Q4 2024 Otis Worldwide Corp Earnings Call
On the call with me today are Judy marks chair, CEO, and President and Kristina Mendes Executive Vice President and CFO.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring 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.
<unk> SEC filings, including our Form 10-K, and quarterly reports on Form 10-Q provide details on important factors that could use that could cause actual results to differ materially.
Judy: Now I'd like to turn the call over to Judy.
Judy: Thank you Rob Good morning afternoon, and evening, everyone. Thank you for joining US we hope that everyone listening is safe and well with.
Speaker Change: We finished 2024 with solid results both for the fourth quarter and full year, and we enter 2025 with momentum and confidence in our service driven business model.
Speaker Change: We achieved these results through the dedication of our colleagues around the globe. So I want to express my gratitude for their hard work execution of our strategy commitment to our customers and demonstration of our Otis Absolutes Star.
Speaker Change: Starting on slide three.
Speaker Change: We achieved organic sales growth of one 9% in the quarter driven by continued strong performance in service, which grew seven 8% with great performance in both maintenance and repair and modernization.
Speaker Change: We grew our maintenance portfolio by more than 4% for the third consecutive year and our portfolio now stands at approximately $2 4 million units, leading our industry and validating the impact and contribution of our service flywheel.
Speaker Change: Modernization was a highlight in 2024, we ended the year with our backlog up 13% at constant currency, while modernization orders grew 18% in the quarter, which sets us up well for the year ahead.
Speaker Change: We generated $682 million of adjusted free cash flow in the quarter, which is our highest quarterly result since spin.
Speaker Change: Cash generation was driven by excellent collections and a reduction in our net working capital.
Speaker Change: Additionally, we continued the strong execution of our customer centric uplift program, enabling us to now increase the expected annual run rate savings to $200 million by the second half of 2025.
Speaker Change: In addition earlier this month, we announced the transformation of our China business to better position ourselves for growth in service and modernization in the current and evolving China market environment.
Speaker Change: We are well underway in transitioning our revenue and profit streams in China from our new equipment to our service and Mot flywheel.
Speaker Change: We also made meaningful progress on ESG initiatives that are aligned with our business strategy in the fourth quarter, we received a gold rating for the third year in a row from Echovirus.
Speaker Change: Many of our customers around the world take ESG strongly into consideration as they make procurement decisions and this recognition demonstrates that we continue to pursue and execute on sustainable strategies that drive value for our stakeholders.
Speaker Change: In 2024, we delivered organic sales growth for the fourth consecutive year since spin and 50 basis points of overall adjusted operating profit margin expansion.
Speaker Change: We have expanded company margin by 30 basis points or more every year since spin.
Speaker Change: Despite the new equipment macro headwinds our industry faced in 'twenty 'twenty four we maintained our new equipment share at 20%.
Speaker Change: We grew adjusted EPS eight 2% and finished the year strong with approximately $1 $6 billion of adjusted free cash flow in 2024, allowing us to return $1 $6 billion of cash to shareholders through dividends and share repurchases.
Speaker Change: We believe our shareholder driven management strategy is sustainable.
Speaker Change: Turning to our orders performance on slide four.
Speaker Change: New equipment orders declined 4% in the quarter due to continued challenging market conditions, primarily in China.
Speaker Change: Excluding China, new equipment orders increased approximately 11%.
Speaker Change: The Americas delivered a strong second half of the year growing orders high teens in the last six months, including mid teens growth in Q4 with strong performance in Latin America.
Speaker Change: Asia Pacific delivered greater than 20% growth with solid results across the region.
Speaker Change: Orders declined by high single digits, and EMEA in the quarter, including weakness in Western Europe, but finished the full year up three 7%.
Speaker Change: And China orders declined more than 20% in the quarter due to continued soft demand.
Speaker Change: Our new equipment backlog at constant currency was down 4% versus the prior year, although excluding China. It was up low single digits.
Speaker Change: Modernization orders bounce back in Q4 as expected with as I noted 18% growth.
Speaker Change: Growth was widespread including China up greater than 20%.
Speaker Change: We ended the year with modernization backlog up 13% versus the prior year at constant currency.
Speaker Change: New equipment and modernization orders combined grew in the quarter with backlog down one point as we continue to drive a shift in mix from new equipment to modernization in China, and other mature markets, where theres, a higher concentration of aged units need modernization and refurbishment.
Speaker Change: Our service portfolio grew four 2% and now stands as noted at approximately $2 4 million units strengthen our number one position globally.
Speaker Change: All regions contributed positively with mid teens growth in China mid single digit growth in Asia Pacific and low single digit growth in both the Americas and EMEA.
Speaker Change: Globally, our Recaptures and cancellations were approximately net neutral for the third consecutive year, leaving net churn at zero and driving growth through conversions.
Speaker Change: As of year end 2024, we have approximately 1 million connected units globally.
Speaker Change: We continue to innovate to adapt to changing market demands and to better serve our customers, while driving growth and profitability across our business.
Speaker Change: For example, we continued to rollout our digitally connected elevator platforms launching gen three across Asia Pacific, where smart cities are being increasingly developed in major urban areas.
Speaker Change: In addition, we launched the enhanced public escalator globally.
Speaker Change: Flagship infrastructure product that provides new features that are critical to our customers' needs.
Speaker Change: We also rolled out new global modernization packages to help our customers proactively plan to upgrade their units to the latest safety standards and to provide a more comfortable experience for their passengers.
Speaker Change: With 8 million of the 22 million global installed units teaching and ready to be upgraded this is a significant opportunity for our modernization business, which is a growth lever for our service portfolio.
Speaker Change: Overall, R&D and strategic investments remained relatively stable at about one 4% of sales for the year, reflecting our ability to invest and innovate efficiently.
Speaker Change: We continue to win many exciting projects based on our innovation abilities to deliver and the trust our customers have in us.
Speaker Change: For example, in Mexico, Otis will install 142 units at the Mexican social security institutes facilities.
Speaker Change: Our elevators will help support the agency's mission by providing safe and reliable vertical transportation at 41 public clinics and hospitals across the country.
Speaker Change: And upon completion will be added to our maintenance portfolio.
Speaker Change: Joining the nearly 600 existing IMS S elevators already serviced by Otis.
Speaker Change: In Hyderabad, India, Otisville installed 21 units in the Tri light towers, a set of luxury high rise residential apartments.
Speaker Change: These towers, which stand up to 60, Florida toll will be oldest indias first use of the <unk> Compass 360 destination management system in our residential project.
Speaker Change: In China, Otis will modernize more than 120 units across two infrastructure projects at the Xi'an Airport in northwest, China, We will upgrade twenty-two moving walkways and 58 elevators and in Wuhan, we will modernize forty-six escalators across eight stations on the city's Metro line too.
