Good morning and welcome to the Otis First Quarter 2022 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis’ website at www.otis.com. I will now turn it over to Michael Rednor, Senior Director of Investor Relations. You may begin.

Thank you, Latonia. Welcome to Otis’ first quarter 2022 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President; and Rahul Ghai, 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 that everyone listening is safe and well. We had a strong start to the year, reflected in our financial results and in the progress made on our balanced capital allocation strategy. We grew organic sales, expanded margins and achieved high single-digit adjusted EPS growth, while driving growth in all regions in new equipment orders and our maintenance portfolio. Our service business experienced favorable pricing and grew revenue, margins and adjusted operating profit. In addition, we generated nearly $0.5 billion in free cash flow while continuing to return the majority of our cash generated to shareholders. In Q1, we completed $200 million in share repurchases and received Board approval of a $1 billion share repurchase authorization. In April, we announced a 20.8% increase to our quarterly dividend, while acquiring the remaining interest in Zardoya Otis. After settlement of the tender offer in mid-April, we now have over 95% ownership of Zardoya Otis and expect to automatically delist it in early May. Timing was better than our prior expectations and is expected to add another $0.02 of EPS accretion in 2022. This progress sets us up well for the remainder of 2022 and beyond. New equipment orders were up 8.8% in the quarter with growth in all regions, leading to approximately 1 point of new equipment share gain on top of close to 2 points of share gain since 2020. In Korea, Otis was selected to provide more than 70 Gen 2 units to the Yonghyun Xi Crest apartment complex in Incheon, Korea. Otis Gen 2 elevators equipped with ReGen drive technology that can deliver substantial energy savings will serve more than 2,200 apartment units. This is our latest project in the region with GS Engineering & Construction and further…

Thank you, Judy and good morning everyone. Starting with first quarter results on Slide 5, net sales were up 0.2% to $3.4 billion. Organic sales grew for the sixth consecutive quarter, up 3.1% driven by service sales, which increased nearly 6%. Adjusted operating profit was up $9 million and up $29 million at constant currency as the drop-through on higher service volume, favorable service pricing, productivity in both segments and lower bad debt expense was partially offset by commodity headwinds and annual labor cost increases. We also maintained our unrelenting focus on cost containment and adjusted SG&A expense was down $17 million versus the prior year and down 60 basis points as a percentage of sales despite the inflationary trends in the economy. R&D trend and other strategic investments were flat versus the prior year. Given the strong cash flow and progress on repatriation, we completed our deleveraging and repurchased $200 million of shares in the quarter. Overall, growth in operating profit, reduction in share count and continued progress on reducing the tax rate resulted in first quarter adjusted EPS growth of 6.9%. Moving to Slide 6, new equipment orders were up 8.8% at constant currency, with growth in all regions. Orders momentum remained strong in Asia, up mid single-digits with about 10% growth in Asia, ex-China. China orders were up 3%, the eighth consecutive quarter of orders growth in the country and outgrew the market that was down mid single-digits. Orders in America were up high single-digit and awards, which precede order bookings, were up nearly 25% in North America, signaling continued strong demand. EMEA orders were up 17% with growth in both Europe and the Middle East. Strong orders growth contributed to total company backlog increasing 4% and 6% at constant currency, with growth in all regions, including…

Certainly. [Operator Instructions] And our first question comes from Nigel Coe of Wolfe Research. Your line is open.

Good morning, everyone. Thanks for the question. So there is lots of – lots to talk about. Maybe just to start off with China. What we’re seeing right now in China, obviously, lots of headlines about potentially Beijing locking down? So curious what impact you’re seeing and what we might expect for 2Q?

