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    Otis Worldwide Corp (OTIS)

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    Business Description

    Otis is the world's leading elevator and escalator manufacturing, installation, and service company, organized into two main segments: New Equipment and Service. The company designs, manufactures, sells, and installs passenger and freight elevators, escalators, and moving walkways for various projects, while also providing maintenance, repair, and modernization services for these products . Otis operates globally, with a significant portion of its revenue coming from international operations, and focuses on converting new equipment installations into long-term service contracts to ensure a stable revenue stream .

    1. Service - Provides maintenance and repair services for both Otis products and those of other manufacturers, as well as modernization services to upgrade elevators and escalators. Maintenance and repair services represent about 80% of Service sales revenue, with the modernization subsegment having high growth potential.
    2. New Equipment - Involves designing, manufacturing, selling, and installing passenger and freight elevators, escalators, and moving walkways for residential, commercial, and infrastructure projects.

    Q3 2024 Summary

    Initial Price$96.61July 1, 2024
    Final Price$103.77October 1, 2024
    Price Change$7.16
    % Change+7.41%

    What went well

    • Otis's Service segment continues to show strong performance, with operating profit margins reaching 24.8% in Q3 and expected to exceed 25% in Q4, driven by growth in maintenance, repair, and modernization, as well as favorable pricing and productivity improvements.
    • In the Americas, Otis is experiencing an inflection point, with New Equipment orders up 23% in the quarter, improved pricing, and strong growth in repair (up 10%) and modernization sales (up low teens).
    • Despite challenges in China, Otis is successfully pivoting to its Service and Modernization business, with service units up high teens and service revenue up 1% in China; the modernization market is growing and picking up nicely, contributing to future margin expansion.

    What went wrong

    • Significant decline in New Equipment sales, particularly in China, is negatively impacting revenues and operating profit margins, with expectations of an approximate 8% decline in Q4 and operating profit margin below 5% for New Equipment due to volume and mix effects, and fading price and commodity benefits.
    • Continued weakness and uncertainty in the China market could result in up to $0.05 EPS headwind, with lower China volumes and mix impacts putting pressure on New Equipment margins into 2025. The New Equipment backlog in China is down mid-teens, and without policy stimulus, margins may remain under pressure.
    • Competitive pricing pressures and regional mix shifts are impacting New Equipment margins, with more than 75% of New Equipment revenue now driven by sales outside China, leading to margin pressure due to mix, and challenging market conditions in regions like Europe adding to the headwinds.

    Q&A Summary

    1. China Market Outlook
      Q: Is China market deteriorating, and will pricing become irrational?
      A: The China New Equipment market remains weak, down 15% this quarter, similar to Q2, and expected to finish the year at about 415,000 units. While pricing remains competitive, we are not seeing irrational pricing. We continue to balance volume, price, and liquidity to maintain a strong China business into 2025. Despite a projected $0.5 billion decline in China revenue this year, we still expect organic top-line growth for the company.

    2. 2025 New Equipment Margins
      Q: Will New Equipment margins remain at mid-single digits in 2025?
      A: Yes, we expect New Equipment margins in 2025 to be similar to the second half of this year, around 5%, due to the mix impact from lower China contribution. Our uplift program is on track and will continue to deliver savings. While we anticipate 50 to 100 basis points of margin decline in New Equipment next year due to volume, mix, and fading commodities and price tailwinds, overall operating profit is expected to grow mid-single digit.

    3. Service Margins and Growth
      Q: Why are Service margins flat, and will they improve?
      A: Service margins are in line with expectations, sequentially increasing from 24.7% in Q2 to 24.8% in Q4, driven by higher volumes and approximately 4 points of price increases, offsetting wage inflation. We anticipate Service margins to be above 25% in Q4, and we remain focused on price, productivity, and uplift actions to continue margin expansion.

    4. Free Cash Flow and Working Capital
      Q: Why is free cash flow guidance reduced, and what about next year?
      A: The free cash flow guidance was reduced to $1.4 to $1.5 billion due to lower down payments from New Equipment orders in China and a working capital build-up of approximately $250 million. We expect this working capital to unwind in Q4 as the business mix stabilizes. Next year, free cash flow should pick up at a faster pace than operating profit growth.

    5. Americas Market Improvement
      Q: Is the improvement in Americas orders sustainable or just due to comps?
      A: While comps played a role, we are genuinely seeing better demand signals in the Americas, with New Equipment orders up 23% in Q3. This indicates an inflection point, and we expect positive performance to continue into Q4 and next year.

