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    Otis Worldwide Corp (OTIS)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$97.47Last close (Apr 23, 2024)
    Post-Earnings Price$96.91Open (Apr 24, 2024)
    Price Change
    $-0.56(-0.57%)

    What went well

    • Modernization margins have surpassed New Equipment margins, indicating improved profitability in this segment. Otis reports that modernization margins are now higher than new equipment margins, driven by productivity improvements and standardization efforts.
    • Strong growth in high-potential markets like India, where Otis is seeing significant demand and investing in operations. India is described as the highest growth market globally, with Otis well-positioned to capitalize on this growth.
    • Robust Service pricing and margin expansion, with Service pricing up over 3 points and Service margins expanding by 70 basis points in the first quarter. This demonstrates Otis's ability to drive profitability in its Service business through pricing and productivity.

    What went wrong

    • OTIS is experiencing continued pricing pressure in the China New Equipment market, with no expectation of recovery in 2024.
    • The China New Equipment market is expected to decline by high single digits to down 10% in units, posing a challenging environment for OTIS.
    • Persistent pricing declines in China may impact OTIS's profitability, even as the company attempts to maintain margins through cost reductions and productivity improvements.

    Q&A Summary

    1. China Sales and Pricing Pressure
      Q: Can you clarify what's happening with China sales and pricing?
      A: China is our most competitive market, with the New Equipment market down 10% in the quarter and expected to be down high single digits to 10% for the year. We're not getting price for New Equipment in China , but we've offset this with productivity and lower commodity costs. We expect New Equipment pricing to remain competitive, with the China segment for 2024 at about 450,000 units. Service pricing is flattish, but we're driving productivity through initiatives like Otis ONE, now covering over 400,000 units.

    2. Modernization Growth and Margins
      Q: Could you talk about margins and demand in Mod orders and backlog?
      A: Mod orders were up almost 13% in the quarter , with backlog up 15%. Mod margins have now surpassed New Equipment margins , driven by productivity initiatives, standardization, and cost reductions in supply chain and installation. We anticipate significant growth across all regions, with the Mod market potential of several million units.

    3. New Equipment Orders and Backlog Outlook
      Q: What's your outlook for New Equipment orders and backlog?
      A: New Equipment orders were down 10% in Q1 , expected to be down mid- to high single digits in Q2. By year-end, the New Equipment backlog could be flattish to down low single digits. Over the next few years, we expect New Equipment to be flattish, with growth coming from Mod, whose backlogs are up 15%.

    4. Service Margins and Growth
      Q: Service margins were strong in Q1; can you update on margin outlook and wage inflation?
      A: Service margins were up 70 basis points year-on-year in Q1 , with portfolio growth of 4% and service pricing over 3%. We're comfortable with a 50 basis points margin increase for the year , considering mix impacts from Mod revenue growing faster than maintenance and repair. We're not seeing unusual wage inflation and focus on productivity to offset costs.

    5. Cash Flow and Share Buyback
      Q: Is there anything affecting free cash flow and AR timing? Also, can you discuss share repurchase plans?
      A: The increase in accounts receivable is due to timing. We're confident of achieving 100% conversion this year. Reflecting our confidence in cash flow, we're increasing our share repurchase from $800 million to $1 billion.

    6. North America Market Outlook
      Q: How does recent softening in lead indexes align with your North America outlook?
      A: The North America New Equipment market remained weak but at a lesser pace than in the second half of '23. We expect more New Equipment stability in '24 than in '23 , though the latest ABI data at 43.6% indicates contraction. All verticals were down, but residential is becoming more stable, and infrastructure has been stable.

    7. Capital Allocation and M&A
      Q: After upping dividend and buyback, how are you thinking about M&A opportunities?
      A: We continue to pursue bolt-on acquisitions where they make sense, focusing on adding density and integrating well. We have a strong balance sheet but don't feel the need for large-scale M&A. We recently decided to buy out the minorities in our Nippon Otis business in Japan.

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