Yes. Good morning, Nigel, it’s Judy. So listen, we had a really strong start to the year, and I’ve got to just applaud our China team for their tenacity and resilience, really good start. New equipment orders up low single digits, backlog up mid-single digits and their portfolio up high teens for the third straight quarter. Our elevator factories are open in China, including our one in Hangzhou, which is outside of Beijing. I confirm that as well as recent as today, but we do – we’ve seen some challenges with shipments and obviously site access. So what we’ve done is we really expect the second quarter to be lighter due to the COVID lockdowns, and we’ve really adjusted the rest of the year to be down low single digits, mainly from our suppliers needing to restart their operations as well. So this is a kind of full supply chain impact where we manufacture in China, mainly for China. We think it’s a reasonable approach. We’re going to continue to monitor how things come back in China. But again, our elevator our factories are open and the timing of the reopening could push some performance into 2023, and that’s why we think it’s a prudent guide. We revised China new equipment to low single digits down and took our full guide down on new equipment, mainly because of this.

Thanks, Judy. That’s great. And then on pricing, we’re seeing strong – obviously, very strong pricing on – in service. I think you said 2.6%, if I’m not mistaken. Equipment orders are [still stat] (ph) on pricing. So – the two questions here is any reason why we shouldn’t expect that kind of cadence on service pricing to continue? And then are we electing to not get price in equipment to maybe gain share – or is there still a lag impact on the pricing recovery?

Yes. So pricing – let me start with service, Nigel. We’re really pleased. We’re seeing good service pricing increased more than 2 points in Q1, and we expect that to continue. Very strong start on service pricing in the Americas, followed by EMEA. So we still have a mix as China is growing at the high teens in terms of the portfolio, but really pleased that between the volume in the portfolio and the service pricing, that’s why we’re seeing such a nice guide in service, and we raised our outlook 5% to 6% growth there. We expect that to continue as the year goes on, and we see no reason not to. We’re exercising our clauses that give us that ability to up our service pricing because of inflation, and our sales folks are being able to realize that price. So, very pleased with that. In terms of new equipment, overall, we’re flat globally. Good performance in Asia and Asia Pacific and EMEA. Americas is flat. We expect America’s new equipment pricing to improve throughout the year, continuing the second half ‘21 trend they had; China is under pressure on pricing and their pricing is down. But overall, we expect to end the year with flat pricing on new equipment.

Great. Thank you.

So Nigel, just maybe a point or two to add on China. First thing, what we’ve seen in China, as Judy said, the pricing was a little bit under pressure. But what we are seeing is that the volume business is doing well. That is where we’ve actually gained a little bit of price flattish to up on the volume side. The larger projects is where we are seeing the pressure. So that is where the pressure is coming through. The flip side on China is that the commodity prices in China, unlike the rest of the world are also coming down. So if you look at the rebar steel, that was down close to 10% in Q1 and the hot-rolled coil, which is another commodity that impacts the steel prices are down close to 5% in the second quarter. So the China commodity market is behaving a little bit differently than the rest of the world. So that is why maybe the China pricing trends are a little bit different. So – but overall, as Judy said, we are kind of flat for the quarter. And for the year, we’re largely expecting that we will mitigate the backlog pricing headwind that we inherited from last year by in-year price increases. So largely, we will be kind of flattish on price for the year.

Great. Thank you.

And our next question comes from Steve Tusa of JPMorgan. Steve, your line is open.

Hi, guys. Good morning.

Good morning, Steve.

So on the services business, some of the key stats that you talked about as being pretty positive, the whole attrition recapture. Can you just give a little more detail on those? Just a little bit more like maybe rolling averages on those metrics, those KPIs?

So we typically don’t provide those quarterly, Steve, as you know. But overall, the trends were fairly robust across all 3 – retention, recapture and conversion. I think we saw global improvements in all three metrics, retention continues to be our, as we’ve discussed previously, continues to be our focus and that improved year-over-year in the quarter, kind of in line with the full year improvement that we saw for all of ‘21. So that trend is good. Recaptures are very strong, especially in China. And as I have said in my prepared remarks, recaptured units exceeded the cancellations in the quarter. So that contributed to our portfolio growth and conversion trends look really good. I mean, again, with China, where we see the maximum opportunity driving the way, and that was a big contributor to the portfolio growth here. So overall, listen, we are very, very pleased with the way things progress. We have, as we said previously, a really, really strong focus on that. And there was a subtle change in what we said, but that’s our portfolio grew more than 3%. So it says the continued traction that we said, we grew 3% last year. And in Q1, it’s more than 3%. So that’s – so we feel good about the full year growth on service portfolio growth.

