Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Otis Worldwide Corp (OTIS, Financial) delivered a solid second quarter with service organic sales growing mid-single digits.
- Overall adjusted profit margin expanded by 110 basis points, and adjusted EPS grew 15%, marking the fourth consecutive quarter of 10% or greater adjusted EPS growth.
- The company generated $353 million in adjusted free cash flow and returned $300 million to shareholders through share repurchases in the quarter.
- Otis Worldwide Corp (OTIS) published its 2023 ESG report, outlining progress towards 13 ESG goals and recently received ISO 45001 certification.
- Service segment continued to show strong performance with portfolio growth above 4% for the seventh consecutive quarter and 14% modernization orders growth.
Negative Points
- New equipment orders were down 11% in the second quarter, with significant declines in the Americas and China.
- The new equipment backlog at constant currency was down 3% versus the prior year.
- Economic softness in China severely impacted new equipment orders, with the market expected to be down 10% to 15% for the full year.
- Adjusted operating profit was impacted by a $15 million foreign exchange headwind.
- Organic sales were down 1% in the quarter, driven by a 9% decline in new equipment sales.
Q & A Highlights
Q: Anurag, do you have any comments on your future plans?
A: There's more to come. My focus is on closing the earnings call and ensuring a smooth transition with Cristina. Thanks for the question.
Q: Judy, can you provide more details on the challenges in China and the counteractions you're taking to support profitability?
A: Our service business in China is performing well, with units up high teens and mod orders up high single digits. We've pivoted to focus more on service, which now accounts for almost a third of our revenue in China. Despite the weak equipment market, we're managing costs effectively and balancing price and volume to maintain a healthy backlog.
Q: Is there any change in your strategy in China, particularly regarding margin preservation?
A: No change in strategy. We're not taking on loss-making units for the sake of share gains. We're focusing on product introductions and driving delivery through our agents and distributors, who are also taking on modernization projects.
Q: Can you explain the free cash flow outlook and the impact of new equipment weakness?
A: We built about $300 million of working capital in the first half, primarily due to lower new equipment orders and faster service business growth. We expect to generate about $825 million in GAAP net income in the second half and reverse about $200 million in working capital, aiming for $1.5 billion to $1.6 billion in free cash flow.
Q: How do you see the new equipment organic sales outlook globally, particularly in the Americas?
A: The Americas backlog is up low single digits, and we anticipate new equipment orders in the second half to be positive. We have about an 18-month line of sight to the Americas, and we expect backlog to be flattish to slightly down by year-end, depending on second-half orders.
Q: Can you provide more details on the pricing trends in China and their impact on margins?
A: Pricing in China is down roughly 10% year-over-year, but costs are also coming down due to deflationary pressures. We're managing costs effectively and focusing on growing our service portfolio, which now stands at about 415,000 units.
Q: Can you discuss the modernization backlog and the outlook for margin expansion in this segment?
A: Our modernization backlog is up 17%, and we're seeing significant growth in orders. We're focusing on industrializing our modernization processes and improving margins, aiming for double-digit margins in the medium term.
Q: How do you view the long-term outlook for the Chinese market, given the recent declines?
A: While the Chinese market has been declining for three years, we believe the long-term demand for urbanization will continue. We're focusing on growing our service and modernization businesses to offset the decline in new equipment.
Q: Can you explain the factors contributing to the 4.9% organic growth in maintenance and repair?
A: The growth is driven by our service portfolio, which grew 4.2%, and pricing, which was up 3.5%. Repair growth has been strong, and we expect it to continue in the second half of the year.
Q: Can you provide more details on the new equipment order trends by geography?
A: EMEA and Asia-Pacific are performing well, with orders up in Central Europe, Southern Europe, and the Middle East. We expect Americas to recover in the second half, while China remains challenging.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
