Q2 2025 Otis Worldwide Corp Earnings Call
Good morning and welcome to Otis's second quarter 2025 earnings conference call.
Speaker Change: Carrie live on the internet and recorded for replay presentation. Materials are available for, download from Otis website at www.otis.com. I'll now turn the call over to Rob Cortaro vice president of investor relations.
Rob Cortaro: Thank you, Tina.
Rob Cortaro: Welcome to otis', second quarter 2025 earnings conference call.
Rob Cortaro: On the call with me today are Judy marks, chair, CEO and president. And Christina Mendes Executive, Vice, President and CFO.
Rob Cortaro: 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.
Rob Cortaro: We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties.
Rob Cortaro: Otis' SEC filings including our form 10K and quarterly reports on form. 10q provide details on important factors that could cause actual results to differ materially.
Judy: Now, I'll turn it over to Judy.
Judy: Thank you, rob. Good, morning, afternoon, and evening, everyone. Thank you for joining us. We hope everyone listening is safe and well.
Speaker Change: Starting with Q2 highlights on slide 3.
Speaker Change: Otis delivered solid second quarter and first half results as the service segment continued to drive strong performance with both a year-over-year and a sequential operating profit margin Improvement.
Speaker Change: Organic service sales in the second quarter were up 4% with growth across all business lines and in all regions.
Speaker Change: Our maintenance portfolio, grew 4%. Again, in the quarter, adding to our industry-leading 2.4 million unit portfolio under service.
Speaker Change: Modernization momentum continued as we accelerated orders to 22% and ended the quarter with the backlog up 16% at constant currency.
New equipment, orders decreased by 1% due to continued economic challenges in China, while orders in the rest of the world, increased 11% versus the prior year.
Speaker Change: We continue to make progress with uplift and we remain on track to achieve $200 million in run rate savings by year end.
Speaker Change: Additionally, in response to continued weakness. In China, we're executing additional actions to reduce costs as part of our China transformation. We now anticipate run rate Savings of approximately 40 million dollars by year end.
Speaker Change: Our 2025 in-ear savings targets. Remain at 70 million and 20 million for uplift and China transformation respectively.
Speaker Change: Together. These initiatives are enabling us to deliver greater customer centricity and to invest in growth
Speaker Change: In addition, we also now expect the impact of 2025 tariffs to be roughly. Half of our expectations in April.
Speaker Change: To arrange of 25 million, to 35, million reflecting more favorable, reciprocal, tariff rates, and our mitigation efforts.
Speaker Change: We completed approximately 300 million dollars in share repurchases in the second quarter taking year-to-date repurchases to approximately 550 million dollars.
Speaker Change: During the quarter, we closed on our previously announced acquisition of 8 Urban elevator locations in the US.
Speaker Change: This deal further. Expands our maintenance portfolio and enhances our ability to serve customers.
Speaker Change: Was $1.97 in the first half of the Year growing 2% versus the same period last year, due to solid margin expansion and continued tax planning efforts.
Speaker Change: In June, we published our connect and Thrive report. That outlines our progress and commitments to 4 key areas, health, and safety, governance and accountability, environment, and impact, and people, and communities.
Speaker Change: These areas are closely aligned with our strategic vision and the Otis absolutes of safety, ethics and quality that we live by every day.
Speaker Change: During the quarter, we were honored to be recognized with several sustainability Awards.
USA Today in collaboration with statista included Otis among America's climate leaders and Forbes recognized. Notice among 200 US companies included on the net. Zero leaders list for reduction of carbon emissions.
Speaker Change: Newsweek also recognized notice among companies from 26 different countries for our environmental sustainability performance. And most recently Time magazine named Otis among the world's most sustainable companies for the second consecutive year.
Speaker Change: Turning to our orders performance on slide 4.
Speaker Change: Combined new equipment and modernization orders grew 4% in the quarter driven by continued strength and modernization.
Speaker Change: Excluding China orders grew 14%, with notable strength in the Americas and asia-pacific.
Speaker Change: Our combined backlog remained relatively flat year-over-year, however excluding China, it increased 10%.
Speaker Change: Our total backlog including maintenance and repair, is at historically, high levels, positioning us. Well, for future quarters.
Speaker Change: New equipment, orders declined, 1% in the quarter. However, excluding China. We saw robust 11% growth.
Speaker Change: For the fourth straight quarter, the America's orders were up in the low teams.
Speaker Change: Asia-pacific also delivered strong results with order growth exceeding, 20% for the third consecutive quarter led by southeast Asia and India.
Speaker Change: This strength was offset by continued softness. In China, where orders declined by more than 20%?
Speaker Change: note however, that our China new equipment orders were sequentially stable in the first half of 2025,
Speaker Change: And we anticipate year-over-year growth in the coming quarters.
Speaker Change: In the mea new equipment. Orders decline, low single digits as strength in the Middle East was offset by weaker demand in Europe.
Speaker Change: At constant currency our new equipment, backlog declined, 3% year-over-year, but excluding China, it grew 8%.
Speaker Change: modernization acceleration continued as orders, grew 22% leading to our quarter end backlog of 16% at constant currency with America's China and asia-pacific each growing orders more than 20%
Speaker Change: The modernization opportunity is compelling driven by the Aging of the 22 million unit installed base.
Speaker Change: We continue to expect these aging units to drive a multi-year growth cycle across our regions.
