Q3 2024 Otis Worldwide Corp Earnings Call
Good morning and welcome to Odisha's third quarter, 2024 earnings conference call.
This call is being carried live on the internet and recorded for replay.
Speaker Change: Presentation Materials are available for download from Otis' website at www.otis.com I'll now turn the call over to Michael Rednor, city advice president of Investor Relations Please go ahead
Michael Rednor: Thank you, Krista. Welcome to Otis' Third Gorder 2024 earnings conference call.
Michael Rednor: On the call with me today are Judy Marks, Chair, CEO and President, and Christina Mendez, Executive Vice President and CFO.
Michael Rednor: 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.
Michael Rednor: We also remind listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties.
Speaker Change: notices SEC filings, including our form today, form 10K, and quarterly reports on form 10K provide details on important factors that could cause actual results to differ materially. Now I'd like to turn the call over to Judy.
Judy Marks: Thank you, Mike, and good morning afternoon and evening everyone. Thank you for joining us. I hope all are safe and well.
Judy Marks: Starting with Q3 highlights on slide 3. Otis returned to top line growth in the third quarter, as we continued to demonstrate the strength of our service driven business model with solid third quarter results.
Judy Marks: In service, we delivered high single digit growth in Q3, bringing year-to-date service organic sales to 6.4%.
Judy Marks: with all lines of business contributing. We achieved maintenance portfolio growth of 4.2% and our modernization backlog increased 12% at constant currency.
Judy Marks: Through the first nine months of 2024, we have expanded overall adjusted operating profit margin by 60 basis points and achieved adjusted EPS growth of 8.2%.
Judy Marks: In two three, we generated $381 million in adjusted free cash flow and completed $200 million in the daily purchases.
Judy Marks: Year to date, we've generated approximately $900 million in adjusted free cash flow and returned $800 million through share repurchases as we execute on our disciplined capital allocation strategy.
Judy Marks: had several exciting accomplishments recently.
Judy Marks: For example, our manufacturing hub in Korea obtained ISO 511 certification. So to now has 11 manufacturing sites certified through the global standard for establishing, implementing, maintaining, and improving energy management.
Judy Marks: In addition, we announce the expansion of our Bengaluru Manufacturing Facility.
Judy Marks: This will increase our capacity and capabilities to help meet the growing residential, commercial and infrastructure demand for elevators and escalators in India, while also expanding our localized manufacturing strategy in the country.
Judy Marks: And last earlier this month, we're proud to be named one of the world's best employers by Forbes Magazine for the third year in a row, reflecting our commitment to our colleagues while being.
Speaker Change: Moving to our orders performance on slide four. New equipment orders were down 3% in the third quarter. A sequential improvement versus the first two quarters a year, despite continued challenging market conditions.
Speaker Change: Excluding China, orders increased approximately 10%.
Speaker Change: Order's return to growth in the Americas, growing more than 20% with excellent performance in North America, while APAC delivered high-single-digit growth driven by continued strength in Japan and Southeast Asia.
Speaker Change: Order's declined by High Single Digital and AMIA due to continued weakness in Western and Northern Europe, bringing orders to 8% year to date after a strong first half.
Speaker Change: A greater than 20% decline in China was a result of continued economic softness in the region.
Speaker Change: Our new equipment backlog at constant currency was down 3% versus the prior year. Although similar to last quarter, the new equipment backlog excluding China was up low single digits.
Speaker Change: This quarter marked two consecutive years of delivering 4% of greater maintenance portfolio growth in each quarter.
Speaker Change: And last within service modernization orders increase 3%. As we face the challenging compare from the prior year in major project bookings, and we expect to see a bounce back to solid mod orders growth in the fourth quarter.
Speaker Change: With mod orders, year-to-date of approximately 10% are modernization backlog increase 12% at constant currency versus the prior year.
Speaker Change: As our colleagues across the globe continue to deliver, we have several customer highlights to share from the third quarter. In Melbourne, Australia, Otis will modernize 30 elevators at 101 Collins Street in the Central Business District.
Speaker Change: Our Skyrise and Gen 3 modernization specific products will be featured along with our signature regen drives and the Otis1 IoT platform.
Speaker Change: In addition, Stahld, the buildings original elevators in 1989 and has maintained them for the past 35 years.
Speaker Change: In the United States, we're proud to support the expansion of the St. Luke's University Health Anderson Campus Hospital in Bethlehem Township, Pennsylvania. Notice who install nine elevators, including five Gen 3 peak and one Gen 3 edge unit, for a new five floor addition.
Speaker Change: The St. Luke's organization has been a valued customer for more than 10 years.
Speaker Change: In the Nordics, our local teams have worked closely with customers to add more than 400 units to the portfolio. In Denmark, we've recaptured 275 units with Domia, a leading construction and housing business.
Speaker Change: And in Sweden, we've recaptured 132 units at Valley and B shopping center. A customer making a welcome return to Odys after 10 years.
Speaker Change: reflecting the continued strength of the infrastructure vertical. Otis was selected to provide more than 340 escalators, and Gen 3 elevators for the 10-gen metro in China, as part of the Metro's new line 8 and in high B-1 line.
Speaker Change: This brings the total number of Otis units in the city's expanding Metro Network to more than 2000. Tension Metro has been using Otis equipment for almost three decades.
Speaker Change: Turning to Q3 Results on Slide 5.
Speaker Change: Oda's delivered net sales of $3.5 billion, with organic sales up approximately 1%. But just an operating profit, excluding a $4 million foreign exchange headwind, was up $8 million, driven by the service segment.
Speaker Change: Third quarter adjusted EPS grew approximately 1% or 1% in the quarter. Against the tough compare of approximately 19% EPS grew in the third quarter of the prior year.
Speaker Change: Operational performance was partially offset by foreign exchange headwinds. This brings a year to date adjusted EPS growth to 8.2%. With that, I'll turn it over to Christina to walk through our results in more detail.
Christina Mendez: Thank you, Judith. Starting with Q3 segment says performance on his live 6.
Christina Mendez: The Tarorganic Cells growth of 1.2% in the quarter was driven by service, which was up 7.7%.
