Q4 2023 Earnings Summary
- Otis's modernization backlog is up 15% , driven by refurbishment demand due to aging equipment across all regions, particularly in Asia Pacific and China, leading to strong growth prospects in modernization.
- Despite a declining Chinese market, Otis has increased its bookings in China by nearly 20% since pre-spin, while the market declined 10% to 15% over the same period, indicating significant market share gains.
- The company's UpLift initiatives are expected to deliver net savings of $40 million in 2024, contributing directly to operating profit, with modernization margins projected to surpass new equipment margins soon.
- Weak market conditions in China: The China market remains weak, with the market down over 10% in 2023. There is significant price pressure due to a deflationary environment, which could impact margins. Additionally, order value declined mid-single digits in China.
- Weakness across segments in North America and Europe: In North America, none of the segments are strong, with multifamily being the weakest due to several years of outpaced growth. Central Northern Europe is also weak.
- Global New Equipment market expected to decline in 2024: The New Equipment market is expected to be down in every region in 2024, with the global market down low to mid-single digits in units.
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China Market and Strategy
Q: Is there increased pricing pressure in China's New Equipment market?
A: Management notes that China's market remains weak and highly competitive, but they believe they gained market share in 2023 despite the market being down over 10%. Costs, including commodity costs, are coming down, allowing them to be price-cost neutral. They have focused on growing their Service business, with Service sales increasing at a mid-teens CAGR and now representing 25% of China sales, up from mid-teens a few years ago. Overall, their China business contributed significantly, with profit up year-over-year. , -
UpLift Savings Impact
Q: How will UpLift savings contribute to 2024 profit?
A: UpLift is expected to contribute $40 million in net savings to the 2024 P&L, fully flowing through to operating profit. This is part of an anticipated $170 million constant currency operating profit growth, with $140 million coming from price-cost benefits. Approximately 70% of UpLift savings will come from Service, with the rest from New Equipment and corporate functions. -
Modernization Growth and Margins
Q: What's driving growth in modernization, and how will margins evolve?
A: The modernization market is growing across all regions, driven by the need to refurbish aging equipment and meet safety regulations. Otis's modernization backlog is up 15%, marking the sixth consecutive quarter of orders increasing over 10%. Management expects modernization margins to surpass New Equipment margins soon, with further improvements as they standardize products and optimize the supply chain. -
New Equipment Outlook and Backlog
Q: How is the New Equipment backlog expected to trend in 2024?
A: Strong orders in Americas and EMEA have resulted in a New Equipment backlog up 2% entering 2024. Management anticipates a book-to-bill ratio similar to 2023 and expects to finish 2024 with a backlog that is flat to slightly higher. This outlook is supported by a planned 50 basis point share gain in New Equipment. -
North America and EMEA Market Conditions
Q: What is the current market environment in North America and Europe?
A: In North America, the New Equipment market ended 2023 at its lowest unit levels since the Global Financial Crisis, with all segments weak and multifamily being the weakest. Infrastructure is performing the best. In Europe, Southern Europe remains strong, led by Spain, while Central and Northern Europe are weak. Residential is performing better in Europe than in North America. Management remains confident due to their investments, new products catering to low-rise markets, and a strong backlog in North America, which is up mid-single digits. -
Maintenance and New Equipment Pricing
Q: Is there evidence of pricing deflation outside of China?
A: Management confirms there is no pricing deflation outside of China. Maintenance pricing is expected to increase by 1%, adjusted for mix and churn, and 3% on a like-to-like basis. New Equipment saw good price increases in 2023 in Americas, EMEA, and Asia-Pacific, with some of that expected to continue into 2024. In China, despite price pressure, costs are coming down, making it price-cost neutral.
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