Speaker Change: Our service portfolio grew 4% in the quarter with contributions from all regions.
Speaker Change: China's strong growth trajectory continued as the region grew its portfolio, low teams asia-pacific through mid single digit, and emea, in America's grew load, single digits.
As our Global teams continue to deliver we're proud to share, second quarter, customer highlights that reflect our success in winning strategic projects through Innovation, execution, and trusted collaborations.
Speaker Change: In the Americas, Otis will modernize 21, elevators at the 1 American Tower in Indianapolis expanding, our long-term relationship with this customer.
Otis provided. The original elevators for the buildings in the 1980s.
Speaker Change: Modernize them in 2009, and is the current maintenance provider otus, will upgrade controls doors signals and cab. Finishes on the elevators,
Speaker Change: In Dubai, we continue to strengthen, and grow our relationship with DMACC properties 1 of the leading luxury, real estate Developers.
Speaker Change: Our latest agreement to supply and install 20 Sky elevators at DMACC Bay 2 in Dubai. Harbour brings our total orders with DMACC to 88 elevators.
Speaker Change: This includes 72 skyrise and 16 Gen 2 systems across 6, high projects in the city.
Speaker Change: These orders. Reflect the trust. Daymak places in our technology and service and they underscore our growing footprint in the Middle East.
Speaker Change: This recently entered into a contract for more than 400 escalators and connected elevators, to support metro and infrastructure expansion projects in hongo chang, chong and Tenzin.
Speaker Change: These orders reflect our ongoing role in supporting Urban Mobility across key cities.
And in Ho Chi Minh City Vietnam, Otis has been selected to install and maintain skyrise and gen 3, elevator systems at the cross.
Speaker Change: A 39st premium mixed use development in the city central business district.
Speaker Change: These units will be supported by our Compass, 360 and EMS Panorama 2.0 management system.
Delivering a modern integrated solution for enhanced passenger experience.
Speaker Change: Turning to our second quarter results on slide 5.
Speaker Change: Otis delivered, net sales of 3.6 billion dollars flat on a year-over-year basis with Organic sales down 2%.
Speaker Change: Adjusted operating project profit. Margin was flat versus the prior year at 17%.
Speaker Change: Excluding a 13 million foreign exchange Tailwind adjusted operating profit decreased 2% with growth in service offset by a decline in new equipment.
Speaker Change: Adjusted EPS declined. 1% or 1% in the quarter driven by a tough year-over-year, comparison from an operational and tax standpoint.
Speaker Change: As I previously mentioned, EPS grew 2% in the first half of the year.
Speaker Change: Adjusted free cash flow was 243 million in the quarter and 429 million year to date with that. I'll turn it over to Christina to walk through our results in more detail.
Thank you, Judy.
Starting with service on a slide 6.
Speaker Change: Service, organic Sales Group 4%, with growth in all lines of business.
Speaker Change: Maintenance and repair, organic sales grew 4%, given by growth in our portfolio and positive price of 3% in maintenance.
Speaker Change: Partially offset by mix sunshine.
Speaker Change: Our repair business accelerated in the second quarter as anticipated growing 6% organically year over year compared to 1% in the first quarter.
Speaker Change: We are pleased with our progress and with our backlog up 8% at quarter end, we are well, positioned heading into the second half.
Speaker Change: Authorization, organic Sales Group 5% with notable growth in China, which increased over 20%.
Speaker Change: While modernization organic sales growth was muted. It was primarily driven by timing of several large projects which can vary from quarter to quarter.
Our modernization backlog remains strong.
Speaker Change: A 16% at constant currency at quarter end.
Speaker Change: And we expect a proximately, 10% growth in modernization sales for the full year.
Speaker Change: Service, operating profit of 5778 million increased 26 million at constant currency with higher volume.
Speaker Change: Favorable pricing and productivity, including the benefits from uplift.
Speaker Change: More than upsetting higher level cost and mix and churn.
Operating profit margins expanded 20 basis points to 24.9% in the quarter.
Making another record quarter in service margins since a spin.
Speaker Change: Turning to new equipment on a slide 7.
Speaker Change: New equipment, organic says declined, 11% in the quarter as a strength in EMA was more than upset by declines in China, America, and Asia Pacific.
Speaker Change: EMA says, AMA says grew 7% primarily due to a strength in the Middle East, which grew greater than 20%. While Europe was up low single digits.
Asia Pacific declined, low single digits with notable strengths in Hong Kong and Taiwan
Speaker Change: obsessed by weakness in Korea.
Speaker Change: additionally growth was negatively impacted by timing of project execution in India, however, the backlog in India remains strong
Speaker Change: America decline High single digits as we work through last year, backlog. But in addition, backlog execution has been slower due to Market concerns around global trade policy.
Speaker Change: China remained weak declining greater than 20% as soft market conditions, a strict Credit Control on segments and a declining backlog. Continue to impact our results.
Speaker Change: Profit of 68 million declined, 41 million at constant currency driven by lower volumes and unfavorable price and mix.
Speaker Change: Operating profit. Margins declined. 240 basis points to 5.3%.
Speaker Change: Driven by the headwinds of lower volume and Regional mix. That were partially offset by productivity including the benefits from uplift and our China transformation.
Judy: I will know 30 back to Judy to discuss our 2025 Outlook.
Judy: Starting on slide 8 with the Market Outlook.
Judy: Before discussing our updated 2025 Outlook, I'd like to briefly discuss our Global Market expectations, which are largely unchanged.