Speaker Change: Finally in the U K Otisville install 17 elevators and one platform lift at the Allison Institute of Technology's, Oxford Interdisciplinary research and development campus that will incorporate more than 30000 square meters of research laboratory space in oncology and preventive care clinic and.
Speaker Change: Educational and gathering spaces.
Speaker Change: Turning to our fourth quarter results on slide five.
Speaker Change: Otis delivered net sales of $3 $7 billion with organic sales up one 9% adjusted.
Speaker Change: Operating profit, excluding a 5 million dollar foreign exchange headwind was up $22 million driven by the service segment.
Speaker Change: Adjusted EPS grew approximately 7% or six cents in the quarter with strong operational performance and the benefit of a lower share count.
Speaker Change: With that I'll turn it over to Kristina to walk through our 2024 results in more detail.
Kristina: Thank you Julie.
Kristina: Starting with segment sales for four months one is <unk>.
Kristina: That organic sales growth in the quarter was driven by service with Whatsapp seven 8%.
Kristina: You agreement organic says were down 6.8% with Americas, EMEA and Asia Pacific growing mid single digits on the back office strong backlog execution.
Kristina: We think China the bus.
Kristina: Backlog heading into the quarter was down mid teens.
Kristina: This together with our strict credit control in shipments led to China, new equipment sales declining grades at around 20%.
Kristina: This decline was partially offset by growth in each of the other regions with notable strength in India, Spain, and Latin America.
Kristina: Service organic says were up seven 8% with T cell, where best performing quite a bit over a year.
Kristina: With mid single digit or greater growth in all regions and all lines of business.
Kristina: Maintenance and repair says what up five 6% with maintenance benefiting from our continued efforts in driving portfolio growth together with DCP and pricing is right.
Kristina: Pricing was up four point, excluding the impact of mix on churn.
Kristina: Repair volumes continued growing approximately 10% and modernization and says further accelerated to 18% growth in the quarter with growth across all regions, including more than 20% growth in Asia Pacific each quarter. This year.
Kristina: Turning to segment operating profit performance on slide seven.
Kristina: No. We meant operating profit of $64 million was down $24 million at constant currency driven by the headwinds of lower volume on regional and product mix.
Kristina: Were partially offset by productivity, including the benefits from uplift.
Kristina: Commodity costs.
Kristina: Operating profit margins came in largely as expected at four 7%.
Kristina: For the full year, new equipment operating profit was down $44 million at constant currency.
Kristina: And operating margin finished at six 1%.
Kristina: 50 basis points lower versus the prior year with the softness in China, being partially mitigate that through productivity pricing and commodity tailwind.
Kristina: Service operating profit of $569 million increased $54 million at constant currency with higher volume favorable pricing and productivity, including the benefits from uplift more than offsetting I'm a lot of wage inflation.
Kristina: Operating profit margins expanded 50 basis points to 24, 5% in the quarter.
Kristina: And 60 basis points to 24, 6% in the full year.
Kristina: Service operating profit in 2024 accounted for 93% of our overall operating profit compared to 89% last year.
Kristina: Moving to the full year 2024, adjusted EPS Bridge on slide eight.
Speaker Change: Yes, the vps in the ear grew 29.
Speaker Change: Or eight 2%, including 22 cents operational growth at constant currency.
Speaker Change: Spoiled by our continued solid service performance.
Speaker Change: Below the line, our adjusted effective tax rate declined by more than one point in 2024 to 24, 8%.
Speaker Change: Driven by continued focus on optimizing the effective tax rate.
Speaker Change: Reduced tax rate and NCI together with a lower share count more than offset headwinds from increased interest expense.
Speaker Change: Additionally, we finished the year with our highest quarterly cash flow since <unk>.
Speaker Change: Delivery and they expect that improvement in working capital in Q4, mainly driven by excellent collections.
Speaker Change: <unk> solid performance throughout 2024 with a strong finish to the year.
Speaker Change: We continue to deliver value to shareholders on the back of sustained execution of our Shelby just try to eat.
Speaker Change: Despite challenging new equipment market conditions in China, we have delivered high single digit EPS growth as anticipated.
Speaker Change: Proving the resilience of our shall we see that business model.
Speaker Change: I will now turn it back to Julie to discuss our 2025 outlook. Thanks Kristina.
Julie: Starting on slide nine with the market outlook.
Kristina: For new equipment in the Americas. The market was up mid single digits in 2024 with mid single digit growth in Latin America, and low single digit growth in North America we.
Kristina: We expect that the market improvement that started in the second half of 'twenty 'twenty four will continue and anticipate that in 2025, the Americas market overall will be up low single digits.
Kristina: In EMEA the market was down mid single digits in 2024, primarily driven by western and Central Europe.
Kristina: Although we anticipate that these two markets will not recover in 2025.
Kristina: Decline is expected to moderate compared to 2024 in total the overall EMEA market is expected to increase low single digits.
Kristina: In Asia, the market was down about 10% in 2024 with solid growth in Asia Pacific up low single digits, partially offsetting the continued decline in China, which we estimate was down approximately 15%.
Kristina: We've seen an approximately 35% reduction since the height of the China, new equipment market in 2021.
Kristina: Although the situation remains fluid, we expect the China market to decline approximately 10% in 2025.
Kristina: We believe the China market will stabilize late in 2025 resetting to this new level.
Kristina: Asia Pacific is expected to be up mid single digits, with India and southeast Asia driving the growth while Korea is expected to be down again in Japan is expected to be flat.
Kristina: Overall in 2025, we expect the global new equipment market will be down mid single digits and units with the growth in the Americas Asia Pacific and EMEA more than offset by the decline in China.
Kristina: This represents a sequential improvement in new equipment market trends in 2025 compared to 2024.
Kristina: In service the global install base continues to grow mid single digits, reaching approximately 22 million units at the end of 2024.
Kristina: As we turn to 2025, we anticipate continued mid single digit growth driven by growth in all regions.
Kristina: Taken together, we expect the global installed base to reach approximately 23 million units at year end.
Kristina: Turning to our financial outlook for 2025.
Kristina: We expect net sales of $14, one to $14 $4 billion growing 2% to 4% organically and down 1% to up 1% at actual currency.
Kristina: Adjusted operating profit is expected to be between two four and $2 $5 billion up $55 million to $105 million at actual currency.
Kristina: $120 million to $150 million, excluding foreign exchange headwinds we.
Kristina: We expect adjusted EPS in the range of $4 to $4.10 up 4% to 7% or more than 20% versus the prior year at the midpoint of the guide.
Kristina: Finally, we expect adjusted free cash flow of approximately $1 $6 billion.
