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F500-2021-235-Otis Worldwide

Raytheon Technologies spun off Otis Worldwide in April 2020. Headquartered in Farmington, Conn., Otis manufactures elevators, escalators, and moving walkways.

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Otis Worldwide Corporation is a global elevator company. Elisha Otis—inventor of the safety elevator—founded the company in 1853 in Yonkers, N.Y., changing urban landscapes forever by enabling the skyscraper. In 1925, the company introduced the first-ever completely automatic elevator. Today, as it operates in nearly every country in the world, Otis manufactures and maintains elevators, escalators, and moving walkways. It became a public company in 2020, the result of a spinoff from United Technologies Corporation.

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Otis Worldwide (OTIS): Company Profile, Stock Price, News, Rankings

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Otis Worldwide

otis worldwide

Good morning, and welcome to Otis Second Quarter twenty twenty five Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com. I'll now turn the call over to Rob Cortaro, Vice President of Investor Relations.

Thank you, Tina. Welcome to Otis' second quarter twenty twenty five earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President and Christina Mendez, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast.

We also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10 ks and quarterly reports on Form 10 Q, provide details on important factors that could cause actual results to differ materially. Now I'll turn it over to Judy.

Thank you, Rob. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope everyone listening is safe and well. Starting with Q2 highlights on Slide three.

Otis delivered solid second quarter and first half results as the Service segment continued to drive strong performance with both a year over year and a sequential operating profit margin improvement. Organic Service sales in the second quarter were up 4% with growth across all business lines and in all regions. Our maintenance portfolio grew 4% again in the quarter, adding to our industry leading 2,400,000 unit portfolio under service. Modernization momentum continued as we accelerated orders to 22% and ended the quarter with the backlog up 16% at constant currency. New equipment orders decreased by 1% due to continued economic challenges in China, while orders in the rest of the world increased 11% versus the prior year.

We continue to make progress with Uplift, and we remain on track to achieve $200,000,000 in run rate savings by year end. Additionally, in response to continued weakness in China, we're executing additional actions to reduce costs as part of our China transformation. We now anticipate run rate savings of approximately $40,000,000 by year end. Our twenty twenty five in year savings targets remain at $70,000,000 and $20,000,000 for Uplift and China transformation, respectively. Together, these initiatives are enabling us to deliver greater customer centricity and to invest in growth.

In addition, we also now expect the impact of 2025 tariffs to be roughly half of our expectations in April to a range of $25,000,000 to $35,000,000 reflecting more favorable reciprocal tariff rates and our mitigation efforts. We completed approximately $300,000,000 in share repurchases in the second quarter, taking year to date repurchases to approximately $550,000,000 During the quarter, we closed on our previously announced acquisition of eight urban elevator locations in The U. S. This deal further expands our maintenance portfolio and enhances our ability to serve customers. Adjusted EPS was $1.97 in the first half of the year, growing 2% versus the same period last year due to solid margin expansion and continued tax planning efforts.

In June, we published our Connect and Thrive report that outlines our progress and commitments to four key areas: health and safety governance and accountability environment and impact and people and communities. These areas are closely aligned with our strategic vision and the Otis absolutes of safety, ethics and quality that we live by every day. During the quarter, we were honored to be recognized with several sustainability awards. USA TODAY, in collaboration with Statista, included Otis among America's climate leaders, and Forbes recognized Otis among 200 U. S.

Companies included on the net zero leaders list for reduction of carbon emissions. Newsweek also recognized Otis among companies from 26 different countries for our environmental sustainability performance. And most recently, Time magazine named Otis among the world's most sustainable companies for the second consecutive year. Turning to our orders performance on Slide four. Combined new equipment and modernization orders grew 4% in the quarter, driven by continued strength in modernization.

Excluding China, orders grew 14% with notable strength in The Americas and Asia Pacific. Our combined backlog remained relatively flat year over year. However, excluding China, it increased 10%. Our total backlog, including maintenance and repair, is at historically high levels, positioning us well for future quarters. New equipment orders declined 1% in the quarter.

However, excluding China, we saw robust 11% growth. For the fourth straight quarter, The Americas orders were up in the low teens. Asia Pacific also delivered strong results with order growth exceeding 20% for the third consecutive quarter, led by Southeast Asia and India. This strength was offset by continued softness in China, where orders declined by more than 20%. Note, however, that our China new equipment orders were sequentially stable in the first half of twenty twenty five, and we anticipate year over year growth in the coming quarters.