Judy: We continue to expect a low single digit decline in the Americas. However we are beginning to see Trends improving sequentially.
Judy: Our Market Outlook for EMA is unchanged with low single digit growth.
Judy: Asia is now anticipated to decline High single digits. This is driven by mid single-digit growth in asia-pacific offset by a low teens decline in China.
Judy: Our outlook for China is now slightly lower than our beginning of your expectation due to continued softness in the market.
While year-over-year comparisons are easier in the second half, we now believe the market will be down approximately 10% for the remainder of the year.
Judy: Taken together. We expect the global new equipment Market to decline mid single digits in 2025.
On the service side, we continue to expect the global install base to grow mid single. Digits driven by low single digit growth in America is an EMA and mid single digit growth in Asia.
Judy: This growing install base, should further support growth in our maintenance portfolio, and expand our service flywheel.
Judy: Turning to our financial outlook for 2025.
Judy: We now expect, net sales of 14.5 billion to 14.6 billion dollars a slight decline from our previous Outlook.
Judy: Driven primarily by a lower outlook for new equipment sales.
This is largely driven by the new equipment Market environment in China and the US.
Judy: In China market conditions have remained soft as liquidity challenges are causing a Slowdown in execution of our backlog.
In the US continued uncertainty over global trade policies are causing project delays.
Judy: That said we have driven low teens or greater order growth in the Americas for 4 consecutive quarters and our backlog remains strong, their up 5% at the end of the quarter.
Judy: This backlog positions us, well, as we head into 2026.
Judy: And as you know, our resilient service business is relatively insulated from tariffs. This resilient business is our core earnings driver representing approximately 90% of our total operating profits,
Judy: Looking ahead. We expect our service. Organic sales growth to continue to ramp up through the remainder of the year.
Judy: Our outlook for adjusted operating profit is unchanged at 2.4 billion to 2.5 billion dollars up, 55 million to 105 million on an actual currency basis, including the impact of incremental us. Tariffs, imposed in 2025.
Judy: This is in line with our prior Outlook as reduced reciprocal tariff rates for China. In favorable foreign exchange rates offset, lower expectations for our new equipment profit this year.
Service profitability should remain strong from growth in all 3, areas of the business, maintenance repair and modernization.
Judy: Our outlook for adjusted EPS is unchanged at $4 to 410 cents. Per share representing an increase of 4 to 7% compared to 2024,
Judy: We expect adjusted free cash flow to be between 1.4 billion to 1.5 billion for the year, which we expect to largely returned to our shareholders, through our dividend, and $800 million of share repurchases.
Judy: Note. We are well on track to meet our share. Repurchase Target having bought back approximately. 550 million dollars a year to date through June.
Speaker Change: I'll now pass it back to Christina, through review the 2025 Outlook in more detail.
Speaker Change: Thank you, Judy.
Speaker Change: Moving toward organic sales outlook on a slide 9.
Speaker Change: We now expect organic sales growth of approximately 1% for the year.
Speaker Change: This is driven by continued, the strengthening service with Organic growth of approximately 5%.
Speaker Change: Kelly obsessed by a decline in Neo equipment of approximately 7%.
Speaker Change: Within new equipment, we have lowered our outlook for Americas to down high single digits.
Speaker Change: And Asia to download teams.
Speaker Change: due to the macroeconomic concerns, you did previously noted
Speaker Change: Within Asia, we expect a strong growth in Asia Pacific observed by a greater than 20% decline in China.
Speaker Change: We continue to expect EMA to grow mixing LEDs for the year.
Within service, we continue to expect growth in all segments, through the remainder of the year.
Speaker Change: Maintenance and repair is expected to grow, approximately. 5% driven by portfolio growth and pricing, partially offset by mix and churn.
Speaker Change: We saw solid acceleration in our repair Revenue in the second quarter and we expect continued acceleration through the second half.
In modernization, we are anticipating approximately 10%, organic growth as we execute our strong backlog.
Speaker Change: Turn into a slight 10 to provide an update on tariffs.
Speaker Change: While circumstances remain fluid our anticipated, tariff exposure. Has many fully declined from expectations in April.
Speaker Change: This is driven by more favorable reciprocal tariff rates, as well as our successful mitigation strategies.
Even these changes, we now expect an approximately 25 million to 35 million negative impacts to our 2025 earnings, net of our mitigation efforts.
Speaker Change: No, that this impact is primarily expected in the second half.
Speaker Change: As the year to date impact has been minimal.
Speaker Change: As a reminder, our car is exposure is primarily in our backlog.
Speaker Change: As we have adjusted contract terms and pricing for the current environment.
Therefore, after execution of the backlog, the impact of the new T is on our results, should be offset by pricing and contract language.
Speaker Change: Turning to our financial Outlook and slides 11.
We currently expect adjusted operating profit to grow, 55 million to 105 million on an actual currency basis, including the impact of tariffs.
This growth is driven by the strength of our service segments as well as cost savings from uplift and our China transformation.
Speaker Change: Adjusted operating margin is expected to expand 30 basis points given by expanding service margins and mix.
Speaker Change: Offset by declining new equipment. Margins from tariffs, as well as the flow through of last year's backlog and Regional mix.
Adjusted free cash flow is now expected to be between 1.4 billion to 1.5 billion dollars for the year.
