments in our strategy that will yield in terms of innovation. So we’ve done €“ we’ve continued our investments in our service business, both in making our incredible field professionals more productive and that’s yielded the apps that they’ve been using continue to show incredible promise. Our Tune app is up in terms of usage, 70%. In terms of in the field, we’ve got a lot of our service parts being ordered. And our sales €“ our field professionals using the upgrade app are also being part of our extended sales force and selling repairs.
So all that’s working well but the linchpin of our strategy is Otis ONE. It’s being connected. It’s having that predictive, transparent information available in our ecosystem. And we continued on our investment strategy for Otis ONE, again, where we define on the service side where we’re going to install these to get the best yield for both productivity and customer stickiness. So what we’re seeing, we did deploy well over 100,000 units again this year on our trajectory to 60% coverage of what’s becoming a larger portfolio, 2.2 million this year. We said we’ll be over 2.5 million units by 2026 in our medium term, and that 60% should be off that two point €“ that higher number. That’s where we’re heading. And we’re seeing the results of that.
We’re seeing it on the productivity side, where our running on arrivals are down. And we’re seeing that also on the customer stickiness side in two ways. One is when we are connected, like our EV product or any connected product, we’re getting more in price for service. And then we’re getting higher conversion rates and higher retention rates. Our retention rates this year, we were pleased with. They’re at 94%. I look forward to the day that we can report a 95% retention rate because that will have significant validity to our service-driven growth strategy. Conversions were up this year. And I think a lot of that, especially in China, going up to 48% this year where they ended was due to our Gen 3 elevators being connected and our Otis ONE units as well.
So globally, we’re now at a 64% conversion rate. And as China continues on its path to get to 60%, which we think is the target, then, globally, we will be at about 70% conversion. And that is our higher margin conversion. On the portfolio itself, that it is Otis ONE. It is that connected product that gives us the conviction that we can take the 4.1% portfolio growth even higher. Even though this is what we shared for the medium-term guide at about 4%, we do believe we can get that higher, including in 2023. So all-in-all, investments in the New Equipment side are continuing. Our R&D spend is there. Our strategic investments are there. We’re really pleased with expanding Gen 3 and Gen360. On the service side, the Otis ONE value proposition for the customers is working, and we believe it’s reflected in our margin expansion as well for our shareholders.
So Anurag, let me turn it over to you for mix.
Anurag Maheshwari: Yes. Thanks. So as you can see, on the investment side, we’ll continue to invest and still grow our margins. Last year, we grew about 30 basis points, this year we’re guiding for 2030. And we’ll look for productivity other ways to kind of offset that. On the mix, it’s two, it’s regional and product or project mix. On the regional mix, as you are aware that China New Equipment is a higher margin market for us. And even last year in 2022, the other markets did a little bit better than China. But if you look at 2023, we are guiding for China to be flat, whereas Americas-EMEA to be up mid single-digit and Asia mid to high single-digit. So that adds a little bit of a regional mix impact. But the more bigger mix impact is coming from project mix.
And over the past two or three years, and as you’ve seen us making announcements on, we won a lot of major projects, part of our share growth strategy has obviously been on the volume as well as looking at different verticals, be it infrastructure, others to grow our major projects. And the more major projects are, they definitely come in with very good maintenance business, very high stickiness, very good margin, but they are lower margin than the volume business. So there’s a little bit of that impact, a healthy backlog that we have of 11% as we go into 2023 and beyond.
Nigel Coe: Makes sense. Thanks for the detail. I guess that was my two questions. But I just want to ask a question on €“ you called out 800,000 connected elevators today. How much of those Otis ONE connectivity? I want to say about half, but clarify that.
Judy Marks: Yes, I think that’s accurate, about half.
Nigel Coe: Yes, great, thanks Judy.