In EMEA, new equipment orders declined low single digits as strength in The Middle East was offset by weaker demand in Europe. At constant currency, our new equipment backlog declined 3% year over year, but excluding China, it grew 8%. Modernization acceleration continued as orders grew 22%, leading to our quarter end backlog up 16% at constant currency, with Americas, China and Asia Pacific each growing orders more than 20%. The modernization opportunity is compelling, driven by the aging of the 22,000,000 unit installed base. We continue to expect these aging units to drive a multiyear growth cycle across our regions.

Our service portfolio grew 4% in the quarter with contributions from all regions. China's strong growth trajectory continued as the region grew its portfolio low teens, Asia Pacific grew mid single digit, and EMEA and Americas grew low single digits. As our global teams continue to deliver, we're proud to share second quarter customer highlights that reflect our success in winning strategic projects through innovation, execution and trusted collaborations. In The Americas, Otis will modernize 21 elevators at the 1 America Tower in Indianapolis, expanding our long term relationship with this customer. Otis provided the original elevators for the buildings in the 1980s, modernized them in 2009 and is the current maintenance provider.

Otis will upgrade controls, doors, signals and cab finishes on the elevators. In Dubai, we continue to strengthen and grow our relationship with Daymak Properties, one of the leading luxury real estate developers. Our latest agreement to supply and install 20 Skyrise elevators at Daymac Bay 2 in Dubai Harbor brings our total orders with Daymac to 88 elevators. This includes 72 Skyrise and 16 Gen two systems across six high rise projects in the city. These orders reflect the trust Daymac places in our technology and service, and they underscore our growing footprint in The Middle East.

In China, Otis recently entered into a contract for more than 400 escalators and connected elevators to support metro and infrastructure expansion projects in Hangzhou, Changchun and Tianjin. These orders reflect our ongoing role in supporting urban mobility across key cities. And in Ho Chi Minh City, Vietnam, Otis has been selected to install and maintain Skyrise and Gen three elevator systems at The Cross, a 39 story premium mixed use development in the city's central business district. These units will be supported by our Compass three sixty and EMS Panorama two point zero management system, delivering a modern integrated solution for enhanced passenger experience. Turning to our second quarter results on Slide five.

Otis delivered net sales of $3,600,000,000 flat on a year over year basis with organic sales down 2%. Adjusted operating project profit margin was flat versus the prior year at 17%. Excluding a $13,000,000 foreign exchange tailwind, adjusted operating profit decreased 2% with growth in service offset by a decline in new equipment. Adjusted EPS declined 1% or zero one dollars in the quarter, driven by a tough year over year comparison from an operational and tax standpoint. As I previously mentioned, EPS grew 2% in the first half of the year.

Adjusted free cash flow was $243,000,000 in the quarter and April year to date. With that, I'll turn it over to Kristina to walk through our results in more detail.

Thank you, Judy. Starting with Service on Slide six. Service organic sales grew 4% with growth in all lines of business. Maintenance and repair organic sales grew 4%, driven by growth in our portfolio and positive price of 3% in maintenance, partially offset by mix and churn. Our repair business accelerated in the second quarter as anticipated, growing 6% organically year over year compared to 1% in the first quarter.

We are pleased with our progress. And with our backlog up 8% at quarter end, we are well positioned heading into the second half. Modernization organic sales grew 5% with notable growth in China, which increased over 20%. While modernization organic sales growth was muted, it was primarily driven by timing of several large projects, which can vary from quarter to quarter. Our modernization backlog remains strong, up 16% at constant currency at quarter end, and we expect approximately 10% growth in modernization sales for the full year.

Service operating profit of $578,000,000 increased $26,000,000 at constant currency with higher volume, favorable pricing and productivity, including the benefits from uplift, more than offsetting higher labor costs and mix and churn. Operating profit margins expanded 20 basis points to 24.9% in the quarter, making another record quarter in service margins since spin. Turning to new equipment on slide seven. New equipment organic sales declined 11% in the quarter as a strength in EMEA was more than offset by declines in China, Americas and Asia Pacific. EMEA sales grew 7%, primarily due to a strength in The Middle East, which grew greater than 20%, while Europe was up low single digits.