Speaker Change: The decline from our previous forecasts is primarily driven by our reduced outlook for Neo equipment sales,
Speaker Change: as well as the impact of the mix.
Speaker Change: As new equipment sells are more favorable to working capital.
Speaker Change: We continue to anticipate approximately 800 million dollars of serve reputations for the year.
Speaker Change: Moving to the 2025 Epps Bridge on a slide to us.
Speaker Change: I would adjust the DPS out, look for the year remains or to 4.10 per share.
Speaker Change: This represents 4 to 7% growth compared to the prior year, driven by a strong operational growth from our service segment.
Speaker Change: The new equipment, segment remains a headwind due to soft economic conditions in China and the impact of global trade policy in the US.
Speaker Change: Favorable foreign exchange rates and a lower share count are expected to offset the impact of tariffs and a higher interest expense.
Speaker Change: And while conditions remain challenging for our new equipment business in the near term.
Speaker Change: Our us backlog is growing and China. Orders are expected to stabilize in the coming quarters.
Speaker Change: And farther more, the resiliency of our service business continues to drive earnings on the back of mid single digit. Topline growth and continued margin expansion.
Speaker Change: We are also continuing to execute our uplift and China transformation initiatives which will allow us to better share our customers while driving 240 million dollars of run rate cost savings by year end.
Speaker Change: In the second half of the year.
Speaker Change: We are making good progress with our China transformation. And as I previously mentioned, we are raising our cost savings Target to forty million dollars due to additional restructuring actions underway.
Speaker Change: Looking at the third quarter, we expect new equipment, organic sales growth roughly in line with our full year guidance.
Speaker Change: With sequentially lower margins in the quarter.
This margin pressure is due to lower volumes, that will be more acute in the third quarter.
Speaker Change: This is due to the execution of cost mitigating actions, such as the temporary Furlow of some of our production facilities.
Speaker Change: Service organic sales are expected to ramp to around 5%.
Speaker Change: And we anticipate solid year-over-year Marine expansion with positive contribution from uplift as we execute the last wave of the program.
Taking together. We expect the third quarter adjusted EPS growth of around 5%.
Speaker Change: Followed by a strong fourth quarter to deliver 6% full year growth at the midpoint of our guide.
With that, I will kindly asked Tina to please open the line for questions. Thank you.
Tina: To ask a question at this time, simply press star, followed by the number 1 on your telephone keypad. We respectfully ask that you limit your questions to 1 with 1 follow up. We will now pause for just a moment to compile the Q&A roster.
Tina: And our first question comes from the line of Jeff. Sprau with virtual research, please go ahead.
Jeff Sprau: Hey uh spread go here at virtual. Uh good morning everyone. Hi Jeff. Hi, how you doing? Um, Judy. I I wonder if you could just maybe unpack service growth a little bit more for us. And the the spirit of my question is um I think we've got 2 quarters in a row here now where service Revenue growth organically is equal to portfolio growth where historically you know, revenues outperformed you know, portfolio growth so you know you mentioned Sharon and mix. I guess I'm you know particularly interested in churn and this kind of economic period of uncertainty. Are you seeing leakage and retention or really what's going on underneath the surface there?
Speaker Change: Yeah. Thanks Jeff and and good morning, um, apologies about your name. So listen, the service is continuing to perform, we're going to be maintenance and and organic sales. We're up 4%, it was driven by 4% growth in the portfolio. Um, we did have positive Service pricing like for like pricing increased 3 points in the quarter. Uh that's a little lower than we had in previous years. But inflation is not as high and in certain parts of the world. Um in the developed mature markets, the Service pricing performance was really excellent uh EMA was up low single our America's team drove mid single digit pricing. So really pleased with that. The the main changes the 2 elements I I'd call your attention to this quarter versus last quarter. Repair sales, snapped back. Um they were 1% in first quarter. This quarter
Speaker Change: What are their 6% and we anticipate incrementally that to increase in the third quarter and even more in the fourth quarter, our repair backlogs up 8%. So we've got good backlog to work on uh as we look through the remainder of the Year mod Revenue was down um to 5% and that was a combination of a lot of major projects that we had won. You saw our mod orders are up 22% uh
Speaker Change: Set now, for for almost for, for multiple years and uh, I think you're going to see that I know you're going to see that come through uh in the next. Next 2 quarters. The operating profit shows shows that uh that service impact as Christina mentioned. We had a record. Um since spin 24.9% operating margin in service and that will continue to drive our our our growth in operating profit uh as we go through and we've had operating profit now in service. Um, this is the 21st straight quarter, so you're going to continue to see that but we know what the growth story on Topline. We own that and you will see that as we go through the second half of the year.
Speaker Change: Uh thanks for that. But just to be clear that I I mean if units are up 4 and service prices up 3, uh the fact that organic revenues are only up 4 is they function of new equipment. Mixed the project related stuff you're talking about or is it or is it retention?
Speaker Change: No, it's the retention. Actually was slightly better in the second quarter than the first quarter. Um, but it's it's a mix and churn effect because as the portfolio grows the the mix is it's growing more in the in the less mature markets, which have lower contribution, especially in China, where we're growing in the teens. So it's really a really a mix and churn effect there. And then, as you know, uh, even with the units that when we when we lose them and we don't retain them and replace them with a recapture that,
Speaker Change: Does come at a lower at a lower margin and a lower price.
Speaker Change: Right, right. Okay. Thanks, I'll leave it there. Good luck. Thanks.