Kristina: We will continue to execute on our disciplined capital allocation strategy and expect to repurchase approximately $800 million in shares in 2025.
Kristina: Grow our dividend payout and pursue approximately $100 million of bolt on M&A.
Kristina: Turning to slide 10.
Kristina: As we've discussed over the last several years the market in China has shifted dramatically.
Kristina: After over 20 years as a high growth market, it's now resetting as a strong but mature market.
Kristina: We foresaw this and have been working to evolve our business model shifting from an emphasis on new equipment sales to deriving value from the lifetime of a customer with our margin accretive emphasis on maintenance repair and modernization sales.
Kristina: The construction boom in China delivered and installed base that is approximately 40% of total units installed globally today.
Kristina: It's a very large and important market each unit requires regular maintenance repair and overtime modernization.
Kristina: Many units built over the past 15 to 25 years are entering the prime age for modernization the modernization opportunity is large and growing.
Kristina: China now presents a tremendous opportunity to drive modernization orders expand our maintenance portfolio and deliver significant growth in our service driven business model.
Kristina: We are transforming our China operations in both service and new equipment to deliver on our China service flywheel strategy.
Kristina: We are investing in our service business to profitably grow our portfolio through conversions and Recaptures.
Kristina: Through our efforts, we are targeting low teens annual performance growth portfolio growth with a focus on quality.
Kristina: And margin expansion.
Kristina: Our service revenue is now approximately one third of our total China revenue.
Kristina: To win an increasing share modernization, we're engaging our new equipment agent and distributor network to accelerate growth.
Kristina: We see a multi year opportunity and we're targeting greater than 20% annual modernization order growth.
Kristina: Within new equipment sales were adapting for the more mature more mature market environment as well.
Kristina: After growing at a mid teens CAGR for more than 20 years, the new equipment market peaked at approximately 650000 units in 2021.
Kristina: Since then industry new equipment units have declined approximately 35% to 420000 units in 2024.
Kristina: We believe it will stabilize in late 'twenty five between 350000 and 400000 units.
Kristina: We currently operate through two brands in China, which have largely operated independently.
Kristina: This structure has served us well historically and enabled us to grow our new equipment business over 700% from 2000 to 2021.
Kristina: To deliver our flywheel strategy, we are consolidating our operations for manufacturing to sales in addition to rationalizing and simplifying our product portfolio.
Kristina: This will drive additional efficiencies separate from uplift of approximately $20 million in cost savings in 2025, and exiting the year with a $30 million annual run rate.
Kristina: Taken together all of these initiatives, which have been underway for awhile position Otis to grow revenue and margin in China, which will continue to be a large and important service market.
Kristina: Turning to slide 11.
Kristina: We've had tremendous success with our uplift program.
Kristina: And have unlocked approximately $70 million of savings in 2024.
Kristina: We now expect to deliver a run rate savings of $200 million by the second half of 2025.
Taken together with our China transformation, we're targeting in your savings of approximately $90 million in 2025, and exiting the year with a target run rate savings of $230 million.
Kristina: With that let me hand, it back to Christine It outlined the 2025 segment outlook in more detail.
Christine: Thank you Judy.
Christine: Taking a more detailed look at our outlook and starting with sales on slide 12.
Christine: It's all organic says are expected to be up to two 4% driven by continued strong performance in our service segment we.
Christine: We expect no agreement organic sales to be down 1% to 4% driven by a decline in China due to continued soft demand. Although this represents a sequential improvement versus 2025.
Christine: Asia is expected to be down low to mid single digits with a strong growth in Asia Pacific, helping to partially offset the decline in China.
Christine: We foresee the Americas to be down low single digits as we walk through a lower backlog.
Christine: Impacted by market pressures in the first half of last year.
Christine: EMEA is anticipated to be up low to mid single digits.
Christine: We anticipate continued strong performance of <unk> service with overall organic sales up 6% to 7% in line with our growth in 2024.
Christine: This includes maintenance and repair are expected to grow mid single digits on the back of sustained portfolio growth of 4%.
Christine: And modernization and up high single leads as we continued to execute on our strong backlog from year end.
Christine: Turning to slide 13.
Christine: The Liberal profit growth every year seems has been expanding operating profit margin by 220 basis points on the back of consistently strong performance in service.
Christine: We remain focused on growing our industry, leading maintenance portfolio.
Christine: Executing on not what is somewhat of a nice ACM backlog and increasing productivity, including benefits of I believe and the time that transformation.
Christine: With our proven services strategy, we will continue setting the industry benchmark in terms of profitability.
Christine: In 2025, we expect to expand margins in line with 2020 for.
Christine: The sustained and solid performance in service is anticipated to offset headwinds in the new equipment business, including pricing volume and mix.
Christine: Commodities were a tailwind in 2024, however, we estimate that impact to be approximately flat in 2025.
Christine: Meanwhile, productivity, including the benefits from our belief and our China transformation is expected to be a positive contributor.
Christine: All in all we foresee operating margin expanding 60 basis points in 2025.
Christine: Mm 120 million to $150 million growth at constant currency.
Christine: Moving to the 2025 E P S <unk> on slide 14.
Christine: Our guidance for adjusted EPS is four two for $10 with a strong operational performance driving approximately 20 cents of growth.
Christine: Along with the benefits from a lower share count will mitigate around 10 cents on 14 has changed and four cents in interest headwinds.
Christine: Note that our guidance is based on current spot foreign exchange rates.
Christine: Excluding this impact the midpoint of our guide would represent a high single digit adjusted EPS growth year over year.
Christine: In line with our midterm guidance.
Christine: We expect EPS in the first and second quarters to be relatively flat.
Christine: With a stronger growth in the second half of the year driven by execution of our modernization on backlog realization of cost savings from what I believe and China transformation initiatives.
Christine: And improving trends in China, and the Americas new equipment.
Christine: Maintenance and repair are expected to be level loaded through the year, reflecting the strength of resiliency of our service business.
Christine: Turning to slide 15.
Christine: Our outlook for 2025 reflects another year of consistent performance and steady execution led by our resilient service business and our I believe in China transformation programs.
Christine: We put yet another year of strong profit growth with a midpoint of our adjusted operating profit guidance.
Christine: Up 6% at constant currency, driven by approximately 60 basis points of margin expansion.
Christine: Our adjusted free cash flow forecast is approximately $1 $6 billion.
Which will support $800 million of SaaS tripled chases and 40% of dividend payout.
Christine: We remain committed to serving our customers delivering growth through our service driven business model.
Christine: On generating long term shareholder value.
Christine: That I will ask <unk> to please open the line for questions. Thank you.
Christine: Thank you if you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
Christine: Please ensure you are not on speaker phone and that your phone is not on mute when called upon thank you.
