Otis Worldwide Corp Q3 FY2024 earnings call

Key Highlights

• Otis returned to topline growth in Q3, with Service showing high single-digit growth, maintenance portfolio up 4.2%, and modernization backlog up 12% at constant currency. Adjusted operating profit increased $8M, adjusted EPS grew 1% YTD to 8.2%.
• Orders: New Equipment orders down 3% Q3, with Americas up >20%, APAC up high single digit, EMEA down high single digits, and China down >20%.
• Customer Examples: Otis modernized elevators in Melbourne, supported St. Luke's University Health, and was selected for Tianjin Metro.
• Uplift Program: Driving a more efficient organization, delivering value to customers, and mitigating global challenges.

Total organic sales grew 1.2% in Q3, driven by Service at 7.7%. New Equipment organic sales fell 8.2%, with over 20% decline in China; excluding China, New Equipment sales rose low single digits. Service sales were $2.2 billion, with 7.7% organic growth, including Maintenance and Repair up over 6% and Modernization organic sales up ~14% year-to-date. New Equipment had 8.2% organic sales decline, with >20% drop in China, but excluding China, it saw low single-digit growth.

2024 Outlook

• Sales: Total organic sales expected ~1.5% growth, driven by Service. New Equipment organic sales down mid to high single digits due to China. Service organic sales expected >6.5%, including Maintenance & Repair ~6% and Modernization >9%.
• Operating Profit: Expected up ~$140M at constant currency. Adjusted EPS ~$3.85, up ~9%. Adjusted free cash flow $1.4B-$1.5B, with $1B plan for share repurchases.

2025 Outlook

• Global New Equipment market expected to improve; Americas flat to up, China down ~15%. Service installed base to grow mid-single digits. New Equipment margins expected to contract, while Service margin expansion expected ~75 basis points in 2024, ~50 basis points annually medium term.

• China Market: Continued economic softness, low New Equipment orders, pricing pressure, and uncertainty around stimulus impact.
• Foreign Exchange: Impact on financial results.
• Macro Challenges: Affecting cash flow and business operations globally.

Q: China fundamentals deteriorating, pricing pressure, strategy in China?

A: Judy Marks mentioned China New Equipment market weak, trading off volume, price, liquidity; Service revenue ~1/3 of China revenue, Mod market growing, margins attractive.

Q: Service margins, labor inflation?

A: Cristina Mendez said Service margins in line with expectations, price up ~4 points, productivity and Uplift offset wage inflation.

Q: Q4 operating profit dynamics, Service vs New Equipment?

A: Cristina Mendez explained Service to continue strong, margin above 25% in Q4; New Equipment expected to decline ~8% in Q4, operating profit margin below 5% due to volume and mix.

Q: China stimulus impact, 2025 outlook?

A: Judy Marks said stimulus impact not anticipated in 2024, more potential in 2025, details from National People's Congress next week.

Q: Free cash flow, working capital, next year expectations?

A: Cristina Mendez said cash flow affected by China New Equipment orders, working capital to stabilize in Q4, 2025 cash flow expected to pick up faster than operating profit.