Our next question comes from the line of Nigel. Co with wolf research. Please go ahead.
Nigel: Thanks, uh, got my name right? That's uh, that's encouraging. Um, good morning. Thanks for the question. Um,
Nigel: Just on the, on the retention. Judy, I know you said it, improves slightly key the queue and maybe you could, maybe just put a final point and and quantify that, uh, but I'm just, um, curious really on, you know, you it sounds to me like you're pointing to new new equipment orders, infecting in the Americas. Um, just given the continued Dragon multi family, it's just, it's surprising to see that. So I'm curious, you know, what do you see in the pockets of growth um in the Americas and then maybe just touch on China as well. I think you said expect, you have your growth in the coming quarters, so just curious if that's just easier comps. So are we seeing some benefit from the, uh, stimulus efforts in China?
Judy: yeah, so Nigel we
Judy: Data once a year. So, you'll see that part. I, I won't elaborate on, in terms of the US. Um, as I said, fourth strong quarter with teens growth North America was up. 15% new equipment orders, um, this quarter. We saw some contraction in Latin America, Brazil, Mexico, chile. Um but North America is so
Judy: So much more of our of our business. As, you know, in, in, in the, in the Americas. Um, really strong performance in infrastructure.
Judy: Uh, we saw resi was flat this quarter. So when we talk about multifamily, our orders were flat year-over-year. So, uh, I view that actually as positive versus the kind of pullback, we had seen in in multifamily over the past few quarters, uh, and then commercial was down. And, um, so, you know, again it was a strong infrastructure. Um, job a lot of major projects, uh, and a lot of volume business, too. And I I couldn't be really more pleased. Um, you know, with, with our performance in North America, uh, really, really strong 4 quarters in a row after almost 6 quarters where we had orders contraction, which is the backlog. We're living through in new equipment, in, in North America. So that's strong in China. Listen the, the new equipment Market, it does remain weak.
Judy: Down 15% first and second quarter. Uh and we see it improving to 10% in the second half. The comps will help, but there was not a single vertical in the second quarter That Grew nor a single single tier City that grew in the second quarter of Tier 1 did better than the others, but but none of them grew. So the best verticals in China for the second quarter.
Judy: China really on value, really 2, things value in terms of because it's very competitive, and the prices are very, very, very low. So, we focus on value and then we focus on our ability to retain it in our service portfolio and where there was other opportunities for for margin, uh, or for for volume where we weren't going to get any margin or get the service attachment rate. Um, we walked away from those. So I think our teams being very disciplined uh to be in a much better place in terms of our backlog.
Judy: And, you know, you look at our new equipment backlog, um, for the company. So our new equipment orders decreased 1%. But if you take out uh, China, the other 3 regions were up, 11% if you look at our backlog for new equipment even though it declined, 3%. If you take China out, we're up 8%. So I'm actually very encouraged for the rest of the world exchange China. China stabilizes and rest of world is growing now, almost a backlog of high single digit at 8%
Okay, that's great. Thanks, Judy. That's great color. And then my quick follow on this, uh, I think for Christina. Um, so it seems like the your 3Q. Uh, and this point is like a like a a dollar per share of earnings. Um, I think the midpoint implies the Step Up in earnings uh, from 32 to 4 queue. Um, that'd be quite unusual. So just wondering how we should be facing.
Judy: Think about the second half and and thinking about that step up and then and fourth quarter.
Yeah, no. Nigel. Thank you very much for the question. So let me give you some color on Q3 Outlook but also the calendar between Q3 and Q4. So starting with Q3 on the New Covenant side, we expect revenues to be in line with the midpoint of the guide around the minus 7%. With my in sequentially, down margin will be around 3% for new equipment in the quarter. The reason being is because we are anticipating the volume drop in the second half and we are executing cost, mitigating actions among others, we will Implement fur in some production facilities, that will mean, that the volume shortfall, will be more acute in Q3, and we will come back to regular level in Q4.
Judy: On the service side. However, as you said, we are accelerating execution on both on repair and modernization, they are going to be around 8% growth in the quarter. And we have very good line of sight to execute repair because our ending backlog in Q2 was around 8%. So it's the execution of the backlog and margin is going to go up sequentially to. We also have an easier compared to Q3 last year.
Judy: So total operating profit will be around 2% up. An EPS will be around 5% up. That means that for the calendar of eps growth in the year will be 3 cents per half.
Judy: 5 cents Q3 and around 14 cents Q4. So it is kind of a back loaded profile. And the growth in Q4 is based upon 3 areas, 1 is on the new equipment side. We expect a better stabilization in China in terms of shipments coming from better liquidity conditions in the market, but we also have an easier comparing China versus Q4 last year. So, new equipment contribution in Q4, will be back to normal levels around 70 million dollars in the quarter. And on the service side we expect an additional acceleration of repair and modes will be around low meetings in the quarter that implies for repair a roundabout in orders but also ramped up in execution and we do have the resources. You may recall that last year, we hired around 2,000 mechanics, those mechanics are productive now. And we are also this year selectively have
Judy: I mean, in those countries where we see farther growth potential of the backlog, and on the both side, it will be around 15%. This is based upon the acceleration of mod in China, on what we call the bond projects. These are the governmental subsidies and you may recall that last year we had a similar acceleration because the subsidies come to an end at the end of the year. So they need to be used. And this year we are planning to do the same with a bigger scale because the program this year is bigger, it's around 100,000 units versus 40,000 units last year. So the acceleration in Q4 is based upon the equipment repair and mode.