I think Schindler said something about a big difference in order volume versus order price in – specifically in North America, like a double-digit difference. Anything going on there with regards to timing of price increases? Did you guys see that a pretty significant between orders to volume and price in kind of developed markets in North America?

Yes. As we said, our pricing in North America was flattish, right? So North America pricing was flattish. I mean the only part in new equipment where we responded to Nigel’s question, Steve, the only place where we saw a little bit of pressure on price was China, right? So that’s where the rest of the world kind of behaved and we expected North America to improve starting Q1 because the cycle time for – from proposal to actually booking the order is really long in North America. So we expected Q4, our pricing was down in the Americas, and we always expected that Q1, we will see the sequential improvement, and we did. So that is good. And hopefully, it continues to gain traction as we go through the rest of the year. But in China, the pricing was under a little bit of pressure as previously discussed, and there was a difference between our units booked and the overall revenue growth in China.

Yes. Steve, we’re seeing a really strong market in North America. Our orders were up 9.1%. The awards, as Rahul said, were up nearly 25%, which is our leading indicator. Resi, non-resi, but especially multifamily, in North America is just really coming in very strong. 12-month roll in the Americas is 13%. So the market is strong. We’re seeing – we’re not – obviously, we have a lag from the time we book till the time we recognize that revenue, but we think that bodes very well for the rest of ‘22 and ‘23.

Okay. Great, thanks a lot.

Thanks, Steve.

And our next question comes from Jeff Sprague of Vertical Research. Your line is open.

Thank you. Good morning, everyone. First, just kind of on housekeeping on Russia, would you had kind of been anticipating something similar to that $0.06 for 2022 in your original guide? And – maybe you could just elaborate on what the plan is there? Are you unwinding the business? You’re trying to find somebody to acquire it? I’m just a little unclear what the plan is there actually.

Yes. So let me answer the first part of your question, Jeff, and then I’ll hand it over to Julie for the second part. So we were expecting a little bit of growth in Russia. The markets were strong getting into the year. So we were expecting a little bit of growth in Russia as we got into the year. But for the sake of ease, we kind of took $0.06 out because we can size the number. But in our original guide, we had a little bit of growth coming from Russia. So Judy, maybe you want to take the second part?

Yes. Thanks. Good morning, Jeff, so I think everyone is aware that we stopped taking new equipment orders and making new investments. We’ve been very public about that in Russia. And really, we are right now evaluating the best ownership structure for the business, whether that’s with us or somewhere else. And that’s why we removed it from the outlook. We really wanted to be able to have a useful comparison. We’re working through our backlog in Russia to try and meet existing customer commitments. Candidly, it is very challenging due to supply chain issues and sanctions. And really, it’s against that backdrop that we’re evaluating options to provide a more certain future for the business. I can’t comment on potential future transactions, but we will update you in due course.

Great, thanks. And then just coming back to service, it’s nice to see the uptick in the margin outlook, and I’m sure some of it is explained by price. I just wonder if you could unpack a little bit more what you’re seeing as it relates to mix and adoption of the IoT offerings across the geographies. You’ve got this outgrowth in China, which would technically be mix negative, right, and the margins are looking better in spite of that. So I just wonder if you could unpack that a little bit more for us. Thank you.

Yes. So on Otis ONE, we had a strong start to the year, especially versus last year first quarter and probably ‘20 first quarter. So we’re picking up nice momentum there and we are headed towards our mid-term – our midterm outlook of 60% of the portfolio covered. We also had some really nice progress in EV bookings, really, which give us another connected product. As we exited the quarter, we had significant EV bookings as well. But we’re really starting to see both the volume pickup and the stickiness, as Rahul said. All three categories are doing better conversion, retension as well as really bringing portfolios, bringing items back to our portfolio. Productivity is strong. It is taking care of any labor increases we’re seeing. And even our apps that we don’t talk about as much anymore, Jeff, have really seen sustained uptick. We’re still rolling them out in some of our Southeast Asia countries as recent as last month. And if you look at the apps, we saw a 20% increase in repair sales booked through the Upgrade app year-over-year. The Tune app, which really gives our mechanics just that ability to use their iPhones to do vibration checking is up more than double same period last year. And we had 50,000 parts ordered, which is up mid-single-digit plus over the year before all using technology. So our mechanics are getting more productive. Otis ONE is adding that ability to be predictive. They have got the ability to see what’s happening with transparency with our customers and we’re seeing actually Otis ONE make a difference in our recaptures when customers come to us, put us back on maintenance because of Otis ONE. So all in all, everything is trending, and that’s why we’ve got confidence in the service, not just in the revenue side, but it will, with volume, it’s going to fall through and the incrementals are going to be strong.