Christina Mendez: New Equipment Organic says, World Down 8.2%, driven by a greater than 20% declining China, as market conditions remain weak.
Christina Mendez: Excluding China, new equipment serves increased low-single deities. The decline in China was partially offset by low-single deities growth in APAC, driven by a strength in Japan and Taiwan, as well as low-single deities growth in the Americas.
Christina Mendez: EMEA was shortly flat as a strength in South and Europe, was observed by Western and Central Europe.
Christina Mendez: New Aquaman pricing was up, low single digits in all regions outside of China.
Christina Mendez: Similar to last quarter, China continues to be under severe price pressure with continuous declines of approximately 10% year over year, although pricing was relatively flat sequentially.
Christina Mendez: Service sales were $2.2 billion. With organic sales growth of 7.7%. As we delivered on our expected acceleration from the mid-single-digit growth in the first two quarters of the year.
Christina Mendez: We grew in all regions and in all lines of business.
Christina Mendez: Maintainance of repair increased over 6% in the quarter. Supported by continue the strong portfolio growth, Maintainance pricing up around 4 points, including the impact of mixed-unchurn, and a ramp-up in repair volumes.
Christina Mendez: Modernization of GANIXS accelerated in the quarter.
Christina Mendez: Up about 14%
Christina Mendez: bringing in year to the italianic cells to approximately 10%.
Christina Mendez: with excellent growth in Asia-Pacific, which was up 20% including contributions widely across year-of-ografies.
Christina Mendez: Dornis to Q3 segment of a rating profit per 4 months on his life 7.
Christina Mendez: New Agreement, operating profit of $84 million, was down 20 million at cost and currency.
Christina Mendez: A stalewan from pricing that continues to flow from the backlog, the activity including the benefits of uplift, and lower commodity costs were more than offset by the impacts of lower volume and regional and product mix headwings.
Christina Mendez: Operating Profit Mahesh came in at 6.4%.
Christina Mendez: Here to date, new equipment sells are down over $250 million, an operating profit has declined by 20 million at cost and currency. That's who's the prior year.
Christina Mendez: In China, New Equipment has been revenue headwain for approximately $400 million. That wouldn't lie a profit headwain of about $100 million.
Christina Mendez: which we have largely mitigated through solid productivity and the benefit of commodity and pricing tailwinds.
Christina Mendez: Service Operating Profit of $555 million, increased $40 million at cost and currency.
Christina Mendez: As dropped through on higher volume, favorable pricing and productivity, including benefits from uplifts, more than offset annual weight inflation.
Christina Mendez: As our result, operating profit margins remained strong at 24.8%. Even while facing a difficult prior year compare, were margin-sexpanded 90 basis points in the third quarter of 2020.
Christina Mendez: D.R. to date, operating profit margins have expanded 60 basis points to 24.6%.
Christina Mendez: With the benefit of our various uplift initiatives, we dropped the R2D data yesterday as DNA, lower by $18 million. While improving a percentage of sales, by 10 basis points year over year.
Christina Mendez: On a lighter gunning says growth, these cost initiatives are helping to mitigate labor inflation on head wings.
Christina Mendez: Supported by a sustained stronger performance in the service segment, we achieved total operating profit by means of 16.9% in the quarter.
Christina Mendez: A guest at EPS grew 1% or 1% in the third quarter, with our operational performance and a lower share count, contributing positively.
Christina Mendez: Moving to cash, we generated $3.81 million of adjusted free cash flow in the third quarter. And we saw the Queensland Improvement in cash from operations within the quarter.
Christina Mendez: We continue to work to drive cash flow into year end, despite the various macro-unnic challenges that we are facing across our business. Most notably in China, due to the low-word new implement orders.
Christina Mendez: Overall, we are today, we grew organic sales 1.2% with mid-single digit or greater growth in all regions outside of China.
Christina Mendez: With service as the driver, we have delivered 60 basis points of my in-expansion, 8.2% at the SDPS growth, while returning $800 million to serholders through serbye bags.
Christina Mendez: We move into the final quarter of the year with continued focus on operational experience across the business, while working to offset the macroheadwinds we are facing.
Speaker Change: Let me now turn it back to Shuri to discuss our 2024 outlook.
Shuri: Now on slide 8, before discussing our updated 2020-4 financial outlook, let me first update you on our industry outlook, including giving some color on how we anticipate 2025 markets to shape up.
Shuri: On the positive side, we now expect the Americas to be roughly flat, up from the prior outlook, as customer-demand signals are showing signs of improvement.
Shuri: We expect China to be down approximately 15% and this takes our Asia outlook down to a roughly 10% decline. There is no change to our new equipment outlook in EMEA or APAC.
Shuri: Overall, we expect global new equipment units to be down high single digits for 2024.
Shuri: Offsetting the pressure on new equipment markets, the service market remains resilient and we expect the global install base to grow mid-Signal digits this year. As units that were booked a few years ago are coming off warranty and converted into the service base.
Shuri: Looking towards 2025.
Shuri: We expect the global new equipment market to improve, despite the new equipment softness in China.
Shuri: We anticipate the combined Americas, EMEA and A-pack new equipment markets should be up-low single digits in units.
Shuri: China remains a question mark, but at this point we currently anticipated the climb somewhere in the range of 5 to 10 percent in units.
Shuri: Clearly dependent on the impact of government stimulus measures.
Shuri: Overall, across all regions, we currently anticipate a sequential improvement in new equipment market growth rates next year versus this year's rates.
Shuri: On the service side, the install base should continue to grow at around mid-single digits.
Shuri: A clear demonstration of the resiliency of the industry.
Shuri: We anticipate the modernization market will continue to grow strongly in all four regions.
Shuri: Turning to our financial outlook for 2024.
Shuri: We now expect sales of approximately $14.2 billion with organic sales growth of approximately 1.5%.
Shuri: Service remains strong across all lines of business for both growth and profit. And Christina will give more color on this in a moment.
Shuri: Our sales outlook is at the low end of our prior expectations, with the changed driven specifically by China New Equipment.
Shuri: Adjusted Operating Profit is now expected to be up approximately $105 million of actual currency and up about $140 million at constant currency. With the change to our prior outlook, similarly driven by China New Equipment.