    6. China Stimulus Impact
      Q: What is the impact of China stimulus on construction?
      A: We are encouraged by the announced stimulus actions but await implementation details. The impact is more likely to be felt in 2025, and we are prepared for potential benefits in both New Equipment and modernization.

    7. Cost Structure Adjustments in China
      Q: How are you adjusting costs in China given lower volumes?
      A: We are optimizing costs in China by reviewing our operational footprint and workforce. For example, we have moved our modernization into New Equipment factories to improve efficiency. These actions aim to maintain profitability and prepare for growth in the modernization business.

    8. Modernization Business in China
      Q: Do modernization margins in China align with global strategies?
      A: Yes, modernization margins in China are attractive and similar to new equipment margins relative to the rest of the world. We are optimistic about the growth potential in China's mod market and are seeing positive early indicators.

    Guidance Changes

    Annual guidance for FY 2024:

    • Adjusted EPS: $3.85 (lowered from $3.85 to $3.90 )
    • Sales: $14.2B (lowered from $14.3B to $14.5B )
    • Adjusted Operating Profit: Up $105M (lowered from up $135M–$175M )
    • Adjusted Free Cash Flow: $1.4B–$1.5B (lowered from $1.5B–$1.6B )
    • Service Segment (Organic sales growth): 6.5% (no change from prior 6%–7% )
    • Maintenance and repair growth: 6% (no prior guidance)
    • Modernization growth: 9% (no prior guidance)
    • New Equipment Segment (Organic sales): Down mid- to high-single digits (lowered from down mid-single digits )
    • Operating Profit Margin: Expansion of 70 bps (lowered from 80 bps )
    • Shareholder Returns: $1B in share repurchases (no prior guidance)
    • China Market (New Equipment sales): Decline by 15% (raised from decline of 20% )

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Tracy A. EmbreePresident, Otis AmericasOctober 2023Tracy A. Embree is the President of Otis Americas since October 2023. Previously, she was Vice President and President of Distribution and Components at Cummins, Inc. .
    Neil GreenExecutive Vice President and Chief Digital OfficerApril 2020Neil Green has been the Executive Vice President and Chief Digital Officer at Otis since April 2020. He was previously Vice President, Transformation and Chief Digital Officer at Otis .
    Nora E. LaFreniereExecutive Vice President and General CounselJuly 2021Nora E. LaFreniere has served as Executive Vice President and General Counsel since July 2021. She previously held roles as Executive Vice President, Chief General Counsel, and Corporate Secretary .
    Sally A. LohPresident, Otis ChinaMarch 2023Sally A. Loh is the President of Otis China since March 2023. She was formerly the Chief Operating Officer and Chief Financial Officer of Otis China . Her role as President officially starts on January 1, 2024 .
    Abbe LuersmanExecutive Vice President and Chief People OfficerJuly 2021Abbe Luersman has been the Executive Vice President and Chief People Officer since July 2021. She was previously the Chief Human Resource Officer at Ahold Delhaize .
    Anurag MaheshwariExecutive Vice President and Chief Financial OfficerAugust 2022Anurag Maheshwari has been the Executive Vice President and Chief Financial Officer since August 2022. He previously served as Vice President, Finance, IT, and Chief Transformation Officer for Otis Asia Pacific .
    Judith F. MarksChair, President, and Chief Executive OfficerFebruary 2022Judith F. Marks has been Chair, President, and CEO since February 2022. She has led Otis as President since 2017 and was named CEO in 2019. She has been a director since Otis became independent in April 2020 .
    Enrique Miñarro ViserasPresident, Otis EMEAOctober 2023Enrique Miñarro Viseras was appointed President of Otis EMEA on October 1, 2023. He previously held positions as Senior Vice President and General Manager at Ingersoll Rand .
    Stephane de MontlivaultPresident, Otis Asia PacificApril 2020Stephane de Montlivault has been President of Otis Asia Pacific since April 2020. He previously served as President of Otis Northeast Asia and President of Nippon Otis Elevator Company .
    Michael P. RyanSenior Vice President and Chief Accounting OfficerApril 2020Michael P. Ryan has been Senior Vice President and Chief Accounting Officer since April 2020. He was previously Vice President and Assistant Controller at UTC .
    Peiming Zheng (Perry)Executive Vice President, Chief Product, Delivery and Customer OfficerMarch 2023Peiming Zheng, also known as Perry, has been Executive Vice President, Chief Product, Delivery and Customer Officer since March 2023. He was previously President of Otis China .
    Cristina MéndezExecutive Vice President and Chief Financial OfficerAugust 23, 2024Cristina Méndez will serve as Executive Vice President and CFO effective August 23, 2024. She was previously Senior Vice President, Chief Financial Officer, EMEA at Otis International in Geneva .