Great. Thanks for the color.

And our next question comes from Nick Housden of RBC Capital Markets. Your line is open.

Yes. Hi, everyone. Thank you for taking my questions. My first one is on China. And if I heard you correctly, you said that you grew orders 3% against the market that was down mid-single digits, which seems like a pretty significant outperformance there. So I’m just wondering what exactly the components are? Is it partly because when you talk about the market, you’re including the lower tier cities where maybe the declines have been sharper, whereas your focus is more on the higher tier cities, where my understanding is demand has been holding up a bit better? Or just any color you could give would be helpful there.

Yes. Let me start, Rahul, and then I’ll let you add. But we saw a share gain of about 1 point globally, but we saw a share gain clearly in China. We came into the year and we expected our backlog to cover 60% or so of the revenue and the rest for the in-year revenue and the rest would be kind of book-to-bill. We thought that book-to-bill, Nick, would be down 5% to 10%. But what we saw in the first quarter was it was only down 5%. So that was fairly positive. As you look at the first quarter, though, we did well Tier 1 through 4 cities, so it wasn’t just the big Tier 1s. We really did well in Tier 1 to 4, and we grew share there, and we grew share in every vertical, residential, commercial, high-rise and infrastructure. So it was an across-the-board gain in terms of share from our China team, and I think that’s what really led to the up 3% in new equipment orders and the backlog up mid-single now.

And Nick, not a lot to add. I think Judy has kind of covered it. I think we covered verticals. We had share gain in all verticals. And what we saw in the market was the market was down about 5% in the quarter, where we saw the growth – we saw a growth in industrial and on the infrastructure side. And residential, as you would expect, was down in the quarter just given the policy that we had. So the market – and the minus 5% that we saw in the market was actually a little bit better than what we would have thought going into the year. We still expect the market to be down 5% to 10% for the year. That estimate has not changed even though some of the metrics have moved around. The construction was up kind of 1% in the quarter. Investment was down a couple of points. The new starts were down, maybe 20% plus in the quarter, but that was a tough compare and then obviously, you had the impact from COVID. But the inventory is kind of holding in China, so the inventory is still at a 3.5 months of inventory. So our estimates for the year on China market growth have not changed. So we’re still expecting minus 5% to minus 10% and with Q1 being down about minus 5%.

Yes, I think it’s just execution of strategy, Nick. Our sales coverage is there. We kept A&D about – our agents and distributors around 2,200. There is been some churn in them as the lower performers are exited and we bring on new for coverage. But our sales coverage actually globally went up about 150 – about 4%, and even though our SG&A went down significantly. So we’re driving everything and it’s all about executing our strategy.

That’s great. And then just one more on China and looking at working capital. So you’re expecting the market to be down 5% to 10% this year. And I’m just wondering what the potential impact could be on working capital and specifically in terms of the prepayment position. Should we expect this to move downward at all? Or will it just increase at a slower rate?

Yes. Our business in China did really well on cash last year, Nick. I mean we were up more than 20% over 2020 levels in 2021. And for the year, for 2022, we kind of expect similar level of improvement in free cash flow in China. So last year, if you look at 2021, our receivables were up slightly less than 10% on revenue that was up more than 25%. So we did really well on cash management in China. But obviously, the situation is volatile. We are looking at our payable situation. We are extending some advances to our customers to ensure supply. But at the same time, we are also looking at, okay, where we can, we are stretching the payable terms. So we’re kind of going both ways, managing it on a supplier-by-supplier basis. But overall, listen, the situation, cash in China was good last year, and we expect a similar level of performance in ‘22.