Shuri: We anticipate adjusted EPS to come in around $3.85. Up approximately 9% driven by strong operational performance and the benefit from a lower share count and continuous improvement in the reduction of our tax rate.
Shuri: We've expected adjusted free cash flow to come with an arrange of 1.4 to 1.5 billion dollars and plan to return the cash we generate this year to shareholders through dividends and 1 billion dollars in share repurchases.
Shuri: We continue to make steady progress with our Uplift program, which is helping to drive a more efficient organization and deliver more value to customers while mitigating some challenges we face for the past few quarters throughout the globe.
Shuri: Overall, our service driven business model and overall company strategy remain on track and we will continue to deliver value to shareholders, including the 9% EPS growth we anticipate this year. Now let me hand it to Christina to discuss our outlook in more detail.
Christina Mendez: Thank you, Judith.
Christina Mendez: Taking a more detailed look at our look and starting with self on a slide 9.
Christina Mendez: Total Organic cells are expected to be up approximately 1.5% Reven by solid performance in our service segment.
Christina Mendez: We expect new equipment organic cells to be down mid to high single digits. Revenge by your declining China, due to the challenging market conditions that Judy mentioned earlier.
Christina Mendez: Total Asia is expected to be down high teams in 2024 with a strong high single digit growth in Asia Pacific. More than upset by severe declines in China.
Christina Mendez: Our outlook for the Americas, MIA and Asia Pacific are unchanged from the prior guidance.
Christina Mendez: Overall, the new Equimment segment has performed weaker than we expected this year.
Christina Mendez: driven by the Marcus situation in China. However, the rest of the world has performed better than we projected at the start of the year. And we anticipate the combined growth of America's, EMEA and A-PAC to be meet single digit app for 2024.
Christina Mendez: Our service segment continues to perform quite well and has been largely aligned with our expectations as we have gone through the year.
Christina Mendez: In land with our prior guidance, we anticipate service organic cells to grow a bit more than 6.5%.
Christina Mendez: This includes maintenance and repair growth of approximately 6%. Our modernization growth of at least 9% at or above, the high end of our prior range.
Christina Mendez: We anticipate continuous modernization, since the moment we do in the fourth quarter, due to the timing of project execution from the backlog.
Christina Mendez: We expect this to be the third year in a row of service organic sales growth of 6% or better.
Christina Mendez: Offsetting the severe headwinds we have faced in the equipment of the past years.
Christina Mendez: and demonstrating the power and resiliency of our business model.
Christina Mendez: Thirdly, to slide 10.
Christina Mendez: At Constant currency, operating profit is expected to grow approximately $114 million.
Christina Mendez: In service, performance this year has been excellent year to date, and we expect operating profit margin to expand approximately 75 basis points for the full year. Remember volume, productivity added by uplift and continuous solid pricing.
Christina Mendez: For new equipment, operating profit margins have now expected to contract 50 basis bonds, as soon as the prior year.
Christina Mendez: Telugu is from productivity including benefits from uplift.
Christina Mendez: Comodities and pricing from the backlog are being more than offset by volume and mixed headwings emanating from lower China new equipment cells. As a result of continued market witness.
Christina Mendez: So, the updated outlook has since a similar fourth quarter organic growth rate in new equipment to what we saw in the third quarter.
Christina Mendez: An Unconstant Current Cases, we would anticipate a similar dollar declining new equipment profit of around $20-25 million, with a slightly larger headwind at actual currency.
Christina Mendez: We expect, overall adjusted operating profit margin expansion of 70 days' points driven by service performance.
Christina Mendez: The update for what I'll look is exclusively driven by the changing new equipment cells driven by China volumes. And we are mitigating these headwings through service volumes, productivity and pricing.
Christina Mendez: Turning to cash flow, we expect what sheath adjusted free cash flow in the range of 1.4 to 1.5 billion dollars.
Christina Mendez: The logo-operating profile look, coupled with fewer down payment from China near Equimator their volumes, are impacting our expected cash flow for the year.
Christina Mendez: We continue to focus on what we can control to improve working capital and we expect strong free cash flow ramp up in Q4 similar to last year.
Christina Mendez: Moving to the 2024 EPS Bridge on a slide 11.
Christina Mendez: We expect to deliver a adjusted EPS of approximately $3.85.
Christina Mendez: This is 31 cents of VPS growth, which is the prior year or approximately 9%. Lately is driven by operational performance.
Christina Mendez: At Constant Currency, we expect approximately 36 cents of operating profit growth outside of China. While we anticipate China to be a headwind of about 10 to 15 cents for the year.
Christina Mendez: Redactions in the effective tax rate. An a lower share count are anticipated to upset headwinds from higher inter-existence and for a change.
Christina Mendez: Minority Interest Expense Naturally Move Flower, due to the weaker China performance.
Christina Mendez: Let me now give you some additional commentary on two areas. First China and second, how we see 2025, say, pinabha, this point.
Christina Mendez: On Signum, although we have largely been able to mitigate the significant China impact on adjusted EPS year to date.
Christina Mendez: In our EPS bridge, we have included a small range of China outcomes.
Christina Mendez: Gives Somatician Alkolo, due to the continued and certain team in the market.
Christina Mendez: As we exceeded Q3, the new equipment backlog in China is down mid-steens, and the
Christina Mendez: While Matt has been said on the policy front in terms of possible stimulus in the region, and we remain optimistic for the policy follow-through.
Christina Mendez: As we see it here today, unless the region begins to accelerate into year end, we could see it being a world of a five-cent additional headwind to EPS.
Christina Mendez: Lower China volumes and the mix impacts naturally puts pressure on the exit runway by the following equipment into 2025.
Christina Mendez: Now, let me talk a bit about 20-25 starting with service.
Christina Mendez: We expect the service business to continue performing well next year with mid-Single Digital Better Top Line Growth and continued Mahr in Expansion.
Christina Mendez: While we expect to achieve approximately 75 basis points of my inexperienced in this year
Christina Mendez: We served at our investor the Infervery that the service business over the medium term would achieve 50 basis points or a slightly more of margin expansion Anurag.
Christina Mendez: So, as you think about the two years combined, we would expect to be somewhere between 100 and 125 basis points of margin expansion within the service segment.
