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    Otis Worldwide Corp (OTIS)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$98.38Last close (Jul 23, 2024)
    Post-Earnings Price$90.21Open (Jul 24, 2024)
    Price Change
    $-8.17(-8.30%)

    What went well

    • Strong Service Growth: Otis delivered maintenance portfolio growth of 4.2% and expects repair growth to return to high single-digit or double-digit in the second half, driven by robust demand and effective pricing strategies ,.
    • Margin Expansion Despite China Headwinds: Despite a double-digit decline in China, which is a high-margin market, Otis expanded New Equipment margins through pricing improvements in other regions, productivity gains, and benefits from the Uplift program ,.
    • Successful Pivot to Modernization and Service in China: Otis significantly grew its Service business in China, with units up high teens, mod orders up high single digits, and mod sales up double digits, making Service almost one-third of China's revenue, double what it was at spin-off ,.

    What went wrong

    • Significant decline in the China New Equipment market, which is Otis's largest margin region, leading to volumes being down double digits and pricing down 10% year-over-year, resulting in a $40 million to $50 million headwind.
    • Slower growth in maintenance revenue, with maintenance organic sales growth at 4.9%, lower than previous quarters, partly due to tough comparisons from elevated repair business in the prior year.
    • Decline in New Equipment orders in the Americas, with a mid-teens decline, contributing to an 11% decrease in total New Equipment orders in Q2.

    Q&A Summary

    1. China Market Outlook
      Q: What's the outlook for the China market?
      A: The New Equipment market in China remains weak, with a projected decline of 10% to 15% for the full year, bringing it down to 425,000 to 450,000 units from a peak of 650,000 units three years ago. The company continues to focus on growing its Service business and managing costs in this challenging environment.

    2. China Pricing and Margins
      Q: How is pricing pressure affecting margins in China?
      A: Pricing in China is down approximately 10% year-over-year on a like-for-like basis. Despite this, the company is effectively managing costs through productivity gains and benefits from a deflationary supply chain, helping to preserve margins.

    3. Margin Expansion Despite Revenue Decline
      Q: How did margins expand despite revenue being down 9%?
      A: Although China New Equipment revenue was down double digits, leading to a mix headwind, the company offset this through positive pricing in other regions, commodity tailwinds, productivity improvements, and benefits from its Uplift program, resulting in margin expansion.

    4. Modernization Growth and Margins
      Q: Can you discuss the growth and margin expansion in the modernization backlog?
      A: Modernization orders are up 13.8%, with backlog up 17%, and margins now exceeding New Equipment margins. The company is on track to achieve modernization margins of at least 10%, driven by industrialized processes and leveraging its extensive service portfolio.

    5. Free Cash Flow Guidance
      Q: Why was free cash flow guidance lowered to $1.6 billion?
      A: Free cash flow was impacted by a $300 million build in working capital due to lower New Equipment orders and faster growth in the Service business, which collects cash after performing work. The company expects to reverse over $200 million in working capital in the second half to achieve its $1.6 billion free cash flow target.

    6. Maintenance and Repair Growth
      Q: Why did maintenance and repair growth slow to 4.9%?
      A: The growth rate reflects a tough comparison to the prior year's second quarter, which saw the highest repair growth. While repair growth has exceeded 10% for almost three years, it is expected to return to high single-digit or double-digit growth in the second half.

    7. New Equipment Orders and Backlog
      Q: What's the outlook for New Equipment orders and backlog globally?
      A: The New Equipment backlog is down 3% overall, with a 12-month rolling order decline of 7.7%. However, orders in EMEA and Asia Pacific (excluding China) are performing well, and the company anticipates positive New Equipment orders in the Americas in the second half based on strong proposal activity.

    8. EPS Guidance and Outlook
      Q: How is EPS expected to trend in the second half?
      A: With interest expenses at the current run rate and the tax rate increasing to 27% in Q3, EPS is expected to be roughly flat in Q3. The full-year EPS is guided to increase by $0.34 at the midpoint, with growth occurring predominantly in Q4.

    9. Impact of China's Market on Service Growth
      Q: Will the decline in China's market affect future Service growth?
      A: The company believes Service growth in China will continue, driven by improved conversion rates and capturing non-Otis units. The Service portfolio in China has grown to about 415,000 units, up from over 400,000 units last quarter.

    10. Americas New Equipment Outlook
      Q: How are New Equipment orders trending in the Americas?
      A: While the Americas backlog is currently down, the company expects orders to improve in the second half, with positive signs in proposal activity and anticipated bookings starting in Q3.

    11. Strategy in China
      Q: Has there been a strategic shift in China?
      A: The company continues its strategy of not accepting loss-making units for the sake of market share in China. The focus remains on growing the Service business and managing costs, with no change in overall strategy.

    12. Leadership Transition
      Q: What are Anurag Maheshwari's plans after leaving?
      A: Anurag did not disclose his future plans but emphasized a smooth transition with Cristina Mendez taking over his role.

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