That’s great. Thanks very much.

And our next question comes from Julian Mitchell of Barclays. Your line is open.

Hi, good morning.

Hi.

Hi, good morning, Judy. Maybe just switching away from China perhaps to Europe. I thought it was interesting you talked about the kind of pushouts there into 2023. So maybe just a little bit more color, I suppose, on was that a Europe-wide comment? Or are there just particular markets that are being affected and you had very, very strong new equipment orders growth in EMEA in Q1. Just wondered how you’re expecting those European orders to play out over the balance of the year? And when you think about the broader Europe market, the last time they had some kind of GDP downturn, obviously, service price and elevators was under pressure. How you feel the market structure is different today, if at all?

Yes. So as you said, our orders were strong in Europe. And we are seeing – so the backlog goes up, as I said in my prepared remarks, it was up more than 5%, and the ARPU more than that, clearly. But what we are seeing, Julian, is we are seeing delays in construction activity, and that’s pretty much all the major European – or most of major Western European markets. So we are seeing that slowdown, which is extending our delivery times from our factories. So that is what we are seeing. And that is the reason we kind of looked at our revenue expectations for the year in EMEA, and we took them down slightly. We were up kind of mid-single digit levels last time if we took them to mid to high this time or low to mid this time. And part of that was obviously Russia coming out because Russia was a faster growth market. So some of that impact was just Russia getting pulled out and some of that was construction. So now we think it’s low to mid. But as you look at the overall construction activity in EMEA, that is kind of holding. So, if you look at the building permit activity that was up 2% to 3% over last year. I think they are expecting that to continue. And so that is where we expect that our orders growth in Europe should be okay for the year. We are not expecting any big slowdown at this point. So, the business seems to be holding up. And all we are seeing is this delay in revenue recognition and the pricing was good as well. So, we saw – we picked up pricing up low-single digits in EMEA. So overall, the business is doing well, except for the slowdown in construction that’s impacting us.

Yes, it’s not a demand issue, Julian, it’s just a delay in the delivery and the recognition of revenue.

Understood. Thank you. And then just on the operating profit line. So, I think your adjusted profit at constant currency was up $29 million in Q1 year-on-year. And the year as a whole, you are guiding up around $130 million. So, you are sort of just taking it looks like the Q1 increase and sort of times it by four across the quarters. I wonder if there was any kind of cadence on that profit development to call out or it really is as simple as sort of $30 million, $35 million increase every quarter? And then specifically on that point, you mentioned the cost inflation headwind of $110 million for the year. How – what was that in Q1? How do we think about that in the second half, the $110 million?

Yes. So, let me start with the second part of your question first, Julian, and then I will get to the first part of the question. So, overall commodity headwinds is about 110 for the year, about $38 million in the first quarter, similar levels expected in second quarter. And what has shifted from the last estimate is clearly, we are expecting a little bit of a headwind in the second half of the year, which was not in our prior expectation that that’s driven by the higher energy prices in Europe that are driving aluminum costs and also some of the steel prices in Europe have gone up. And same thing in North America, we have seen commodity pricing moving higher in North America as well, offset to some extent by lower prices in China. So, commodity headwinds $110 million for the year, about $76 million in the first half, the balance in the second half of the year. Now, in terms of cadence, you are right, I mean what we saw – you can think it’s kind of a run rate. But what you are seeing, obviously, the earnings in new equipment were pressured in the first quarter because of the higher commodity headwinds. And we are expecting kind of similar level of pressure on new equipment earnings in the second quarter. So, the margins in new equipment on a year-over-year basis are going to look very similar in the second quarter as they did in the first quarter. So, the margin expectations in new equipment first quarter, second quarter are going to be similar. And if you look at our full year margin guide, that is more or less in line with the first quarter margin guide. So, we are not expecting a huge acceleration in new…

Julian, the only other thing I would add is what we saw in repair in the first quarter was very positive, which shows even in the regions where people are concerned about office populations, we are seeing elevator usage pick up in the – really in the commercial side of the business as well. And our repair business certainly indicated that in Q1. That’s going to help drive this – again, this margin expansion in service as we go through Q2 through Q4.