Christina: Great. Thanks. Christina.
What's Dora Bank? Please go ahead.
Yeah, thanks. Good morning.
Speaker Change: Good morning, welcome to Nicole. Thank you so much. Um, maybe we could just start with the China transformation savings. You guys were very clear about, you know, the what you're adding but I guess. What does that mean for carryover savings into 2026? Is there anything that we should be thinking about next year?
Speaker Change: Yeah, so the China transformation service, at the beginning of the year, we guided 20 million, India, 30 million run rate. We are executing according to the plan, we have 5 million in the first half of the year and the remaining 15 million will come in the second half. But because of the more acute, the decline of volumes, we are taking additional cost reduction actions. That's why we have increased the Run rate from 30 million to 40 million. So this is going to be an incremental savings for 2026 and and when you step back and you look at our overall picture of any equipment in the year, new equipment, sells are going to decline around 4 400 million dollars versus 450 million dollars last year. This is a very similar decline in terms of contribution last year. The decline was 44 million this year. Excluding that is an extra
Speaker Change: In our effect, we are going to decline 60s, listening, incremental, decline of 15, but we are facing new head Wings. 1 is the price because price in the backlog, in China became negative last year, as with the, the related prices, the market that dated prices. This is a headwind of around 100 million bpy this year. And the second 1 is Commodities at last year was 20 million positive. This year is flat, but we are only deteriorating incremental, 15 million. So this shows you all the cost actions. We are taking in the equipment that are uplift program but also the transformation of China and the usual productivity, material, productivity action. So there is a lot of cost mitigation in the new equipment side. Yeah, Nicole let me put this in. Kind of the business perspective versus just the financials. Yeah, we made a major organizational trans.
Speaker Change: Transformation change in China. As we started the year, we went from basically 2, separate, almost wholly, operating companies with very different brands, to being more laser focused on new equipment and modernization together in China for for good rationale and service. So we now offer both those Brands and service and we offer both those Brands and new equipment and modernization, but now we have the ability to optimize to have our agents and distributed
Speaker Change: And our direct sales folks, make us more customer Centric. So we're going through this transition and at the same time, obviously market conditions are are a headwind in new equipment especially Services. Growing nicely modernization is growing very nicely in China, over 20%, mod growth in China over mid teens portfolio, growth in service. So we are preparing while we're taking this cost out. We're preparing for and and implementing our new China approach to Market which will position us. Not just for the fourth quarter of this year to to get to that stabilization point. But for 26 and Beyond to go to market in a different way than we have in the past 20 years.
Speaker Change: Okay, thank you. That was a very comprehensive answer, appreciate that. And then just maybe a quick follow-up. The discussion around 3Q versus 4q Cadence was really helpful. Just 1 follow-up to that. What about the Cadence of free cash flow? Does that look more akin to normal seasonality or will it look similar to the earnings profile? Thank you. Yeah. So as flow in the second half of the year is going to be at the level of the second half in 2024. So, we have a good line of sight to deliver as we deliver last year. A cash flow is weaker than what we expected but is primarily driven by the business mix. So we have seen Neo equipment that they already in further and service remain in a strong. And as you know,
Speaker Change: Apply transformation. We are Transforming Our processes while Outsourcing our collections areas to a third party. The transition is progressing very smoothly. We are collecting with no disruption in the business and we are positive that as we end up the transition towards the end of the year, the support of our new partner is going to help us accelerate and optimize collections even further.
Speaker Change: Thank you. I'll pass it on.
To next question comes from the line of Steve Tulsa with JP Morgan.
Speaker Change: Hi, good morning.
Speaker Change: 6.
Speaker Change: Um, can you guys just talk about how you're set up into, you know, like just mechanically what the backlog would suggest for next year in China and I I'm sorry. Did you say that the, um, the the orders there are, are looking to improve sequentially. Now, I, I didn't quite catch that in the beginning.
Speaker Change: On any.
Speaker Change: Yeah, the the orders will improve sequential.
Speaker Change: China.
Speaker Change: Um backlog for uh is actually you know let me just take take you through the the whole world in terms of backlog and and how they're doing. Um you know if you look at let's start in the in the Americas. Steve, our backlog as we ended last year was minus 4, which is obviously where we saw some of the challenges in in, in the uh, in the revenue.
Speaker Change: This year on new equipment in, especially in North America, we're ending this quarter up 5 there, so that plus the orders we anticipate through the rest of the year position us really well going into, 26 asia-pacific, really strong backlog, double digit. So we're we're really pleased there and and EMA will be fine as we enter, especially based on the Middle East and Spain, and some other locations. So, it leaves us with China backlog. And that's why we've been talking a lot ex-china today. Um, China was about 12% of our Revenue, Global Revenue this year, 10% or this quarter 10% last quarter. So it's still now that smaller contribution so we're watching it closely. We're we're right sizing right. Sizing our, our costs to the best of our ability. Um, but but even with, um, you know, the mod backlog will be up. The service backlog will be up going into, um, into next year at
Speaker Change: China. But um, the new equipment backlog will be down.
Okay, so I mean that, that, that just sounds like on a like from a profile perspective is is China enough of a drag next year to, you know, um, completely offset what's happening the other regions.
Speaker Change: Um, you know, we're not going to, we're not going to guide for next year yet, Steve, but the other regions are are really growing strongly.