Christina Mendez: On New Equipment, I've seen the past few years, including China, we feel good about the rest of the world combined, growing low-single digits or better into a 25.
Christina Mendez: While there are still a few months to go, which will determine exactly the orders in 24 and I will end in Bagloch having in 2022.
Christina Mendez: If we assume that the backlock entity is here, down low single digits, that would be a fairly good starting guide post for the equipment of line in 2025.
Christina Mendez: As you mentioned earlier, China remains uncertain for the new equipment segment, for both self and profit.
Christina Mendez: As without policy change and a stimulus action, we would expect our second half Marriand Red in New Equipment to persist throughout 2025.
Christina Mendez: The magic rate within New Aquimant is being impacted by the meaningful seed in regional needs.
Christina Mendez: With more than 75% of the new equipment revenue, now being driven by sales outside of China.
Christina Mendez: We will continue to work to offset the headwinds that these poses through productivity, while continuing to drive the oblique program and rightsizing our course, to align with the current market conditions.
Christina Mendez: In Clothing.
Christina Mendez: Our results from the first nine months demonstrate our ability to deliver on our service driven business model.
Christina Mendez: We continue to focus on what we can control, including growing our portfolio, executing on our expanded modernization backlog, and continuing to drive productivity throughout the organization, including uplift initiatives.
Christina Mendez: We continue to drive results through the remaining of the year to set us up well to perform in 2025.
Christina Mendez: With that, please open the line for questions. Thank you.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone, keep ahead to raise your hand and join the queue. And if you like to withdraw that question, I can press star 1.
Speaker Change: Your first question comes from the line of Nigel Cole with Wolf Research. Please go ahead.
Speaker Change: Thanks for the details on that by 25%
Speaker Change: Um...
Speaker Change: Just so it seems that China fundamentals are starting to really sort of cheer in. I'm just wondering...
Speaker Change: You know, the message has been, you know, obviously pricing pressure, being accepted by the declaration re-inpocos. So I'm just wondering...
Speaker Change: If the OE pressure we're seeing right now, whether that's really a function of lower China margins, not just the mix of China. And this wondering if the pricing is getting irrational and whether there's any changes in strategy, you know, the other next year, one or two years within China.
Speaker Change: Yeah, thanks Nigel and good morning.
Speaker Change: Listen, the new equipment market, as you heard myself and Christina Say and China, remains weak. It was down 15% this quarter, similar to second quarter.
Speaker Change: and we think that's how the year is actually going to finish. We are constantly trading off.
Speaker Change: Volume, Price and liquidity to make sure that our China business remains strong. As we go into 2025, we now believe the China segment for 2024 will be at about 415,000 units.
Speaker Change: As we've looked and as we've shared, our new equipment revenue is down fairly significantly, double-digit. Our service revenue is flat-ish to up slightly, our portfolio units are still up high teens.
Speaker Change: So the pivot and the strategy we've been making to service is working about a third of our revenue now in China is service.
Speaker Change: and as you heard Christina say we're down $400 million in revenue year to date in China.
Speaker Change: We're going to put in our guide. We're going to be down a half billion dollars of revenue in China this year and still have organic top-line growth for the company. Now, when we look structurally at China, our new equipment total contribution is really only down a couple of points.
Speaker Change: So we are still seeing the deflationary environment, we're optimizing commodities to the best of our ability and really trying and focused on delivering down a few points even though pricing.
Speaker Change: Remained competitive, it has always been competitive in China on new equipment.
Speaker Change: We are not seeing irrational pricing. We're seeing sustained competitive pricing. And a 415,000 unit market to me is still a healthy market in terms of segment size for us to secure the business we want.
Speaker Change: The Mod Market is growing and is picking up nicely and you'll see us drive Mod Margin Expansion.
Speaker Change: As we grow scale there, our mod orders here to date in China, our positive October was very positive, but for the quarter it was not at the level we wanted and there was a little bit of...
Speaker Change: A little bit of resistance.
Speaker Change: As people were waiting to understand more about the equipment renewal incentives that had been announced early in the quarter with not a lot of specificity. We're seeing that pick up that was prior to the bigger stimulus that was announced.
Speaker Change: and later in the quarter. Our service units are up yet again, high teens. The service revenue was up 1%.
Speaker Change: So our business in China is reshaping.
Speaker Change: It's if you think down a half billion, $500 million, that's the lowest revenue we've had in China since we've reported in 2017, which was in our form 10, we did a look back two years.
Speaker Change: and yet as you look at the contribution even that our China theme has made, it is not at that level of drop.
Speaker Change: So we're watching Mix carefully. Obviously the other three regions are adding significantly to the mix and the margin and the top line on new equipment and the service business, including in China, is doing very well.
Speaker Change: Okay, that's great, Judith, that's great colour, thanks very much. And then just a quick one on service, you know, that the flat service margins, the year you obviously have kept, you know, the service outlook unchanged. Was that sort of...
Speaker Change: Your Pants are the quarter and maybe just obviously the mods mix would have been at the... So maybe just a bit more colour on terms of the operate leverage within services and whether the labour inflation is actually getting a bit worse there in terms of impacting the margins perhaps.
Speaker Change: Hi, Nigel, this is Christine Amt.
Christine Amt: So on service markings, they are coming broadly in line with expectations. And in fact, when you see sequentially, they are going up. It was 24.7 in Q2, 24.18 in Q4.
Christine Amt: and this is thanks to the flow to of Goodwood Bolions and you have seen that there was a Good Drum Pub.
Christine Amt: of services in the quarter, coming mainly from the timing of repair and modernization. We also have a very good performance in price, price was up in the quarter approximately 4 points.
Christine Amt: Screening the impact of Nick Sanchran and we also have productivity and upliftments. So, Sonol of Disease Compensation, waiting for the information that is really light with expectation. So, I will say...
Christine Amt: Burya's serious tape performance in service in live with expectations and discounting even an opportunity for Q4 as we see modernization is ramping up very nicely.
Speaker Change: Yeah, Nigel, the other thing if you recall last quarter, we anticipated repair picking up in the second half of the year and mod conversion picking up in the second half of the year.