That’s very helpful. Thank you.

Thanks Julian.

And our next question comes from Joe O’day of Wells Fargo. Joe, your line is open. Joe O’day: Hi. Good morning. Thanks for taking my questions. I wanted to go back to a comment, I think last quarter, just talking about the cadence around Americas. And I think Judy, you had mentioned that there were some larger projects in Americas that were – you were kind of scheduled for back half of the year. I just wanted to kind of check in on that, see if those time lines are still kind of going according to plan.

Yes. Joe, good morning, they are. I mean, we had secured some large projects in ‘21 and that will actually not just be second half of this year, will be more strong in early ‘23. And that’s still consistent. Those projects are all on schedule. So, what we said last quarter still holds. Joe O’day: Got it. And then it looks like there was a $20 million cut to CapEx guide. How much of that is Russia related? How much of that is other factors?

Yes, some impact from Russia, but we are just looking at calibrating the full year. So, that’s what we did. So, just nothing major things move around all the time. There is not a big cut in any one line, but there is some definitely some impact from lower investments in Russia. But overall, it’s just kind of minor tweaking in different lines. Joe O’day: And then maybe just a clarification on service price, the pricing you got in the quarter, how much of that was contractual just on kind of escalators? How much of that was maybe a little bit more proactive on activity levels?

Well, it all takes activity. So, even though we have those clauses in the contract, they don’t automatically happen at a renewal unless we can enforce it and sell the value of what we are doing. So, our sales force had to go out and basically make all of that happen. So, there was nothing that would just happen automatically, mechanically or commercially. So, it was all make happen, and the team did a great job explaining how we had additional costs and how it’s appropriate for those to flow through on price. Joe O’day: Got it. Thanks very much.

Yes. Thanks Joe.

And our next question comes from Cai von Rumohr with Cowen. Your line is open.

Terrific. Thank you very much and nice results. And so just follow-up on Jeff’s question. I mean we have terrible relations with Russia. The numbers weren’t bad, but presumably going forward, are you concerned that basically, there will be any sort of penalties put on you or operating difficulties as a result of being a U.S. company. And what should we think about the ultimate exit? I mean are you going to be able to get your bat back, or are they basically going to squeeze you, so it ends up being a loss.

Well, Cai, I think it’s important to reinforce that we are following all sanctions that have been imposed by the U.S., the UK and – so we are following all of those rules. We provide an important life safety service everywhere in the world, especially in our service business. So, we are – obviously, we are evaluating who should be or could be the rightful owner of this asset, and that’s the evaluation we are under. We will share more as we learn more, but we will have to see where that evolves.

Got it. Thank you. And then turning to your service population, so could – you were up, obviously, I think you said high teens in China, which looks like it suggests the rest of the world was up 1.5%, 1.8%. Could you give us some color on the service population growth in each of the other three areas as well as some comment in terms of the growth versus how much from conversion, what was the retention loss? And what was the recapture in M&A? Thanks.

Yes. No, it was – as we said, overall, Cai, good growth globally, obviously, strong growth in China. And the other emerging markets in Asia did well as well, but we did grow our portfolio in both Europe and the Americas as well. Obviously, they are lower growth economies. And so they contribute a lower amount because the growth is clearly happening in Asia, but it was a global improvement with improvement in all four regions. And then your second question on conversion. I think the conversion rates obviously moved up a lot overall throughout the world, but especially with the improvement in China kind of driving that, and that is where we expect most of the improvement to come. And the cancellation rate is good. I mean we keep making progress and the fact is that we make, especially in the where that is really important is in the more mature markets, in the U.S. and in the Western European economies. And that is where if you look at our improvement this year, that is we saw – that is where we saw the maximum improvement in our retention rates. Both Europe and U.S. did really well, or Europe and Americas did really well on improving the retention rates. And that is what we really need to see because that also drives price because that’s – losing that portfolio hurts us the most. And by improving our retention rate, that drives incremental price and incremental margin. But overall, really pleased with the progress we are making globally.