Speaker Change: Our next question comes from the line of Rob Orem with Milius research.
Rob Orem: Uh thanks. Good morning. Um just wanted to clarify hey uh demand in North America. I mean what you just referenced backlogs being strong? I think earlier in the call, you kind of talked about um some project, delays you mentioned recovery multi family. So I wonder if you could just square that Circle. Thank you.
Rob Orem: Sure. Well and you may have seen the the June ABI data that came out this morning which was down a little from May but inquiries being up Dodge momentum's up in June. Um, and so you know what, we're seeing for the segment, we stayed at download single, but I would tell you, as we kind of came through the end of the second quarter, we are starting to see some some nice positive, um, opportunities when we look at at proposal activity and and pending Awards as well, uh, in terms of of North America, um,
Rob Orem: The uh, the the uncertainty we talked about was for the current backlog. We're executing at job sites.
Rob Orem: You know, everything we're seeing locally which is, you know, we'll look at, we'll look at the data but but what we're hearing uh, again is is as the tariffs are getting more defined and settled. There's there's more excitement, we all are, you know, waiting for interest rates and and whatever will happen from the FED to happen, you know, obviously in the second half of this year, there are a lot of of jobs where the math works with that next, small interest rate decline. Uh, so we've bid them, we're waiting to hear our team is, is prepared. Not just to win them, but to perform. And I think we, we've seen just really strong performance there.
Rob Orem: Very helpful. Thank you.
Speaker Change: Your next question comes from blind of Julian Mitchell with barklay, please. Go ahead.
Julian Mitchell: Hi, good morning. Um, maybe. Um, just wanted to start with a broader question on uh, free cash flow because I guess the based on the updated dollar guide for this year, um, you've sort of got the same free cash flow. It looks like for, you know, in dollars for 4 years running now, despite not over that period sort of mid single digit sales growth.
Julian Mitchell: Made single digit plus net income dollar growth. So
Just trying to understand, you know not not so much in Q2. But what's going on? More broadly on free cash flow. Margins or conversion is something changing in Industry Dynamics around uh payment terms or something competitively. Um anything you'd call out there.
Speaker Change: Yeah, no, thank you for the question, Julian. And it's what I said before to, to Nicole. So it's a, it's a matter of the business mix that is changing. We and the working capital of new equipment is more favorable than in service. And in the last years, new equipment has been declining because of the situation in China in 2025. The situation is a little bit more acute because on top of China we have the decline of us in in sales driven by the ending backlog. Last year, that was negative. Plus what you mentioned, the job site are a slightly delayed because of the uncertainty about about that is but this is just a temporary effect. So service is growing strongly service collects but we collect later. It's a matter of time. So by when we stabilize the equipment and we have line of sight because the US backlog is growing, it's growing 5% in Q2, so us will stabilize and China, will vote.
Speaker Change: Bottom out. And we also, we also mentioned that orders in China are expected to stabilize towards the end of the year. And on the other side, we will collect in service. So we our business fundamentals remains unchanged, our business models, generates cash flow conversion of 100% plus because of our low Capital intensity, because of our low R&D is just a matter of the temporary receipt of the mix until we stabilize the equipment. Yeah. Uh, Julian, there's no structural change in payment terms, um, across the industry, uh, everything remains strong and, um, you know, I, I, I just want to, you know, give a shout out to our colleagues who do such a great job in execution, and then collect that cash, that allows us to be able to share that cash with our shareholders. And you saw our committed to the 800 million and Sherry purchase and to our dividend. And I think we've been, you know, we're really good.
Speaker Change: Good stewards of giving that Capital back to our shareholders.
Julian Mitchell: That's helpful. Thank you. And then just a short to term question on the, the operating, um, margin Dynamics, um, just to understand. So in in the first half of the year, you know, the operating margin is up, you know the 20 bits or so and and including the Q3 guide, not not much and and then you've got this step up for the whole year guided of, um,
Julian Mitchell: Uh, you know, including tariffs, sort of 30 bits or so. So that margin Step Up is happening. Um, I suppose, despite a bigger tariff headwind later in the year, um, maybe this help us understand sort of what what's the the puts and takes their around, sort of the, the degree of tariff, margin headwind in the back half or Q4 and and what all those countervailing factors are to offset that
Julian Mitchell: 10 basis points, 20 basis points of margin, but on the other side, the business makes improves in the second half of the year because we are accelerating very strongly repaired and modernization again on the back of a strong quarter and baclock growth. And as you know service margins are higher. So this is going to be a Tailwind but in addition we are finalizing the execution of our uplift program. Uh and we have very good line of sight because most of the actions are now to be executed, they are progressing on plan and also China. As I mentioned before, the 2000 in year savings, we have captured 5 million in the first half so the remaining comes in the second half. So essentially It's a combination of business mix productivity and the flow through of the uplift and China transformation savings. Yeah, let me let me just uh reinforce our confidence in the service business in the second.
Speaker Change: Half of the year, we have the backlog, we have the resources as Christina said, and now we execute and you will see that, make the difference and and drive the guide and and put, you know, that'll take care of the Tariff impact and, and it will get us again back to the Outlook that now, we've reconfirmed twice.
Julian Mitchell: Great. Thank you.
Speaker Change: Our next question comes from the line of Chris Snyder with Morgan Stanley. Please go ahead.