Speaker Change: Both of those are contributing nicely. Repair was up 10% with really led by the Americas.
Speaker Change: and Mod if you look at really how we've performed on the...
Speaker Change: on the delivery side of MOD, you know, we were over 13% in terms of sales.
Speaker Change: That's going to continue with our back-l-mod back-log up 12%. We keep anticipating repair to normalize, to like a point above maintenance, but it looks like we'll wrap this year and fourth quarter again with strong repair, similar to third quarter.
Speaker Change: Okay, thank you.
Speaker Change: Here next question comes from the line of Jeffrey Spredg with Vertical Research Partners. Please go ahead.
Jeffrey Spredg: Thanks for morning everyone. Hope everyone is well. Hey, Judy, can you also just drill a little bit into Mod, China? And I guess so, this specific angle of my question is...
Jeffrey Spredg: You know, kind of, if you think about mods global layers, certainly rest of the world right, we're thinking historically a little bit below new equipment, you know, with the trajectory above new equipment, you know, as you re-align the business, does that play both the existing, the same way shape and form in China?
Speaker Change: Yeah, it does, Jeff, and good morning. So, Mod Margins in China look attractive like new equipment margins do in China relative to the rest of the world.
Speaker Change: and we're seeing that play out this year as well. It's early days for modding China, obviously a younger portfolio.
Speaker Change: but a portfolio that will accelerate and grow more rapidly when you think about Kager versus anywhere else in the world. So we're in a unique position to do mod and industrialized mod with our kits.
Speaker Change: from the start.
Speaker Change: There's not a lot of old units, the modernized and mods, so most of these are our Gen 2 units, which means we're going to get the benefits of scale, commodities, we're already handling Gen 3 mod on our Gen 3 line and our factories in China. So I'm very optimistic about mod in China in terms of available segment, in terms of demand, in terms of rapid growth.
Speaker Change: and again, what we've seen early orders in October and Mod is very promising. This equipment renewal program that I spoke about just to give you a little context was announced.
Speaker Change: I think in the July timeframe, it was for everything from appliances, to cars, but elevators and escalators were included, which we thought was very important.
Speaker Change: The challenge is obviously with all these getting the rules out locally and that that take that has taken a little time and the reason why I believe our mod orders weren't as strong as they needed to be in the third quarter.
Speaker Change: You're going to see Mod bounce back, nicely we've already seen it knocked over in China. You're going to see more significant mod orders.
Speaker Change: As we came into this quarter globally, our modellators were up for 7 or 8 quarters double digit. You will see a return to double digit in the fourth quarter and then the rest of the world.
Speaker Change: We saw some timing issues in Mod in the third quarter in terms of some major projects. There's a move to the fourth quarter but we expect those to come in. And we did a slight compare with a couple projects in the middle east from Q3 last year that were pretty significant Mod projects.
Speaker Change: So we'll be back to double digit in the fourth quarter, which means the backlog will remain strong going into next year. And I think what you've now seen is we've proven the conversion, the mod margin for the third quarter in a row globally, was better than the new equipment margin.
Speaker Change: So the strategy we put in place last year to industrialize mod, we're seeing that take hold and we're seeing mod margins now greater than new equipment and we do have line of sight to the 10% mod margins we anticipate in the medium term.
Speaker Change: And then just really big picture on China, you know, as we sort of stepped back right, going from I don't know, called 650,000 units to 450, which you characterize as still healthy.
Speaker Change: I just wonder, like, big picture though, is that the right number, right? I think the second biggest market in the world is India, like 75,000, right?
Speaker Change: If China's overbuilt and the population is shrinking, does it that number just have to actually grind lower over a number of additional years?
Speaker Change: I think there's a potential for it to grind lower as you say Jeff, but it's gonna grind lower at a lower rate.
Speaker Change: You've taken a third of the volume out from 60 to 415 and next year when we're looking at, again, without stimulus impact, down 5 to 10%.
Speaker Change: What that means is we're actually going to see sequential growth improvement in new equipment in 25 at Otis over 24.
Speaker Change: Because of the China not decaying or decreasing as much as it did this year.
Speaker Change: So when we look at the compares and sit here this time next year, we actually, and we'll give you the guide clearly in late January with all the specifics.
Speaker Change: But we actually see sequential top line growth improvement in 25. We're going to see it in service and we're going to see it in new equipment.
Speaker Change: Great, thank you for sharing it.
Speaker Change: Here next question comes from the line of Julian Mitchell. With Barkley's, please go ahead.
Julian Mitchell: Hi, good morning.
Julian Mitchell: Maybe just had one clarification on the sort of fourth quarter operating profit dynamics. So I think you've guided the full year up about 140 million constant currency.
Julian Mitchell: You know, slide 11 and 10 and then I think you know the nine months was up, ninety six million on slide 20. So you have this sort of 40 million plus increase.
Julian Mitchell: Year on Year in Q4.
Julian Mitchell: But I think new equipment down 20 or 30 and Q4. So it's a sort of a bigger uplifting.
Speaker Change: Service, it looks like just maybe help us understand kind of what's driving that. It looked like the sort of general seasonality in the Q4 guide is a bit stronger than your normal seasonality on profits.
Speaker Change: Hi Julian, this is Christina and I see a very good analysis. As you have said here today we have grown operating profit at cost of currency of about 96 million, which means margin expansion of 60 million. And when you look into Q4 we expect service to continue performing very strong.
Speaker Change: So, I'm flying to continue growing on the back of the ramp up of free-per-rand modernization and a good flow through operating profit with additional margin expansion. Margin is expected in service to be above 25% in Q4. But it's not driven by seasonality, it's just driven by the performance of execution from pin-up the top line and...
Speaker Change: Continually working on productivity.
Speaker Change: On the other side on near-quimance we expect Q4 to be more or less at the same level of top line decline as in Q3 approximately – 8%.
Speaker Change: and that means flow through into operating profit with.
Speaker Change: operating profit margin below 5% because we have them all human and the mix effect and additionally we see price and commodities gradually fading out in Q4.
Speaker Change: But overall, we compensate the decline in the equipment with a very strong performance in service, in order to deliver as you rightly set approximately 40-50 million operating profits close in the quarter. Yeah, that 25% March rate is very achievable based on everything we're seeing during.