Yes. And Cai, we were 1% 2 years ago. Actually, in 2020, we were 2% portfolio growth. 1% in ‘19, 2% in ‘20, 3% last year. We said we would be 3%-plus. That’s what’s driving, again, everything we have said that to drive that portfolio is the key to our service success, and we just had our fifth consecutive quarter of service organic sales growth and our ninth consecutive quarter of adjusted operating profit growth in our Service segment, So, this and growth in every region this quarter on the portfolio. So, that’s what we need to continue to see going forward. That’s what our team is focused on.

I get that, but you give projections for everything else, obviously, if – you mentioned how well China is doing. If China continues at upper teens, even at mid-teens as it’s getting bigger, that has some leverage on the rest. So, what’s the potential that you could be close to the 3.5% for the full year?

Definitely. Yes. I mean our expectation, I think we said it just post Investor Day, Cai, that we see portfolio growth hedging – continue to improve, and there is a clear line of sight at some point to this portfolio growth, starting with maybe a four and then maybe even going up from there. But we take this in small steps and every quarter is a dot point on the board that – and all these dot points make up a trend. So, I think that’s what Judy kind of alluded to, just kind of the sequential improvement. And I think we are putting another dot point on the board with this quarter. And we are hoping that by the time we end the year, this number starts with a four, but we are not there yet. So, we will keep marching forward.

Terrific. Thank you.

And our next question comes from John Walsh of Credit Suisse. Your line is open.

Hi, good morning and I appreciate you taking the questions.

Thanks John.

Maybe just first on pricing, can you just remind us kind of historical cycles, the ability to hold on to the pricing you have been pushing through? And I guess, the question really focuses around is this all still strategic, or is some portion of this kind of a surcharge that as we get maybe some lack of inflation at some point gets given back to the customer?

So, most of our price increases are structural. There are surcharges kind of built into that number, because as we have discussed previously, we have escalator clauses, which are tied to overall inflation in the economy. So, that gets captured on the maintenance side, so nothing unusual in the quarter. We should be keeping this entire price increase. Obviously, it’s all market-dependent, and a large portion of our portfolio comes up for renewal in the first quarter, but not all of it. So, we will keep kind of guiding to you guys as the year goes on, how this moves forward. So, that’s point number one. And the second part is – and then obviously, on the new equipment side, it is once you kind of sign the contract, it’s there. So, I think on both sides, there is no reason to give any of this price increase back. On repair, where we kind of do more break/fix work, there are some surcharges that we add based on the travel that we need to do. So, that is where we do add a surcharge based on travel. But on maintenance and new equipment, there is nothing unusual about the price increases we are just kind of pushing through, and we should be retaining all of it.

Great. And then maybe as a follow-on to that, just thinking about capital allocation, every once in a while, you get some noise around a larger asset, either in Asia or Europe. Can you just remind us kind of where doing something larger kind of fits within your capital allocation strategy of share repurchase, dividends, smaller bolt-ons?

Sure. So, we talk about the smaller bolt-ons at about the $50 million-ish kind of level a year. As you can see when something is attractive like Zardoya Otis, we didn’t hesitate. And kudos to our team for just executing that with excellence with the squeeze out occurring. So, we will be the full owner and delist in the next week or two weeks. So, we are always looking for an opportunity. We think we are at a really good leverage point right now. We are still investment grade. We were able to keep that as well as repaying. We repaid $0.5 billion of debt in the first quarter after $350 million in ‘20 and $450 million in debt in ‘21. So, we are keeping the debt kind of where we want it. Our gross debt is at about $6.75 billion right now, and we think that’s a good place. And if a large strategic opportunity comes up, whether it’s in Europe or Asia or in the Americas, we are going to – we are obviously interested and we are going to evaluate it because the large generation type opportunities don’t happen that often in this industry. So, we are making sure we have got the flexibility on the balance sheet to do that. In the interim, the cash we generate in-year, we plan on returning to our shareholders. We raised our dividend late last week, a little over 20%. And now that’s 45% over 2 years, and already bought back $200 million of shares in the first quarter. As Rahul said, we are going to do another $300 million. So, we will be at $500 million for this year. And our Board reauthorized $1 billion cap for us to do that. So, we are going to share with our shareholders until – and keep our ability to do strategic acquisitions when they arise.