Speaker Change: Your first question comes from the line of Joe O'dea with Wells Fargo. Your line is open.
Joe O'dea: Hi, good morning, Thanks for taking my questions.
Speaker Change: Tim can you expand on the China kind of cost initiatives.
Speaker Change: Think about that as roughly a $2 billion revenue pool in China.
Speaker Change: Maybe two thirds of it that's it's more equipment oriented.
Speaker Change: It would seem like that the targeted savings are around 2% of that new equipment revenue.
Speaker Change: And just trying to get a little bit of context around the opportunity here and with the upward.
Speaker Change: Sort of revisions that we've seen an uplift I'm trying to think about that.
Speaker Change: That $30 million in it where it could go overtime.
Yeah, Let me start Joe Thanks for asking the question listen I think we have a in Sally and the team have really focused on really resetting our business. We have seen structural change in China, and we are structurally changing otis to pivot and to you can.
Speaker Change: Our journey to move to becoming more of a service oriented business and it's become more of a mature market. So we've made this change we announced at the first week of January and we're working through it and our best estimate right. Now is what you see in terms of run rate as we exit the year, we're looking at every opportunity possible.
Speaker Change: But we also want to ensure since China is 40% of the install base we ended 2024.
Speaker Change: With our portfolio again up mid teens for the 13th straight quarter, but we ended our portfolio with 435000 units, which is more than twice what we started at spin. So we've been on this journey, but that's still if you assume that you know that's for China, that's still 4% to 5% market share. So.
Speaker Change: We want to make sure that we're investing and we keep our mechanics and we keep all of the key skills, we need to succeed in service and now in the growing Mod business. Our Mod orders as you saw were pretty strong for fourth quarter, we're really proud of them, China Mod waters doubled in the quarter.
Speaker Change: And that we think is a combination of focus and also a combination of this you know the stimulus that was introduced for re refurbishment, where we estimate that we secured about 8% to 9% market share on that refurbishment first tranche so again for us.
Speaker Change: It's about tuning the organization.
Speaker Change: Stripping out excess overlapping costs and now, creating a very market driven service in Mod business.
Speaker Change: Yeah, Judy I can complement with them financier. So the 30 million run rate are expected to be primarily in the new equipment side for new equipment in China in 2025 from a revenue standpoint is going to moderate because we expect them a stabilization of the market. The wash at the end of the year.
Speaker Change: Yeah, but the margins are going to be under pressure, because we see the lower backlog flowing through plus additional either pricing from the backlog also flowing through you may remember that in 'twenty for pricing in China was down 10%. So we these transformation program, we are going to rightsize the organization on a specific.
Speaker Change: On the equipment in order to adapt to the new market size, we are targeting $20 million year savings that will be approximately low to mid teens reduction of indirect cost and 30% reduction in real estate.
Speaker Change: Now the problem is not only about right sizing. The equipment is also about investing into service because he has the opportunities in our malls. So services as of 2020 for one third of the revenues of China, We have a small market share in service and we want to roll and we are going to roll.
Speaker Change: And this is on the back off.
Speaker Change: Consolidating the teams the two brands will be under the same umbrella. These would allow us to increase corporate Atg service.
Speaker Change: Secondly, east consolidate and also portfolio on rationalizing them being able to differentiate value onto address different customer needs.
Speaker Change: And that's one of the least consolidated the agent and distribution networks. These would also help to accelerate modernization and growth as Julie has said more than 20% targeted on an annual basis.
Speaker Change: That's all helpful detail and then.
Speaker Change: Just as it relates to the fourth quarter and in the service margin, there and sequentially down from the third quarter. It looks like it may have come in a little shy of internal expectations and so any any color on that service margin and then you think about that moving forward.
Speaker Change: Yeah, Let me start Joe what what probably isn't obvious to end everyone is is we've we've made a focused investment in our service flywheel, we talk about it a lot, but the linchpin of that is having qualified mechanics and field professionals available throughout the.
Speaker Change: Globe.
Speaker Change: In 2024, we added 2000 field mechanics, and field professionals, which is a skilled craft to our prior 42000 population. So we increased 5% our direct field workforce.
Speaker Change: Because this is the life safety business many of them come in as apprentices.
Speaker Change: A partner with experienced mechanics, and learning curve takes time, and we may have probably underestimated the productivity of bringing on those 2000.
Speaker Change: To drive service, especially in the fourth quarter, but we had the cost of them, but for me. It's an absolutely critical investment in our future. So that we don't have a labor shortfall. We've got trained mechanics, and we can grow both the service and modernization. So again, we're up to 44000 field professionals, who everyday.
Speaker Change: We are delivering for us, but a lot are have just joined us and it's a worthwhile investment.
Speaker Change: And then there's a question.
Speaker Change: Paris on Joe. So you are right you said decline, but this is a seasonal effect that you may see when you look back it was even sharper in 2023 is because of vacation on absorption, but then compared to 23, our margin ratings service grew 50 basis points in 'twenty four vessels 20 basis points in <unk>.
Speaker Change: 23, and this is despite of the acceleration that we have had the month modernization has grown 18% in sales in Q4 much more than in the past and because of the good performance on the field and efficiencies, including I believe we are able to grow faster in terms of my radio service.
Speaker Change: 2023.
Speaker Change: Yeah.
Speaker Change: Got it thanks very much.
Speaker Change: The next question comes from Rob Wertheimer with Melius Research Your line is open.
Speaker Change: Alright. Thank you Judy you mentioned the.
Speaker Change: Physicians in the field professionals and Im a little curious if you have any thoughts on <unk>.
Speaker Change: Your decision process there so.
Speaker Change: What is your productivity trend on your existing base.
Speaker Change: Retail professionals does that sort of anticipate as.
Speaker Change: We can see in the <unk> I guess.
Speaker Change: Thank you might grow above whatever that productivity labor productivity rate would be maybe you have an aging workforce to deal with and to measure absorbed placement there just thinking about your decision process as you expand that.
Speaker Change: That workforce.
Speaker Change: Yeah, no. Thanks, Rob I think were seeing challenges across the construction market in general for workforce and for US because this is such a.
Speaker Change: Skilled craft, we made the conscious decision to invest and that investment has occurred in many markets across the globe. So we want to be prepared we know we're going to continue to grow our service portfolio. We've got modernization revenue in the outlook for twenty-five growing high single, obviously with the backlog, we'll try to do even better.
Speaker Change: Are there and you can see that just picking up year over year. So for US we want it we wanted to get these are practices in and even some of the skilled journeyman who come from other companies. So that we can first fulfill the immediate maintenance and repair requirements. We have our repair business is still up about 10% for.
