Judy Marks: You bet.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Steve Tusa with JPMorgan. Your line is now open.
Steve Tusa: Hey, good morning.
Judy Marks: Hey, Steve.
Steve Tusa: I think you called me. I was €“ we got some other calls going on this morning, so you overlap. Sorry about that. Can we just get a little bit more info on like attrition or retention? Maybe a little more precision around how much that may have improved year-over-year. Obviously, 1% is a lot. So there’s some nuance there. Maybe just a little more precision on that, from the 94%.
Judy Marks: Yes. We’ve got €“ there’s a chart in the back. And Steve, we’ve shared that we €“ our focus is having a net positive net churn between retention and recaptures. Retention, they’re the most important units to us. We get them at the highest margin, and that’s where we want to start that individual customer relationship that we hope last decades into modernization and then into it, just for decades. So it’s at 94%. It’s about aligned with last €“ with 2021. I’d say it’s pretty close in terms of retention and recapture though, it was up. And you can see that slightly, but it was up healthy, and that was really driven by a few items. Two, I’ll call out. One is our sales specialization where we actually have recapture sales reps that, that is all they do.
And they focus on the density and capturing the best of the optimal units for Otis because we have to go in at a lower price than we would at a normal conversion, but we want to make sure that they are accretive. So the recapture specialists really €“ we saw them hit their stride as we went through 2022. And the second is Otis ONE. And the capital investment, we continue to make at the data level on connected units and on offering that when we do go recapture that really makes a difference to our customers. I’ve personally been involved in a few of those sales calls to win some portfolios back. And it really makes a difference. We can show them the visibility they have, their dashboard they’re going to have and the whole ecosystem we offer.
And so those two combined have really helped, and that’s really €“ that’s been our strategy, and it’s what we’re going to continue doing.
Steve Tusa: And then just on the attrition in China. I know it’s a growing part of the installed base, but any trends there worth calling out?
Judy Marks: I think it’s pretty consistent with 2021 is what I would say. We didn’t see huge anomalies. Obviously, it’s €“ our portfolio in China, our service portfolio, I think we’ve shared is a little over 325,000 units. And that’s grown. It’s our sixth straight quarter of mid to high single-digit portfolio growth in China. And so we’re continuing, recapture, did well there. So we’re continuing to monitor that. But our team €“ our service teams in China are continuing against six straight quarters, and we expect €“ because of the growth in that segment, we expect that to be in the teens again for 2023.
Steve Tusa: Great, thanks a lot.
Operator: Thank you. And our next question comes from Miguel Borrega with Exane BNP Paribas. Your line is now open.
Miguel Borrega: Hi, good morning, everyone. I’ve got a couple of questions. The first one on your margin for New Equipment in China, I know that you don’t disclose this, but can you give us some color on how this has evolved over the years? How does your margin compare today versus, for example, pre-COVID levels? And at the moment, what is the direction of travel for margins on new orders? And then maybe longer term, can you give us a sense why margins in China were keeping much more profitable than, for example, Europe or the U.S.? Thank you.
Anurag Maheshwari: Okay. I think there were three questions over there. So let me start with the China New Equipment margin. We don’t disclose margin by regions. If you look at China New Equipment, it is slightly higher. It’s a good margin business for us. Importantly, if you look at even last year with all the volume decline, the commodities headwinds that we faced, we were still able to mitigate a significant amount of that through productivity. So the margins of the New Equipment business have actually held quite strong because of the productivity business. And even this year, where we are guiding to our margins to be, we’re almost back to 2021 levels. Despite volume being flattish or slightly down, China volume being down 10% and going through a commodity headwinds of about $150 million, $180 million.
So clearly, the margins are trending in the right direction. And all I would say is that we’re quite happy with the way we’ve been able to mitigate some of the headwinds to get to where we are right now. Yes. So that’s on the first question regarding where our New Equipment margins are. Backlog is trending up. The backlog margin is trending up. We’ve had price increases over the past couple of quarters. If you look at where we’re exiting this year, in 2021, our backlog margin declined by one point, we are above one point right now. And €“ where commodities are and where our pricing and new orders and new proposals are going in, that backlog margin should kind of inch up as we move along through the course of the year. We, again, don’t give specific guidance on where it would be, but it’s encouraging to see the price kind of sticking in the market over there.
Yes. And sorry, what was the third question? I couldn’t quite get the question completely. If you could just repeat that, Miguel.
Miguel Borrega: Well, just give us a sense on the spread between margins in China and the Rest of the World. Why shouldn’t we see some kind of conversion trending down to more like Europe or the U.S.?
Anurag Maheshwari: Yes, it’s still accretive for us in terms of the margins over there when we keep driving productivity. So it will €“ the strategy that we’re kind of embarking upon the digitalization of productivity, we should see the margins kind of inching up. I mean net-net, on the service side, we’re seeing 50 basis points margin expansion this year, which is on the high end of a medium-term guidance. And obviously, margins will differ by region, by country. But with all the tools we are doing and we see margin expansion across all the regions.