Speaker Change: Thanks very much for that detail and then maybe for the 2025.
Speaker Change: A equipment margin outlook, I think Judith you had talked about, sort of new equipment margin when you're thinking about next year and realize it's early, but a good placeholder might be
Speaker Change: You know, sort of margins next year in New Equipment Simulet to this second half. So I think it's sort of, you know, third quarter, you're running it.
Speaker Change: You know, 34th quarter you're running a sort of mid-single digits there. See, I see a 6% Q3 and it sounds like 5% or less in Q4 for new equipment. So, you know, sort of 5% margin in 2025 and new equipment as it looks today. Just help us understand kind of what's that assuming maybe for pricing and are you planning or starting to enact?
Speaker Change: for the cost-out measures, there's the uplift program working through in its second year. Anything happening on there to try and get those sort of nose up on new equipment margins.
Speaker Change: Without guiding, I think you're very accurate in terms of what you're seeing for 25 new equipment margins. Again, driven by the impact of mixed.
Speaker Change: As China contribution is less and the rest of the world is now as Christina said over 75% of the revenue for new equipment. Just so you get a sense, China's going to finish this year all in at 13% of our revenue.
Speaker Change: So it's really changed the dynamic, but our Uplift program is on track.
Speaker Change: Last quarter you saw we updated the outlook and the run rate and that is holding well and that will continue to deliver in 2025 and we've planned on that.
Speaker Change: Before I turn this over to Christina, on maybe a little more color, why don't I just give you how to sales and the top line look for 2025. So, in new equipment, again, excluding China or new equipment backlogs up low single digits.
Speaker Change: and the next week, we'll see where the fourth quarter ends up in terms of orders.
Speaker Change: Now, new equipment top line, we'd expect low single digit growth next year for everywhere outside of China.
Speaker Change: and China, we would expect along the lines that we saw this year.
Speaker Change: But we'll, you know, we have to wait and see we haven't pre-programmed any stimulus. I think we're all waiting to see what happens.
Speaker Change: in the next week at the end of the week with the National People's Congress.
Speaker Change: and we are prepared for the stimulus, whether it comes in new equipment or mod, we have to capacity, we have to keep the abilities on our factory and in our field. So new equipment, you know, I all in the growth, we think we'll be downloading it, single digits.
Speaker Change: You know, kind of plus or minus where the backlog comes in at the end of the year.
Speaker Change: on Service Top Line.
Speaker Change: Really strong service portfolio growth. And if I could just take a minute, we talk about this 4.2% a lot and we've had 8 straight quarters or 2 years of that.
Speaker Change: What I think it's important for everyone to understand is with the largest service portfolio in the globe at 2.3 million units growing that almost 2.4 million by year end.
Speaker Change: We're adding 25,000 units every quarter to our service portfolio. And as we shared it in Vester Day, our average service customer has four units.
Speaker Change: So we're adding 25,000 customers, which is why we have such faith in our service driven business model. That drives maintenance, that drives repair, and it drives additional density for us that gives us productivity, all of which support, again, this high margin service business.
Speaker Change: and with our retention rate at almost 94%, it also then drives that continuous relationship for 15, 20, 30 years that gives us the modernization business.
Speaker Change: So, service next year as we look at it, maintenance and repair is going to be driven by that strong portfolio growth and very solid repair volumes.
Speaker Change: We've been getting price on service this year as Christina said like for like pricing increased four points.
Speaker Change: We're watching Inflation, but we will get price next year. We'll be at the same level, depends where we are in the world with inflation, but we will get price on the maintenance side and the portfolio growth. It'll be a tailwind in 25.
Speaker Change: Repair volume, very strong as I said north of 10% growth. We still see solid repair backlog going into next year.
Speaker Change: Expect that to normalize, but you've heard me say that every year, so but we do expect it to normalize and mod, you know, as we exit it right now, the third quarter backlogs up 12.
Speaker Change: And we did 9% you know we're looking at 9% high single digit plus that's what you should expect next year too if not better because the mod backlog's growing.
Speaker Change: So I just wanted to give you some color on the portfolio itself.
Speaker Change: [inaudible]
Speaker Change: This near-term new equipment in China doesn't get me concerned because we're still growing mid-team plus, if not high-team portfolio in China, and the rest of the world is growing our portfolio low single-digit. So we don't see there being a knock-on effect.
Speaker Change: A few years out because we have time to work it. We have time to do recaptures and we are focused on improving our retention rates
Speaker Change: are doing much better in China and the like. Let me turn it over, Christina, for you on any other comments on progress.
Speaker Change: on the Profit side and you had a very good analysis. So as Judy, recapping the top line, we expect next year low single-digit up, that is sequentially slightly better because of less decline or lower decline in new equipment. But now on the margin side.
Speaker Change: Service will continue with margin expansion. You recall that we said back in February in our investor day that service was going to grow 50 basis points.
Speaker Change: of Annual Margin Expansion, this year we have overdriven, we are 75 basis points, but when you put together 24 and 25, we expect margin expansion of around 100-125 points in service.
Speaker Change: On the other side, new equipment, as you rightly said, we have the effect of volumes and mix, but additionally, as I mentioned before,
Speaker Change: Next year, the commodities and price tailwinds that we have benefited this year are going to gradually fade out.
Speaker Change: So all of this together would mean that the second half of the year marriage rate is going to persist in 2025 and it would mean approximately 50 to 100 basis points of margin decline.
Speaker Change: But when you put everything together...
Speaker Change: We have a stronger service segment, a weaker new equipment, but overall operating profit is expected to grow mid-single-digit next year.
Speaker Change: That's great. Thank you.
Speaker Change: Your next question comes from the line of Joe Odia with Wells Fargo. Please go ahead.
Joe Odia: Hi, good morning. Thanks for taking my questions.
Joe Odia: Can you elaborate a little bit more on America's and Europe and the growth that you're seeing in the backlog and price versus volume and I think just as we
Joe Odia: consider multifamily pressure and office pressure but the growth that you're seeing and an outlook for growth into next year trying to understand kind of market versus share gain and other factors at play.
