Otis Worldwide Corporation Q4 FY2025 earnings call

Management Statement and Operational Highlights

• 2025 Achievements: Secured record modernization orders, ended with strong momentum. Achieved record adjusted free cash flow of $817 million in Q4, $1.6 billion for the year. Returned $1.5 billion to shareholders. Completed China transformation initiatives, including buying out minority shareholder in Otis Electric.
• Innovation and Products: Unveiled Gen3 Comfort, Skyrise Mod, Link Mod, and AI tools at China International Import Expo. Launched Gen3 product family in EMEA with Otis One IoT connectivity. Otis One connected units approached 1.1 million, driving 35% growth in subscription revenue in 2025.
• Orders and Backlog: Combined new equipment and modernization orders increased 10% in Q4. Total backlog grew 8% at constant currency. Modernization orders grew 43% at constant currency, ending with a 30% backlog increase at constant currency. Service portfolio grew 4% for 14th consecutive quarter to 2.5 million units.

Segment Performance

• Service Segment: Organic sales grew 5% in the quarter. Maintenance and repair grew 4%, modernization increased 9%. Service operating profit was $638 million, up $49 million at constant currency, with operating profit margins expanding 100 basis points to 25.5%. For the full year, service organic sales grew 5%, adjusted operating profit margin expanded 40 basis points.
• New Equipment Segment: Organic sales declined 6% in the quarter. New equipment operating profit was $47 million, down $15 million at constant currency, with operating profit margins declining 110 basis points to 3.6%. For the full year, new equipment organic sales declined, but total new equipment backlog increased 2% after seven consecutive quarters of decline.

Guidance

• 2026 Outlook: Total organic sales expected to increase low to mid-single digits. Service segment expected mid- to high-single digit growth, with maintenance and repair benefiting from portfolio growth, pricing, and field performance. New equipment organic sales expected down low single digits to flat. Adjusted EPS expected mid- to high-single digit growth. Adjusted free cash flow expected $1.6 billion to $1.7 billion. Target dividend payout ratio 40% and $800 million in share repurchases.

Risks

• China Market Challenges: China market decline moderated in 2025 but still a factor. Structural differences in China's market with shorter contract durations and competitive dynamics leading to higher churn.
• Commodity and Pricing Pressures: Commodity prices, especially steel, could impact costs. Pricing challenges in certain markets, though managed locally.
• Retention and Churn: China's retention rate structurally lower due to market dynamics. Need to balance portfolio growth with value contribution in other regions.

Question and Answer

Q: Growth expectations for maintenance and repair within services segment for 2026, service profit trend, and retention/churn A: Expect repair rates to ramp up to 10% plus, maintenance to gain at least a point. Service profit expected to accelerate with top-line growth, margin expansion from volume growth, pricing, productivity. Retention rate ex-China stabilized, expected small growth in 2026 with focus on retaining high-value units.

Q: New equipment margins, structural vs cyclical A: New equipment segment small, margins headwind in 2026 due to volume decline, mainly from China. China is highest margin region, but cyclical factors impact.

Q: Service margin expansion, mod margins A: Repair volumes growing, modernization industrialized with scale benefits, margins getting closer to target. Mod margins strong in China due to mod bond stimulus program. Service margins expanded 100 basis points in Q4, with factors like repair growth, modernization scale, and asset sales contributing.

Q: Modernization annual growth potential A: Modernization market growing, expected to continue with industrialized approach, specialized sales force, and packages. Orders and backlog ahead of revenue, expecting mid-teens growth in 2026.

Q: EPS outlook, phasing A: EPS expected mid- to high-single digit growth. Q1 expected flat, with acceleration in subsequent quarters due to service top-line growth, margin expansion, and favorable FX.

Q: Margin expansion beyond restructuring programs A: Service business strength, productivity from IoT connectivity, pricing actions, and top-line growth will drive margin expansion beyond restructuring benefits.

Q: China market outlook, mod conversion A: China market expected to decline less in 2026, with mod bond program continuing. Mod conversion quicker than new equipment in some cases, but mix varies.

Q: EPS phasing, service investments A: EPS phasing expected to improve in second half, with service investments continuing to drive productivity and customer satisfaction.

Q: Repair investment, retention rates A: Repair backlog growing, resources calibrated for best use. Retention rate ex-China stabilized, expected slight growth in 2026, with focus on high-value units in all regions.

Q: China conversion rate, price cost A: China conversion rate lower due to strategic focus on high-value units. Price cost managed locally, with China expecting slight decline, rest of world positive low single digit price.