Speaker Change: For another year. So we have to we no one wants their elevator escalators down we need that field work force. So for US. It's a worthwhile investment again I think it did have an impact on margins in our in service margins in fourth quarter, but to me that's a short term.
Speaker Change: Issue versus the long term capability to deliver.
Speaker Change: Again, we do have an aging workforce just like most industrials too and we're up to 72000 colleagues now 44000 in our field, which if you do the math. It means we've obviously reduce the indirect head count.
Speaker Change: Almost 1000, so I think we're heading in the right direction for next year, but more importantly for Otis as future because we need to be able to fulfill the needs of our customers in the markets, we serve and in those markets, we need that workforce.
Speaker Change: Thank you.
Speaker Change: The next question comes from Amit Mehrotra with UBS. Your line is open.
Speaker Change: Thanks, a lot.
Judy: Judy I think.
Judy: Primary market is the highest mark to market for the company on the new equipment side.
Judy: Obviously, the market could be getting you there, but as you pivot maybe more proactively towards service.
Judy: Could you just talk about the impact of new equipment margins structurally I know, you're you're taking out costs.
Judy: And maybe offset some of that mix impact but structurally.
Judy: Where do you expect the mix of that business to go as you kind of pivot more proactively service and maybe just related to that with the China market has obviously been a moving target.
Judy: Could you just give us a sense of what's behind you.
Judy: So what's giving you confidence that in 2025 in terms of that 354000 market.
Speaker Change: Yeah, no. Thanks, Amit so listen on China, as we wrap the year ended up being 13% of total Otis revenue, which is where we kind of see we saw it going third and fourth quarter.
Speaker Change: And Thats all in so total China revenue versus total Otis revenues, 13% traditionally as I said with the incredible CAGR, we had in China, new equipment. It did become a very high volume business with high profitability. It has become more challenging over the past three years as price.
Speaker Change: As have become more competitive but in a deflationary environment. Our team has done an amazing job to get cost out to get material productivity and to get installation productivity.
Speaker Change: What we want to do is take that same focus and.
Speaker Change: That's why we're modular rising or Pat making my modernization packages, China gives us a unique opportunity in terms of both service and mod to improve our profitability in China.
Speaker Change: First as we grow our service portfolio, especially through Recaptures, we build density in a very large country again 435000 units as we ended the year up again mid teens for the year, but we need the ability to continue to build density because as you see with Otis and us.
Speaker Change: You saw on chart 13, it's that density that drives our service operating profit margin that has increased every year since the spin.
Speaker Change: Actually it's increased every 19 straight quarters since spin so that's what we need to take to China.
Speaker Change: And we do that through a little different lens.
Speaker Change: As we as we came out of spin we focused on growing our service portfolio, 1% wasn't acceptable. We're now at four plus we have higher aspirations.
Speaker Change: But we have so much data available right now that we understand the value of each unit, we understand the quality contribution of each unit and so in China explicitly as we focus on conversions and specifically on Recaptures, we're doing it as we've done in other mature markets.
Speaker Change: Placing it in a city or in a route where we can get that density and we don't have the same cost that's going to help us make China service margins, which traditionally has been our lowest because of lack of density improve to at some point approximate mature markets.
Speaker Change: The modernization opportunity will come at scale and we've moved Mod margins. This is the for the full year mob margins globally exceeded new equipment margins.
Speaker Change: And we're going to continue as we said to get to at least double digit margins for modernization over the medium term.
Speaker Change: Okay. That's very helpful and just one follow up for Christine if I could so.
Speaker Change: I think the expectation is marred growth to be up.
Speaker Change: High single digit organic.
Speaker Change: This year I think orders were up low double digits last year they were up.
Speaker Change: High teens in the fourth quarter can you just talk about maybe the disconnect there.
Speaker Change: And are is globally mod growth mix I guess mixed positive for service margins is that neutral can you just talk about that mix impact from that outgrowth.
Speaker Change: So on the guide and Amit you are right. So I would say there is a little bit of conservatism in the guide that is based on we want to see the resources ramping up on US. We have mentioned we in Q4, the wassa will ramp up but we need to continue in order to be able to execute on the very strong backlog. So this is an opportunity for the guide.
Speaker Change: We are guiding high single digit vessels, 13% exiting backlog and we can do more and getting the resources on the mix. So we see service modernization has lower margin compared to the repair and maintenance, although modernization margins are increasing based on the standardization of packages supply chain on efficiencies on their feet.
Speaker Change: Because of the standardization.
Speaker Change: You may recall that at the beginning of the year modernization means over past new equipment, we continued that trend and they continue being above on growing so gradually the margins will get better but it is going to be a headwind in terms of my ingrate. These surveys, but overall very positive in terms of control.
Speaker Change: Sure.
Speaker Change: Okay. Thank you very much appreciate it.
Speaker Change: Your next question comes from Nigel Coe with Wolfe Research Your line is open.
Nigel Coe: Thanks, Good morning, everyone.
Speaker Change: I just wanted to follow up on that question.
Nigel Coe: Obviously, you're improving margins has been a big initiative.
Nigel Coe: So what do we expect margins to be in 25. This is 24 and I know that they were running low single digits. I think they are on the track towards mid single plus.
Nigel Coe: And then just maybe talk about the cost savings that you've got coming through.
Nigel Coe: Both the.
Nigel Coe: On both the both programs.
Nigel Coe: The total impact in 2025, but just curious where those land between equipment and services and perhaps corporate.
Nigel Coe: Yeah, so on on Mod margins as we said.
Nigel Coe: Now four quarters in a row full year, we surpassed a new equipment margins, Nigel which so so obviously higher than the new equipment annual margin for 24, so a little above mid single heading towards high which has been our objective and again heading towards double digit and our teams responded well.
Nigel Coe: Well again, all part of our strategy to not just drive Mod revenue, but then have that mod.
Nigel Coe: Back into the portfolio Christina.
Speaker Change: Yeah on the savings. So in 2025, we are expecting to generate $20 million in China coming from the transformation program is going to be all in new equipment and will help to compensate the headwinds that we see in the price from the backlog.
Speaker Change: On uplift will be we have raised the total program part of that is going to be 200 million now we exited 2024 with 120 million run rate and we expect around 70 million India savings in 2025, approximately 65% of that will be in service 35.
Speaker Change: 5% remaining in new equipment with a very small piece in incorporate and when you look at our service growth in the guide.
Is approximately 180 million with Hawaii and out of that you deduct the $40 million coming in from the Ablate savings you can see that there is still a very positive growth coming from operational performance.
Speaker Change: Okay. Thanks, Christine maybe just as well if you just kind of talk about the $250 million of.
Speaker Change: Restructuring.
Speaker Change: I think as sort of the total bucket there's homepage.