    Questions to Ask Management

    1. Given the significant decline in China's new equipment market to approximately 415,000 units and expectations of further declines, how does Otis plan to adapt its cost structure and strategy in China to maintain profitability in the face of prolonged market weakness?
    2. With service margins remaining flat year-over-year despite high single-digit growth in service sales, what specific measures is Otis taking to improve service profitability amid wage inflation and increased repair and modernization activities?
    3. Considering the competitive pricing environment and economic softness in China, is Otis contemplating any strategic shifts to protect margins, such as prioritizing service and modernization over new equipment sales, and how sustainable is this approach long-term?
    4. Orders in EMEA declined by high single digits due to continued weakness in Western and Northern Europe; what challenges are you encountering in these markets, and what strategies are in place to reverse the declining trend in orders?
    5. Despite generating $381 million in adjusted free cash flow and returning $800 million to shareholders, how does Otis justify significant share buybacks amid the need for investment in growth regions to offset the downturn in China and potential weaknesses in Europe?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateDecember 1, 2022
    End Date/DurationN/A
    Total additional amount$2.0 billion
    Remaining authorization$400 million
    DetailsThe program aims to return capital to shareholders, improve financial metrics such as earnings per share, and provide flexibility in managing the company's capital structure.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EPS: Approximately $3.85, growth of about 9% .
      2. Sales: Approximately $14.2 billion, organic sales growth of 1.5% .
      3. Adjusted Operating Profit: Increase by $105 million in actual currency, $140 million at constant currency .
      4. Adjusted Free Cash Flow: $1.4 billion to $1.5 billion .
      5. Service Segment: Organic sales growth of 6.5%, maintenance and repair growth of 6%, modernization growth of 9% .
      6. New Equipment Segment: Organic sales down mid- to high single digits, decline in China .
      7. Operating Profit Margin: Expansion of 70 basis points .
      8. Shareholder Returns: $1 billion in share repurchases .
      9. China Market: New equipment sales decline by 15% .
      10. 2025 Outlook: Global new equipment market improvement, China decline by 5% to 10% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Sales: $14.3 billion to $14.5 billion, organic sales growth of 1% to 3% .
      2. Adjusted Operating Profit: Up $135 million to $175 million at actual currency .
      3. Adjusted EPS: $3.85 to $3.90, up 9% to 10% .
      4. Adjusted Free Cash Flow: $1.5 billion to $1.6 billion .
      5. Service Organic Sales: Growth of 6% to 7% .
      6. Operating Profit Margin: Expansion of 80 basis points .
      7. New Equipment Organic Sales: Down mid-single digits, China down 20% .
      8. Service Operating Profit Margin: Expansion of 75 basis points .
      9. New Equipment Operating Profit Margin: Roughly flat .
      10. EPS Growth: Approximately 10% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Organic Sales Growth: 3% to 5% .
      2. Operating Profit: Growth of $160 million to $190 million at constant currency .
      3. Adjusted EPS: $3.83 to $3.90, increase of 8% to 10% .
      4. Free Cash Flow: Approximately $1.6 billion .
      5. Share Repurchases: $1 billion .
      6. Dividend: 14.7% increase .
      7. Tax Rate: Around 25.5% .
      8. Market Outlook: Asia down mid-single digits, China down 10% .
      9. Service Margins: Up 50 basis points .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EPS: $3.80 to $3.90, growth of 7% to 10% .
      2. Organic Sales Growth: 3% to 5% .
      3. Operating Profit Margin Expansion: 50 basis points .
      4. Adjusted Operating Profit: $2.4 billion to $2.45 billion .
      5. Adjusted Free Cash Flow: $1.6 billion .
      6. Share Repurchases: $800 million .
      7. New Equipment Organic Sales: Flattish, China mid-single-digit declines .
      8. Service Organic Sales Growth: 6% to 7% .
      9. Maintenance and Repair Organic Sales Growth: 5.5% to 6.5% .
      10. Modernization Organic Sales Growth: 8% .
      11. Project Uplift Savings: $150 million .
      12. New Equipment Profit Margin: Flat to up 10 basis points .
      13. Service Profit Margin Expansion: 50 basis points .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • KONE Oyj - Major competitor globally in both the New Equipment and Service segments .
    • Schindler Group - Major competitor globally in both the New Equipment and Service segments .
    • TK Elevator - Major competitor globally in both the New Equipment and Service segments .