Speaker Change: Thanks, Joe. Listen, in the Americas, I'm really pleased. This is really the first quarter. We're seeing really early projects moving forward again with green shoots.
Speaker Change: We all know the indicators, ABI and DODGE. I won't repeat them for you, and I know we like to think some are leading, some are lagging. I think that you're going to see this all settle out over the next 12 to 18 months.
Speaker Change: We are definitely seeing improvement in the new equipment market segment in Q3. You saw our orders were up 23%. We knew we needed that. We said we'd come back in the second half.
Speaker Change: and we delivered and actually in North America we increased our pricing it was the best we did anywhere in third quarter it was low single-digit but it was the best anywhere in in the in the quarter in the world
Speaker Change: If you look at America's for the year, year-to-date, we're down 9.5% in orders.
Speaker Change: But if you eliminate that large infrastructure job we want in Canada in the first quarter of 2023, we have shown nice sequential growth quarter after quarter, and we're really seeing more new equipment market stability.
Speaker Change: Some of it and again, we get this from our sales teams as they're talking to customers The sentiment has gotten a lot better after after the Fed You know changed the rates
Speaker Change: We've got a really strong backlog in the Americas, a good 18-month-plus line of site to perform, even though our backlog is down, because our sales have been up significantly. Our new equipment sales in the Americas came in 6% for the quarter. It was hotter than the prior low single-digit and mid single-digit for the full year. We expect the fourth quarter to be mid single-digit as well.
Speaker Change: Service sales in the America, portfolios up low single-digit, repairs were great in the third quarter, about 10%. They're there year-to-date, and we anticipate that continuing into the fourth quarter. Mod orders...
Speaker Change: to continue and mod sales. We're up low teens for the quarter.
Speaker Change: and year-to-date they're up high single digits.
Speaker Change: So, we believe the America's market, the market itself has stabilized and our performance is doing much better. And when we look at, this is a little different commentary than you heard last quarter, when we look at the different verticals.
Speaker Change: This quarter, we still had the best verticals were infrastructure and industrial buildings.
Speaker Change: But all
Speaker Change: of the verticals were up this quarter in North America, which to us is a real inflection point.
Speaker Change: If I go to EMEA, what we're seeing in the market itself,
Speaker Change: It's challenging, but we're performing very well. Middle East is doing very well, South Europe is strong, North Europe is a little weaker.
Speaker Change: Spain and Africa are doing very well and even Central Europe for us this quarter did very well despite You know the market uncertainty and environment in Germany
Speaker Change: We're seeing pressure in France, but our backlog in EMEA is solid. New equipment year-to-date is up 8%.
Speaker Change: So even though the quarter was down in order, strong first half by EMEA, the team is performing very well.
Speaker Change: Our 12-month roll in EMEA orders is up 7.8%, and I really believe we're outperforming the market there. Our backlog is up over last year in EMEA, and our Gen 360 product is rolling out very well.
Speaker Change: So, a little different commentary this quarter, inflection we're seeing in the Americas and I think we're outperforming in EMEA in a challenging environment.
Speaker Change: That's really helpful commentary and obviously sort of mixed trends that we see in some of the leading indicators so appreciate it.
Speaker Change: And then just wanted to ask on cost structure, you know, as it relates to
Speaker Change: China, and you're thinking about that market sizing moving forward, obviously some of the build-out that you did there to serve that market.
Speaker Change: But as we think about it today and the potential for volumes in this range for a while, how do you think about costs or those things we could hear more about as we get into next year?
Speaker Change: You will definitely hear more about costs coming out in China and it's listen this is for two reasons one we would do this based on the market but second with our uplift program we're changing the way we work to be more customer centric to have common processes everywhere to have to have the ability to actually continue to drive significant growth.
Speaker Change: But in China, you know, we're looking at everything from our operational footprint We have moved our modernization into our new equipment factories. So any facilities that used to do modernization don't do that anymore And we we're obviously looking at at our workforce
Speaker Change: I have to give Sally and the team incredible credit for operating under some pretty, pretty tough economic times right now. As I said when, I think in my first answer, we're trying to balance
Speaker Change: rational volume with pricing and with our customers abilities to pay.
Speaker Change: That's what's really driving our cash guide coming down.
Speaker Change: We're not going to take business just for the sake of volume to fill factories or to keep the field gainfully employed. We're taking what we believe is smart business that will put us in a strong position to continue to grow our service business in China and get ready for that nascent mod business to really take off.
Speaker Change: When I think about mod and new equipment, you know, I can't tell you where that crossover is going to happen yet
Speaker Change: But when you think about what we the price of a unit in mod is About the same price of a unit in new equipment everywhere in the globe including China where our mod margins are highest
Speaker Change: And so, as that picks up, right now we have 415,000 units in the new equipment segment this year in China. As that mod market picks up, we will hit 415,000 units sometime this decade, just as the mod segment.
Speaker Change: I can't peg when that's going to be, but we're actually going to have a larger market to serve in China and around the world than we have today.
Speaker Change: It's very interesting. Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Chris Snyder with Morgan Stanley. Please go ahead.
Chris Snyder: Thank you. And I appreciate all the color on, you know, China, potential range of outcomes next year. But, Judy.
Chris Snyder: You know, I would just be interested in your perspective on the stimulus actions we've seen in China so far, you know, anything more that you're watching that could come here in the coming weeks or months.
Chris Snyder: and ultimately just kind of what it means for China construction. Thank you.
Speaker Change: use the potential liquidity, debt relief, all of that. The announcements that were made are positive. To us, it's now the how.
Speaker Change: We believe the first indication of this, and we talk, we've talked to the party secretaries because we're focused on economic development, we want to grow in China and we will grow in China despite this half billion of revenue, you will watch our service and our mod business continue to grow and we'll stabilize this new equipment business.
Speaker Change: You know our early look is you know with the stimulus with the aging population We think this is going to actually accelerate modernization more. It's going to allow with the 5100 white projects
Speaker Change: for Projects to Get Finished, which will give us more confidence and liquidity with some of our customers as well and our key accounts.
Speaker Change: But the first time I think we're going to know more, Chris, is there's a special meeting in the National People's Congress, the most senior members next week, with a readout next Friday, November 8th.