Speaker Change: 20, <unk> <unk>, that's a big number just wanted to ask on that but maybe could you just maybe just expand on the service guidance 24, five exit rates in <unk>, we normally have richer margins in the second half of the year just wondering how we think about service margin.
Speaker Change: <unk> in the first half of the year to discuss that because I think the comps are quite something.
Speaker Change: So with restructuring we are guiding approximately $250 million a civic number because we are finalizing that at least program. So we will achieve the $200 million run rate by the end of 2025 year to date and a 24, we have spent approximately $140 million restructuring so there.
Speaker Change: Remaining up the up to the $300 million cost to achieve in the program are to be spent in 2025 and in addition to that you have the 40 million restructuring from the China transformation. So he is going to be a very intense year in terms of restructuring in order to end up the year in a very good position from our cost base with all of the cost.
Speaker Change: Going to move out.
Speaker Change: And we think Nigel this aligns nicely I've I've called this the year of transformation for Otis in 25.
Speaker Change: We've been an uplift we've done the process definition, we've done the organization design, we've implemented and announced and now we're making it happen across the globe. In 2025, we are moving to our global business services activity as well so there's cost to be had but we're going to go through this.
Speaker Change: Transformation and simultaneously deliver with excellence operationally as you see with the margin expansion driven off our service business and following our strategy, where we think that puts us in a really stronger positioned for 26. When this is all run rate behind you know we have the run rate benefit.
Speaker Change: But more importantly, we're focused on our customers.
Speaker Change: And we've seen it's been a nice bounce back in North America actually all of the Americas in terms of orders in our EMEA business.
Speaker Change: I couldnt be more pleased we are outperforming the market even in northern Europe, we are outperforming the market not just in orders, but in in in our revenue and across the board in our Asia Pacific business, just had a fantastic 2024 in every in every metric possible so as the Mar.
Speaker Change: <unk> come nicely as we kind of get to the second half of 'twenty five 'twenty six Otis is positioned we've got the cost structure. We want we got the customer Centricity. We want we have the workforce, we want which is why we made that investment we have the strategy to execute and I really think it's setting up nicely for later.
Speaker Change: 25 and 26.
Speaker Change: Great. Thanks, Judy.
Speaker Change: The next question comes from Julian Mitchell with Barclays. Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: Maybe first just wanted to follow up I think Kristina you talked about flattish sort of EPS in the first half.
Speaker Change: A stronger second half so just wanted to follow up on that.
Speaker Change: Is the driver there in the first half kind of organic sales.
Speaker Change: <unk>.
Speaker Change: Slightly just because of the new equipment declines and then operating margins.
Speaker Change: Very slightly just because you have that new equipment margin decline being pretty steep.
Speaker Change: And then I guess FX is the biggest first half headwinds.
Speaker Change: Then second half kind of maybe just flesh out that a little bit please.
Yeah. So yeah is it broadly as you have described so service is going to be very level load that service will continue growing on the top line mid single digits on the back of the portfolio growth plasma that nice Asia and execution and the margin expansion is also going to come gradually on the other side new equipment first half of the year.
Speaker Change: He is going to be challenge Youll recall that there is not only the exiting portfolio. We also have a tougher compare because for example, amerigas is that that increase in orders in the second half of the year. So he is going to be a period until we execute the slower backlog and we also reflect the impacts from price and in the second half of the.
Speaker Change: We expect the flow through of all of this transformation initiatives into my in that's why EPS is broadly flat in the first half on a strong increase in the second half on FX is also going to impact because of a tougher compare in the first half of the year and as we shared the FX spot rates. It was the best we know.
Speaker Change: To start the year, we shared that with you we put that on the chart. We will update you every quarter and if if non U S currencies get stronger you'll see that you'll see that flow through in the appendix youll see that 30% of our 2020 for revenue was in U S dollars and 70% in other currencies.
Speaker Change: That's great. Thank you and then just my follow up is on the new equipment.
Speaker Change: Backlog outlook, so I think new equipment backlog at constant currency was down mid single digits in Q4 with sort of full year.
Speaker Change: New equipment orders down high single digits for the year as we look to this year ahead.
Speaker Change: Based on your comments around China stabilizing later in the year and orders recovery in the Americas and EMEA.
Speaker Change: Should we expect that new equipment.
Speaker Change: Backlog go up.
Speaker Change: <unk> to be.
Speaker Change: Exiting 2025 is that kind of the core assumption informing the various cost savings programs and so forth that you've laid out today.
Speaker Change: Julian our new equipment backlog is down 4%.
Speaker Change: The Americas backlog is down mid single they had a tremendous revenue year in 'twenty for.
Speaker Change: So they drove a lot of deliveries a lot of shipments and a lot of installations.
Speaker Change: Out of our Florence factory and.
Speaker Change: And their orders coming in second half of 'twenty for Americas is our longest lead time for for conversion to revenue there.
Speaker Change: Our backlog is solid and actually up up nicely almost almost double digit.
Speaker Change: And AP is up low teens. So we have this blend going on in backlog with China, obviously being down that we will be working through and again, we're encouraged by by the new equipment market segments being up in three of our four markets.
Speaker Change: Unfortunately, they're not the bookings book and ship markets as much and so so we'll go from there.
Speaker Change: Okay.
Speaker Change: Got it but the sort of China stabilization later in the year.
Speaker Change: Julian I would just correct myself EMEA is up lets say mid single forbid Atlas.
Speaker Change: Got it thank you.
Speaker Change: I just wanted to follow up very quickly Judy on the China stabilization later in the year.
Speaker Change: That's based on sort of any any assumptions around.
Speaker Change: When you look at sort of conversation with property developers or expected stimulus moves and any sort of fleshing out of that China kind of stable assumptions.
Speaker Change: The out years.
Speaker Change: Yeah. So no no new stimulus is assumed in that.
Speaker Change: But it is coming from discussions with a lot of state owned enterprises a lot of.
Speaker Change: Local party officials.
Speaker Change: This has now transitioned to to a local ownership.
Speaker Change: Challenge in our local economic.
Speaker Change: Challenge for the local government so in all of those discussions that we're having.
Speaker Change: There is this feeling that from the stimulus activities. We saw in 'twenty, four which were multiple but haven't really yet changed sentiment with the buyers. We will see what happens now with it with the Chinese new year. This week in the lunar holiday that's happening as we speak in terms of.
Speaker Change: Real estate, which tends to happen. This time of year. There is a general feeling we are getting that gives us more confidence to believe that that is when we will hit that that stable that stable Foundation point that I said between 350000 and 400000, new equipment units going forward.
Speaker Change: Great. Thank you.
Speaker Change: Next question comes from Jeff Sprague with vertical research your line is open.
Jeff Sprague: Thank you and good morning, everyone.
