Otis Worldwide Corporation Q3 FY2025 earnings call

• Otis delivered strong third quarter results with organic sales up 2%, driven by Service growth of 6% and modernization organic sales growth of 14%. Adjusted operating profit margin expanded by 20 basis points. • Maintenance portfolio grew 4%, on track to approach 2.5 million units in the service portfolio by year-end. Modernization order growth accelerated to 27% and backlog increased 22%. New equipment orders grew 4%. • Opportunistically completed approximately $250 million in share repurchases during the third quarter, bringing the year-to-date total to approximately $800 million. • Launched Otis Arise MOD packages in the EMEA region. Named TIME magazine's list of the world's best companies for 2025 and Forbes one of the world's best employers. • Secured strategic customer wins in various regions, such as the 100 McAllister project in the Americas, the largest bond-funded elevator renewal project in China, a project with Sobha Realty in Dubai, the K-Project in South Korea, and the JPMorgan Chase Global Headquarters project in New York.

Service organic sales grew 6%, with Service operating profit reaching $621 million, which increased by $49 million at constant currency, and operating profit margins expanded by 70 basis points to 25.5%. New Equipment organic sales declined 5%, with New Equipment operating profit amounting to $59 million, a decrease of $24 million at constant currency, and operating profit margins dropped 170 basis points to 4.7%.

• Upgraded Americas market outlook to low single digits growth. • Expect total net sales to be in the range of $14.5 billion to $14.6 billion, with organic sales growth of approximately 1%. • Adjusted operating profit is expected to be between $2.4 billion and $2.5 billion, and adjusted EPS is narrowed to the range of $4.04 to $4.08. • Adjusted free cash flow is anticipated to be approximately $1.45 billion for the year. • Organic sales growth is driven by the Service business, with maintenance and repair expected to have mid-single digit growth, repair is projected to accelerate to 10% or above in the fourth quarter, and modernization is expected to achieve approximately 10% growth in 2025.

• Rebuilding customer trust for retention will take sustained time. • Uncertainties in the China New Equipment market with expected mid-single digit decline. • Impact of tariffs on New Equipment margins, with an anticipated tariff impact of approximately $30 million for the full year.

Q: Talk about the efforts underway on the maintenance side in terms of retention and recapture.

A: Judith Marks said it's a long journey, expecting sequential improvement but rebuilding customers' trust to return to a 94% retention rate will take sustained time. They continue to add units, understand conversion rates, and focus on customer satisfaction and driving retention rates up.

Q: On Americas and New Equipment, any more color on the recent activity in infrastructure and resi verticals?

A: Judith Marks said they are much more positive on Americas growth due to demand in infrastructure and resi verticals, and New Equipment execution has improved with backlog growing in the Americas for the fifth straight quarter.

Q: Visibility on repair?

A: Cristina Mendez said repair started with 1% growth in the first quarter, 6% in the second quarter, 7% in the third quarter, and has line of sight to at least 10% in the fourth quarter, giving confidence in the maintenance and repair outlook.

Q: Service margins and future headwinds?

A: Cristina Mendez said Service margin expansion was strong in Q3, but mods and investments may have some headwinds, while focusing on service contribution growth in dollar basis.

Q: Free cash flow and modernization impact?

A: Cristina Mendez said free cash flow has sequentially improved, and with New Equipment stabilizing and Service growing, free cash flow is expected to improve as modernization affects the business positively.