Chris Snyder: Thank you. I want to follow up on, on the prior commentary around March and into the back half. So I guess is service mix getting more favorable into the back, half versus Q2 because it seems like much of the uplift in growth from the 4 back to I guess, something like 6 is driven by mod um which I thought would have been more diluted to to service margins. Um thank you. Any color on that?
Yeah, I mean the simple answer and and the candid answer is it's actually more driven by repair step up which again we have 8% backlog. Going into the third quarter, there will be additional repair orders added, the demand. We're seeing there is strong everywhere in the world, all 4 regions. EMA Asia Pac China and the Americas and that mod will pick up too but the relative contribution both in sales and in profits will come from repair.
Speaker Change: Thank you, I appreciate that and then maybe just on the Americas. Obviously, orders have been pretty good, you know, not converting at the rate expected.
Speaker Change: You know, I guess, what do you think the market needs to see to start converting those orders? Is it? You know, visibility around tariffs. Is it, is it interest rates? Any thoughts on that? Thank you.
Chris Snyder: Yeah, no, we it's a great question Chris. Um, we do convert. Well, the challenge the the Americas especially North America. Is our longest lead time from when we booked an order to, when we get to a job site. There's a combination of reasons from permitting to just general construction challenges in the US. So we've been running through 18 months ago of backlog and you know now we've got 4 straight quarters of orders Improvement which you'll see in 26 really, start stepping up the revenue uh for North America. So it's that part's not an issue. What we're just seeing is a bit of of of uncertainty right now, on current job sites from the backlog that we're literally not just delivering, but installing, and it's just, you know, as each job takes another week or 2 longer than anticipated, you know, we're not seeing it. We're not seeing that impact on the
On the margin side on the labor side because we can move our crews around, but we are seeing it on when we realize the revenue.
Speaker Change: Thank you, I appreciate that.
Chris Snyder: You bet.
Speaker Change: And our final question comes from the line of Joe Oda with wilts Fargo. Please go ahead.
Joe Oda: Hi, good morning, can can you just expand a little on where the furls are occurring? Um, how long you expect those to be in place at this point?
Speaker Change: Yeah, so they're they're temporarily let me be clear. I mean measured in weeks.
Speaker Change: Um, and, and you're mainly seeing them where we're seeing our new equipment challenges in terms of Revenue, North America and China.
Speaker Change: Got, it makes sense.
Thinking about, uh, order activity in the back half of the year. Uh, if you could, you know, revisit I think you gave a little bit on China that in particular, but then also America's and Amia how how you're looking at order Trends there?
Speaker Change: Yeah, let me start with modernization then I'll turn kind of new equipment over to Christina and and we'll, we'll pair pair up on this 1 as partners. Um, listen, the modernization order strength will continue and you will see that continue globally. And I think you'll actually see more strength coming out of emia relative to, to how they performed, um, in the, in the first half. Uh, they had a challenging second quarter, but it was due to a tough compared to a major modernization. They won second quarter last year, so we expect to be talking about EMA, mod orders, uh, becoming far more positive, but the other 3 are on good trajectories to continue at this rate. We've always believed that mod orders because of the market demand. We're seeing China, will be up far more than 20% because you'll see this we call this Bond mod. This government stimulus mod at 100,000 units available that they have to spend the money by
Christina: The year end, you'll see that pick up well Beyond 20% that we saw last quarter. And as I said, America's had a phenomenal quarter with 50%, Plus in North America, I don't expect them to sustain that rate but I do expect them to be in the teens plus, uh, for mod and APAC, uh, has strong strong mod growth as well. They were, they were 20 plus percent and they should be at least teams plus Christine. I'll let you talk to new equipment.
Speaker Change: Yeah, so and the new equipment side, we have talked about China. China has been sequentially stable in the first half of the year. We expect ramp up in the second half, bpy back to Flat to even a slightly positive in orders. The reason for that is, of course, the easier compared but also the fact that we have been working on the transformation initiatives of new equipment in the first half of the year in consolidating, the 2 Brands consolidating agents and Distributors. So we are now in very good shape to start getting the results in terms of orders. On the America side, America has had a super strong performance since the second half of last year has been growing meet teams of above all the second half of this year. We expect the growth to slow down a little bit but it's just a matter of the compare because they started growing very strongly last year so we expect them to be sequentially stable but the growth with
Christina: Slow down.
Christina: And then, on EMA EMA is expected to be kind of low meeting up for the year. The reason for that is we have a very strong growth in Middle East.
Christina: There are certain markets in Europe that are more muted. I'm talking about Central Europe, Western Europe, or the north of Europe. But we are also taking selective investments in those markets, where we see, positive possibility to grow several segments. But always with the prospect of converting into service afterwards,
Speaker Change: that's a great color. Thank you. Thank you.
Judy: I will now turn the call back to Judy for closing remarks.
Speaker Change: Thank you Tina, while we Face near-term. Challenges in our new equipment business. We remain confident in our long-term Outlook, the global install base, continues to expand, while the population of aged units, presents an attractive and growing opportunity for modernization.
Speaker Change: To gather these strong fundamentals, should continue to drive our service flywheel.
Speaker Change: As we look ahead, we're confident our service driven business will continue to deliver attractive long-term shareholder returns.
Speaker Change: Thank you for joining us. Thanks to our Otis colleagues and thank you to our investors.
Speaker Change: Thank you again for joining us today. This does
Speaker Change: include today's conference call, you may add disconnect