Speaker Change: Hey, Judy I, just wanted to drill a little bit more into China service, which obviously.
Jeff Sprague: Part of the call here today.
Jeff Sprague: Could you just address China conversion I see you shared a 51% like I said in the slides.
Jeff Sprague: Global at 66, so I think that kind of means ex China, youre running 90% ish sort of conversion.
Jeff Sprague: Maybe just kind of speak to the dynamics behind the conversion rate in China.
Jeff Sprague: What youre working on or what you shared with us today might improve that conversion rate.
Jeff Sprague: Yes, Jeff the conversion rate ex China is approximately where you said it was so the rest of the world on average is close to 90% we have some markets, where we're getting close to 100 and others that are just a little under 90, So I would say average.
Jeff Sprague: To the right.
Jeff Sprague: Right.
Jeff Sprague: Metric for you to use your China conversions I think we've done a lot to make the conversions happen more efficiently more effectively and where we want them to in terms of location and density we do that because more than half of our China portfolio is connected we are sure.
Jeff Sprague: Shipping all of our units with Otis one on them and that creates the stickiness.
Jeff Sprague: Four conversions. So we've got the technology there we've got the relationships there, but now that we've we're still a dual brand as Kristina mentioned, we still have two brands, but we don't have two independent businesses operating so our service workforce as they come take over during the war.
Jeff Sprague: Warranty period, they'll get to know Otis and they'll get to net will have greater coverage, because we won't be one brand of coverage versus another independent brand of coverage that's going to give us what we think is increased stickiness.
Jeff Sprague: Stickiness for post warranty for that conversion as just one example.
Jeff Sprague: And then maybe similar just on retention maybe.
Jeff Sprague: Maybe this is a function of the softer China, but I think it's drifted down a little bit.
Jeff Sprague: 4% in 'twenty, two and <unk> 93, and a half in 'twenty, three and I think we're 92 and a half year now.
Jeff Sprague: Just kind of what's going on that is that China is it something else center pressuring retention rate a little bit.
Jeff Sprague: Yeah, it's interesting because we focus we certainly focus on retention rate and you've heard me say before we have the leading retention rate across our industry, but we want to continue to improve that.
Jeff Sprague: I mentioned in one of my other answers, though we're using data more effectively and more efficiently to understand what every unit contributes in our service portfolio. So now it's not all about rates, it's not all about four 2% portfolio growth, it's about having the most profitable growing.
Jeff Sprague: Folio, we can so using that I would tell you going from 93, and a half or so the 92 to 92 four.
Jeff Sprague: Some of that is in voluntary obviously, we have customers who are not thrilled at times with our performance or for other reasons decided to change, but some of that's not.
Jeff Sprague: Not voluntary.
Speaker Change: And so we are working through our portfolio and what what Kristina and I have tried to make sure. The team does is even if that retention rate is going down we're getting higher quality in the portfolio higher profit dollars.
Speaker Change: And we're also making sure that we're net neutral on our net churn so that the the conversions then become the portfolio Chris. So if you noticed in our in the backup we are neutral on net churn, even though the retention rate went down so we're going to have a higher quality.
Speaker Change: Contributing portfolio and then I do believe you'll see the retention rate go up again.
Great. Thanks for that color and then just one other quick one just on China.
Speaker Change: What are you thinking for new equipment price in 2025.
Speaker Change: It's just the volume outlook.
Speaker Change: Yeah, we expect to price with Cosby and roughly now trial. So that would mean, maybe a few points of price decline, but we will compensated with real cost out yeah, and we're already seeing we've got about 40% of our commodities locked globally, but in China with the deflationary in.
Speaker Change: And steel we're locking in as much as we can still coming out with other engineering and material productivity. Our teams are working around the clock to get the cost side down as they have every year.
Speaker Change: Great. Thank you for all those details.
The next question comes from Steve Tusa with Jpmorgan. Your line is open.
Steve Tusa: Hi, good morning.
Speaker Change: Hey, Steve.
Speaker Change: Most of the questions have been asked but just on the on the new equipment orders.
Speaker Change: You said it was a was there like a 15% difference between the total and the total ex China is at the rate. It goes from negative four to a positive 11, I think you said ex China, yes.
Speaker Change: So I mean, I don't know what percentage of orders.
Speaker Change: China was in <unk> of last year I know your revenue base is 25%, but I mean that implies if you just use the 25% that China orders are down like I don't know 50% plus.
Speaker Change: It's a pretty big hit right.
Speaker Change: <unk> for China.
Speaker Change: Mike.
Speaker Change: I wouldn't go that I think I think you were a little too high but you're not far off.
Speaker Change: So I guess, how do we how do we reconcile that with like a 10% view of next year downturn I don't know wed like the annual ultimately kind of the annual was but like is your backlog still do you have enough backlog to be like Super confident in that 10 today or are you kind of getting towards the end of the year a little bit.
Speaker Change: More.
I hand to mouth because these are some obviously, it's not a huge part of your business any more profit wise, but.
Speaker Change: Some pretty significant declines obviously.
Speaker Change: Yes, so our traditional China business was about two thirds backlog coming into a year and a third book and ship. So that's your term hand and mouth my term book and ship right.
Speaker Change: [laughter], Okay, we're talking we're talking similar language here.
Speaker Change: So and that's that's not we did not see that materialize in the third or especially the fourth quarter.
Speaker Change: So we are we're going to keep watching it we believe the year ended 24 for the segment new equipment segment in China 420000 units and we believe it's going to be down another 10.
Speaker Change: And that's why I think it's going to end between $3 50, and 400 and stabilize there.
Speaker Change: Okay, but I guess I'm just wondering if that.
Speaker Change: It doesn't seem like that's like you've got a ton of visibility on that given how we're kind of entering the year.
Speaker Change: Oh actually narrower than average visibility.
Speaker Change: Yeah, I'd say that with similar visibility to last year. Although we started we thought it was going to it it came in worse the fourth quarter actually the segment came in down 20 for the year came in down 15, because it did not.
Speaker Change: None of the stimulus really help new equipment per se.
But I actually we have similar visibility going into this year and we've already seen that the January results because our teams often right now for the Chinese new year. So I think we've got pretty good line of sight. Okay. Great. Thanks for the color I appreciate it thanks.
Speaker Change: The next question comes from Chris Snyder with Morgan Stanley. Your line is open.
Chris Snyder: I'll try to combine my questions here and effort of time I wanted to ask about the Americas business I'm. So last quarter, we saw a sharp positive rate of change on the year on year order growth for Americas.
Chris Snyder: It seems like it's mostly a function of comps I guess my questions are one our Americas orders going higher in absolute terms or is this still primarily a function of comps.
Chris Snyder: Understand.
Chris Snyder: I guess and then.
