Otis Worldwide Corporation (OTIS) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Service Segment Drives Performance: Service organic sales grew mid-single digits, with maintenance portfolio growth of 4.2% and a 17% increase in the modernization backlog.
• Adjusted EPS Growth: Adjusted EPS grew by 15%, marking the fourth consecutive quarter of 10% or greater growth.
• Strong Free Cash Flow: Generated $353 million in adjusted free cash flow and returned $300 million to shareholders through share repurchases.
• ESG Progress: Published the 2023 ESG report, highlighting progress towards 13 ESG goals and detailed greenhouse gas emission reduction goals.
• Exciting Customer Highlights: Notable projects include installations at Unity The Amaryllis Versace in India, Terminal 3 West at San Francisco International Airport, and several contracts with the Shanghai Metro.

Pessimistic Highlights

• New Equipment Orders Decline: Orders were down 11% in the second quarter, with a mid-teens decline in the Americas and a double-digit decline in China.
• Economic Challenges in China: The economic softness in China severely impacted new equipment orders.
• New Equipment Backlog Decrease: At constant currency, the new equipment backlog was down 3% versus the prior year.

Company Outlook

• 2024 Financial Outlook Adjusted: Sales expected in the range of $14.3 billion to $14.5 billion, with organic sales growth of 1% to 3%. Adjusted EPS now expected in the range of $3.85 to $3.90, up 9% to 10%.
• Service Business Strength: Anticipate continued strength in the Service business, with service organic sales expected to grow 6% to 7%.
• Project Uplift Savings: Anticipate run rate savings of $175 million by mid-2025 from Project Uplift, with in-year savings of approximately $60 million in 2024.

Q & A Highlights

• Q: Can you drill a little bit more just into China? (Jeffrey Sprague, Vertical Research Partners)

  A: Our Service business in China, specifically, units are up high-teens for another quarter. MOD orders are up high-single digit. MOD sales are up double-digit. We're really pleased with the pivot we've made. And now this is now a multiyear strategy we've been implementing to have a greater focus and yield in China on Service. (Judith Marks)

• Q: Is there any change in your strategy, which has been clearly focused on gaining share? And is there now more of a focus on preserving margin there? (Nigel Coe, Wolfe Research)

  A: No change in strategy. What you're probably not seeing behind the scenes is, how our team has, again, continued to pivot. We continue to do product introductions and we continue to drive delivery in terms of our orders through our agents and distributors. Our agents and distributors, again, think about 2,400 of them. A lot of them have also taken on modernization as well. So we've expanded their remit, so that we continue to prepare for the future, which is going to be a more MOD heavy future regardless of what happens structurally on the new equipment side. (Judith Marks)

• Q: Can you give us some kind of color on why the margin expanded despite revenues being down 9%? Is this purely on the back of a better mix with China down double-digits and Americas up or is there was something else within Q2 that lifted the margin? (Miguel Borrega, Exane BNP Paribas)

  A: Thanks for the question. So firstly, just to ground everyone, China New Equipment is our largest margin region in Otis. So it's actually, when China volume goes down, it's a mixed headwind for us. It's not a mix tailwind for us, where team was able to offset the mix which is quite substantial for the quarter because if you look at a revenue down a couple of hundred million dollars and that to essentially in China on the New Equipment side, and that causes about a $40 million, $50 million headwind. We were able to offset that because of pricing in our backlog from the other regions, which was positive, commodities, productivity and the benefits of uplift. So we control what we can control. And as we've gone through this call, China is an important New Equipment market. We all appreciate that. But I think the other regions plus productivity have been more than able to offset that as a result of what you saw the margin expansion. (Anurag Maheshwari)