Release Date: October 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Otis Worldwide Corp (OTIS, Financial) achieved high single-digit growth in its service segment, with year-to-date service organic sales up 6.4%.
- The company reported a 4.2% growth in its maintenance portfolio and a 12% increase in its modernization backlog at constant currency.
- Otis Worldwide Corp (OTIS) generated $381 million in adjusted free cash flow in Q3 and completed $200 million in share repurchases.
- The company expanded its manufacturing capabilities in India and received ISO 5,001 certification for its manufacturing hub in Korea.
- Otis Worldwide Corp (OTIS) was named one of the World's Best Employers by Forbes Magazine for the third consecutive year.
Negative Points
- New equipment orders were down 3% in Q3, with a significant decline in China due to continued economic softness.
- The new equipment backlog at constant currency was down 3% compared to the previous year.
- China's new equipment sales declined by more than 20%, impacting overall sales performance.
- The company faced foreign exchange headwinds, which partially offset operational performance.
- Otis Worldwide Corp (OTIS) revised its 2024 sales outlook to the low end of prior expectations, driven by challenges in China.
Q & A Highlights
Q: Can you elaborate on the pricing pressure in China and whether there's a change in strategy for the next year?
A: Judith Marks, CEO, explained that the new equipment market in China remains weak, with a 15% decline this quarter. Otis is focusing on balancing volume, price, and liquidity to maintain a strong position for 2025. Despite a significant revenue drop in China, the company is still achieving organic top-line growth. The strategy is to pivot towards services, which is working well, with service revenue slightly up and portfolio units increasing.
Q: How are service margins performing, and is labor inflation impacting them?
A: Cristina Mendez, CFO, stated that service margins are in line with expectations, with sequential growth from 24.7% in Q2 to 24.8% in Q3. This is due to strong volumes and productivity, which offset wage inflation. The service segment is performing well, with opportunities for further growth in Q4, particularly in modernization.
Q: Can you provide more details on modernization (MOD) in China and globally?
A: Judith Marks noted that MOD margins in China are attractive and similar to new equipment margins. The MOD market in China is expected to grow rapidly due to a younger portfolio. Otis is well-positioned to industrialize MOD with Gen3 units, and early orders in October are promising. Globally, MOD orders are expected to return to double-digit growth in Q4.
Q: What is the outlook for the Americas and Europe, considering market pressures?
A: Judith Marks highlighted that the Americas are showing signs of improvement, with orders up 23% in Q3. The market is stabilizing, and Otis is seeing positive performance across all verticals. In EMEA, despite market challenges, Otis is outperforming, with strong performance in the Middle East and South Europe.
Q: How is Otis addressing cost structure in China given the market size changes?
A: Judith Marks mentioned that Otis is reviewing its operational footprint and workforce in China to align with market conditions. The company is focusing on rational volume and pricing strategies, while preparing for growth in service and modernization. Otis is not taking business just for volume but is strategically positioning itself for future growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