Chris Snyder: Do you guys believe the Americas market will be up low singles next year, but your new equipment business in the Americas will be down low singles.
Chris Snyder: <unk> orders convert slowly to revenue in.
Speaker Change: In the Americas, but I didn't know if you guys are different from the broader industry in that regard. Thank you.
Speaker Change: Yes, I don't think let me answer your second one I don't think we're different from the broader industry.
Speaker Change: For four quarters before.
Speaker Change: Second half of 'twenty three in first half of 'twenty for the Americas orders were down significantly and.
Speaker Change: And understandably with what was happening in the economy interest rates going up and developers just not making those decisions. We started seeing some of those green shoots happened late in the second quarter, which led to a positive third quarter and then the fourth quarter, we were up 14% in new equipment orders and I believe that was more than.
Speaker Change: More than a compare them Cristina philosophy, it was not going to comment on that so sequentially. We are having growing new equipment orders in absolute dollars every quarter in 2024, including Q4. So there was also a good ramp up Q4 compared to Q3, but we are I will tell you Chris we are seeing and again. This is whether you could look.
Speaker Change: At Abi and B B very pessimistic.
Speaker Change: <unk> tends to lag even up to 18 months as an indicator for us the Dodge construction index looks positive and it is positive. The construction activity is picking up the proposal activity is strong our ability to convert has been very strong. We've got line of sight for 18 months now and our.
Speaker Change: <unk> backlog the reason, even though the segment's up and our backlogs down or our 25 looks down low single digit is because we had such a strong revenue year.
Speaker Change: Working through backlog.
Speaker Change: Our Americas team deserves a ton of credit in 2004 will refill that but it is full with permitting with all the other challenges Americans jobs, even the volume jobs, just take longer from order to full revenue recognition.
Speaker Change: Thank you.
Speaker Change: <unk> next question comes from the line of Nick Houston with RBC. Your line is open.
Nick Houston: Yes, hi, everyone. Thanks for taking my question I'll just ask one.
Speaker Change: If we think about.
Speaker Change: Four 2% growth in the installed base is it possible to break this down into.
Speaker Change: New equipment conversions.
Speaker Change: Retention recapture and then also on marketing because.
Speaker Change: Because I mean, my sense is that you're on the path.
Speaker Change: Two to three years, most conversion probably becoming the biggest feeder of the portfolio as that business gets bigger and new equipment is declining. So I'm. Just curious if you can maybe quantify that please.
Yes, Nick so on Mod conversions, there's two types of Mod theres, an on portfolio Mod and as an off portfolio Mod and on portfolio modernization or refurbishment is one where we already have it in our service portfolio and so we get the modernization we tend to get it in a less competitive.
Speaker Change: Because we've been cultivating working with customer helping them financially plan for this with their capital planners and we get those so those are almost net neutral when you think about the fact that they're already on our portfolio.
Speaker Change: So I just want to make sure you understand but off portfolio mods that we can bring back something that's not in our maintenance today do the modernization and then convert it that becomes an incremental portfolio upside. So kind of one is almost retention and the other is truly.
Speaker Change: Our new portfolio add so I know and I'm.
Speaker Change: I'm really excited about them odd market I hope you know that we purposely added a strategic imperative we focus the company on it across the board from sales to moving this into our manufacturing plants, we're trying to get the supply chain. We are driving these packages in the supply chain activity and savings and we will grow.
Speaker Change: Significantly in Mod, but a portion of that will be mined from our own portfolio. So that's kind of protect versus new growth. So I. Just as you as you think about that I just want to add that dimension because I'm not sure we've discussed that before right.
Speaker Change: Right now we have not broken out yet where mod comes into the four point too, but I would tell you off portfolio Mod would be a very small portion to date of that $4. Two very small. So this is all still service conversion recapture retention with a very small amount.
Speaker Change: That mod off portfolio is going to grow significantly over time, and we will try and provide at least color on how that's growing as we go forward.
Speaker Change: That's really helpful. Thanks very much.
Speaker Change: Yeah.
Speaker Change: Your final question comes from the line of Miguel <unk> with BNP Paribas. Your line is open.
Miguel <unk>: Hi, good morning, everyone. Thanks for taking my questions I just have one last question.
Speaker Change: And once you use around the modernization market in China.
Speaker Change: And whether this market become increasingly competitive.
Speaker Change: Over the years to come.
Speaker Change: Why wouldn't we see the same kind of price pressure more liquid.
Speaker Change: Thank you very much.
Speaker Change: Yes, Thanks, Miguel I think it actually ties nicely into my last conversation, which is if you have the customer relationship and you can be on your own portfolio you have a higher probability of a potential sole source award for modernization because youre crafting it when it's off.
Speaker Change: <unk> just like anywhere in the world It will be competitive I think the biggest difference in China to date is we don't see that the multitude of independent service providers. They have such a large service portfolio I mean, 40% of the install base, it's still growing 400 500.
Speaker Change: Units a year are converting out of new equipment at the segment level into into service in China, There's ample service work for Isps in China. So we don't see them really trying to penetrate the modernization market at any level.
Speaker Change: Modern innovation takes construction skills, it takes different skills, and just repairing and maintaining elevators, because you have to pull a unit out.
Speaker Change: There is no general contractor you do at all is the modernization provider. So while we see some large isps in some parts of the mature markets doing that it's not a large number and in China. It's a.
Speaker Change: It's a very small number so will it get competitive with the larger Oems potentially.
Speaker Change: Potentially will it be a large market to serve yes should we get good pricing on our own portfolio, Yes, which is why another reason why we want to grow our China service portfolio as rapidly as possible and have been focused and have a strategy to do that but we you know we.
Speaker Change: We've already moved modernization packages into our new equipment factories in China, and just as we are procuring parts for new equipment for Gen three or a gen 360, we're doing the same for a gen. Three mod. It's the same equipment. Its the same machine itself. So we're getting news, we're getting that's that supply.
We have scale, we're getting everything and now in China, because it will be so large we are going to have really mod installation teams that will be going from installation to installation. So the installation efficiency will be very cost effective as well so everything that worked at scale in new equipment on the call.
Speaker Change: Site in China will be what we leverage Fremont.
Speaker Change: Super helpful. Thank you very much.
Speaker Change: You bet.
Speaker Change: Sorry. This concludes the Q&A session I will now turn to Judy marks for closing remarks.
Judy Marks: Well. Thank you Sara listen 2024 was a year of service strength and strategic resiliency for Otis we enter 2025 with confidence in our long term strategy and certain of our ability to provide value for our customers colleagues and shareholders I hope everyone stays safe and well. Thank you for joining.
Speaker Change: Us today.
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.
Speaker Change: Okay.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: Okay.