Great. Thank you very much.

Thank you.

And our last question comes from Joel Spungin of Berenberg. Your line is open.

Good. Good morning.

Hi Joel.

Hi. On Russia, if I could start there. Just – I just want – I can’t see the number in the presentation or the release, maybe I have missed it. Have you actually said what your operating assets in Russia is and if there is a level of any outstanding receivables or working capital there?

Yes. Overall, we did not disclose that, Joel. But overall, our asset base in Russia is not huge. We are – we typically do get advances from our customers in everywhere in the world before we get a new equipment order. And Russia is, call it, 80% new equipment. So, our – we are actually in a negative working capital position in Russia. So, as and when something happens, obviously, we will update the accounting, but we don’t expect a big asset write-off. There could be some other charges that we will have to evaluate as time goes on, but we don’t expect a big asset right off to come from anything that Judy mentioned earlier.

Great. Okay. Thank you for that. And then can I just ask about just looking at the numbers on Slide 28. But then is this right, the adjusted operating profit margin in Russia on new equipment was 18%, and that seems incredibly high.

So, just keep in mind, Joel, yes, it is high. And the reason for that is twofold. One, obviously, the biggest reason for that is that we don’t do a lot of installation in Russia. We sell the equipment through our factory to people who actually install it. So therefore, that just drives higher margins because what you – if you look at our industry, we made more money on selling the equipment and the installation part is lower profit. So, that is what you see in Russia because we don’t do a lot of installation that comes through. And obviously, there are some other adjustments that go through as well anytime you try and pull a business out. But the biggest driver of that is just the nature of our business in Russia.

Got it. That’s helpful. Thank you. And then maybe just one quick question on China. And thank you for the detail on how you are doing there and on the outlook there. I was just wondering to what extent I think you talked about the market being down mid-single sort of now your current thinking. Are you able to say sort of implicitly within that, what your assumptions are about sort of normalization some of the challenges you are seeing in Russia. Are you assuming that things get back together back to something approaching normality by the middle of the year, or do you just assume that they stay roughly as they are?

Joel, your question is on China, whether we see the market getting back to normal in China?

Well, actually, more when you see supply chains and some of the disruption that you have seen they are normalizing.

Yes. So, we are – obviously, Q2 is going to be tough, right. I mean we – obviously, we are expecting the lockdowns to kind of end mid-April, but they have now extended. So, we will see how. So Q2, we are still expecting to resume delivery starting May. So, that’s still part of the expectation. But obviously, we will keep monitoring that. We think from our own delivery standpoint, we should be able to catch up as we get into Q3 and Q4 because we saw that just post-COVID, after the lockdowns, we had a really, really strong Q2 in Russia in 2019 – sorry, in China. We saw a really strong bounce back in China in Q2 of 2019. And we expect that as soon as the lockdowns lift, we should be able to recover. But the supply chain part is a little bit more uncertain for us because that we don’t control directly, and that was the reason for taking down our guide, as Judy said earlier. So, we have adjusted our guide, reflecting more of the supply chain issues and potential some conversion challenges with job sites and other places. But from our own factory standpoint, we are pretty confident that as soon as the lockdowns lift, we are ready to go.

Understood. Thank you very much.

Thank you.

I would now like to turn the conference back to Judy Marks for closing remarks.

Thank you, Latonia. So to summarize, we had a strong first quarter and continue to make progress on our strategic priorities while weathering macroeconomic challenges. We recognize the work left to be done to continue building on our track record of resiliency and strong execution. We are confident we will do just that and deliver 10% adjusted EPS growth in 2022 with continued momentum in 2023 and beyond. Thank you for joining our call, and please stay safe and well.

This concludes today’s conference call. Thank you for participating. You may now disconnect.