Speaker Change: So we'll see what happens there. I will be on the ground in China in November. I think it's important
Speaker Change: to be able to talk to our customers, to be able to talk to our colleagues
Speaker Change: The stressful time and they are delivering when you think about the decline we've had in the top line and yet our focus on continuing to deliver for our customers and grow our service business.
Speaker Change: So I think we'll all know more. We do not anticipate that impacting fourth quarter financials.
Speaker Change: Even if rules come out, if it does, I'll be happy to share that with you in our fourth quarter earnings.
Speaker Change: We see this more as a potential for 25, but in all the color Christina and I have given you today, because we're not going to guide for 25 yet, we have not anticipated any positive impact of the stimulus on China.
Speaker Change: So when we say down 5 to 10 next year for China New Equipment at the segment level.
Speaker Change: for units available in the market, that does not anticipate any stimulus.
Speaker Change: same with the modernization market. There's 10 million units available for service.
Speaker Change: You know, we added...
Speaker Change: Our service growth this quarter was high teens.
Speaker Change: So now in China, we're up to 425,000 units in our service portfolio. That's still 4% share. We've got plenty more we can recapture, plenty more to convert. So we are hopeful, but we need to understand the implementation rules. And most importantly, our customers and the local governments need to do that.
Speaker Change: I appreciate that. If I could just follow up on the Americas, you know, you talked about customer, you know, better demand signals from customers.
Speaker Change: You know, if we look at the orders in America, it's obviously a very sharp rate of change. Q3, you know, up 20, first half down 20. You know, were you starting to see that better customer demand in Q3, or is that Q3 order number really just a function of comps, and then that, you know, improvement is really maybe a Q4 into 25 driver? Thank you.
Speaker Change: There were certainly some comps.
Speaker Change: I want to be clear about that. But now we are seeing between proposal activity and we had a lot, and you know, Chris, we get a down payment when we when we sign an order.
Speaker Change: everywhere in the world but especially in the Americas. And it's you know it's not it's not something that that is really negotiable or that we we give back and a project gets canceled. So our customers have to have.
Speaker Change: that conviction that their project is going to go. And we had a lot that were just really close, but waiting, I think waiting to hear what the Fed was doing, waiting to see what the economy was doing. But as I said, for all the segments, we're talking commercial, office, residential,
Speaker Change: infrastructure and industrial to have turned positive in the market in the third quarter, it's more than comps. Our team's performing and you can expect that kind of positive performance regardless of comps fourth quarter and into next year.
Speaker Change: Thank you.
Speaker Change: Our final question comes from Patrick Bowman with JPMorgan Chase. Please go ahead.
Patrick Bowman: Hi, good morning, Judy, Christina, thanks for letting me squeeze in here.
Patrick Bowman: Just had one, maybe two, but one first one on free cash flow, the $1.4 to $1.5 billion this year. Can you talk about what working capital drag is embedded in that and parse that out in terms of drivers? Maybe size the China down payment drag you called out or anything else unusual depressing this year that should flip around next year to give you better growth?
Patrick Bowman: because I'd assume, and you can correct me if I'm wrong, that pre-cash flow growth next year should be better than kind of the mid-single digit you expect on operating profits. So just wanted to check on the dynamics there.
Patrick Bowman: Hi Pat, this is Cristina. So yeah, you are right, the...
Patrick Bowman: and 900 million year-to-date cash flow. That means that...
Speaker Change: There are two reasons for that. One is the business mix. On the one side, new equipment declining, especially because of China, and we don't get it on payments. But on the other side, we are growing in service, and the collection time in service is later because we collect when we execute the job, for example, on repair.
Speaker Change: in Q3, now in Q4, and overall the $200 million working capital is going to be unwound. So the expectation in the guide is to deliver in Q4 approximately $550 million cash flow. That is more or less the same level of cash flow we delivered last year in Q3.
Speaker Change: And then to your question in 2025, yeah, you are right, we should expect that as we stabilize the business mix, cash flows should pick up at a faster pace than operating profit growth.
Speaker Change: and Patrick from a capital allocation perspective you know if you think about it we're gonna do a billion of share buybacks and six hundred million roughly of dividend
Speaker Change: versus this 1.4 to 1.5. We have the ability to do that because the team's done a great job bringing our cash balance down probably since the first time significantly since spin from a billion dollars to almost 800 million.
Speaker Change: So, you know, we are working every element of this to be able to share, you know, to obviously share this cash back with our shareholders.
Speaker Change: At least 100%. We'll guide in January.
Speaker Change: Makes sense. And then last one, just on service margins, if you could talk about.
Speaker Change: Just the factors around why the margin expansion for next year would slow to something less than 50 basis points.
Speaker Change: relative to the 75 you're guiding for this year. Just any color on the factors that were better than expected this year that we'll reverse, I guess, next year to make it
Speaker Change: you know, closer to that 50 over the two-year period.
Speaker Change: At the end, we are not guiding now, we are just providing some color of the trends.
Speaker Change: The 50 basis points is what we committed back in Investors Day and this is going to come and of course on top of that we continue working on the same actions we have implemented this year in terms of price, productivity and uplift and we will target to overdrive but for the time being this is what we can mention.
Speaker Change: Understood. And modernization, business, those margins are expected to continue expanding as part of that guide for next year?
Speaker Change: Yeah, you'll see that in January.
Speaker Change: Yes. Okay, thanks so much for the call. Best of luck. Thank you.
Speaker Change: And ladies and gentlemen, that does conclude today's question and answer session, and I would now like to turn the call over to Judy Marks for closing remarks.
Judy Marks: Thank You Krista. Our solid results in the first nine months of the year demonstrate the resiliency of our service-driven business model. We remain focused on mitigating macro headwinds and further driving shareholder value in order to deliver a strong final quarter and beyond.
Judy Marks: Our growth in modernization, maintenance and repair, and the overall service portfolio validates that our flywheel continues to fuel profitable growth.
Speaker Change: As I close the call, I'd like to take this opportunity to thank Mike for his many contributions to OTIS and wish him success in his new role. Stay safe and well, everyone. Thank you for joining.
Speaker Change: Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation and you may now disconnect.