Asia Pacific declined low single digits, with notable strength in Hong Kong and Taiwan, offset by weakness in Korea. Additionally, growth was negatively impacted by timing of project execution in India. However, the backlog in India remains strong. Americas declined high single digits as we work through last year backlog, but in addition, backlog execution has been slower due to market concerns around global trade policy. China remained weak, declining greater than 20% as soft market conditions, a strict credit control on shipments and a declining backlog continue to impact our results.

New equipment operating profit of $68,000,000 declined $41,000,000 at constant currency, driven by lower volumes and unfavorable price and mix. Operating profit margins declined two forty basis points to 5.3%, driven by the headwinds of lower volume and regional mix that were partially offset by productivity, including the benefits from uplift and our China transformation. I will now turn it back to Judy to discuss our 2025 outlook.

Starting on Slide eight with the market outlook. Before discussing our updated 2025 outlook, I'd like to briefly discuss our global market expectations, which are largely unchanged. We continue to expect a low single digit decline in The Americas. However, we are beginning to see trends improving sequentially. Our market outlook for EMEA is unchanged with low single digit growth.

Asia is now anticipated to decline high single digits. This is driven by mid single digit growth in Asia Pacific, offset by a low teens decline in China. Our outlook for China is now slightly lower than our beginning of year expectation due to continued softness in the market. While year over year comparisons are easier in the second half, we now believe the market will be down approximately 10% for the remainder of the year. Taken together, we expect the global new equipment market to decline mid single digits in 2025.

On the service side, we continue to expect the global installed base to grow mid single digits, driven by low single digit growth in Americas and EMEA and mid single digit growth in Asia. This growing installed base should further support growth in our maintenance portfolio and expand our service flywheel. Turning to our financial outlook for 2025. We now expect net sales of $14,500,000,000 to $14,600,000,000 a slight decline from our previous outlook, driven primarily by a lower outlook for new equipment sales. This is largely driven by the new equipment market environment in China and The U.

S. In China, market conditions have remained soft as liquidity challenges are causing a slowdown in execution of our backlog. In The U. S, continued uncertainty over global trade policies are causing project delays. That said, we have driven low teens or greater order growth in The Americas for four consecutive quarters, and our backlog remains strong there, up 5% at the end of the quarter.

This backlog positions us well as we head into 2026. And as you know, our resilient service business is relatively insulated from tariffs. This resilient business is our core earnings driver, representing approximately 90% of our total operating profit. Looking ahead, we expect our service organic sales growth to continue to ramp up through the remainder of the year. Our outlook for adjusted operating profit is unchanged at $2,400,000,000 to $2,500,000,000 up $55,000,000 to $105,000,000 on an actual currency basis, including the impact of incremental U.

S. Tariffs imposed in 2025. This is in line with our prior outlook as reduced reciprocal tariff rates for China and favorable foreign exchange rates offset lower expectations for our new equipment profit this year. Service profitability should remain strong from growth in all three areas of the business: maintenance, repair and modernization. Our outlook for adjusted EPS is unchanged at $4 to $4.1 per share, representing an increase of 4% to 7% compared to 2024.

We expect adjusted free cash flow to be between $1,400,000,000 to $1,500,000,000 for the year, which we expect to largely return to our shareholders through our dividend and $800,000,000 of share repurchases. Note, we are well on track to meet our share repurchase target, having bought back approximately $550,000,000 year to date through June. I'll now pass it back to Christina to review the 2025 outlook in more detail.

Thank you, Judy. Moving to our organic sales outlook on Slide nine. We now expect organic sales growth of approximately 1% for the year. This is driven by continued strength in service with organic growth of approximately 5%, partially offset by a decline in new equipment of approximately 7%. Within new equipment, we have lowered our outlook for Americas to down high single digits and Asia to down low teens due to the macroeconomic concerns Judy previously noted.

Within Asia, we expect a strong growth in Asia Pacific, offset by a greater than 20% decline in China. We continue to expect EMEA to grow mid single digits for the year. Within service, we continue to expect growth in all segments through the remainder of the year. Maintenance and repair is expected to grow approximately 5%, driven by portfolio growth and pricing, partially offset by mix and churn. We saw solid acceleration in our repair revenue in the second quarter, and we expect continued acceleration through the second half.

In modernization, we are anticipating approximately 10% organic growth as we execute our strong backlog. Turning to Slide 10 to provide an update on tariffs. While circumstances remain fluid, our anticipated tariff exposure has meaningfully declined from expectations in April. This is driven by more favorable reciprocal tariff rates as well as our successful mitigation strategies. Given these changes, we now expect an approximately $25,000,000 to $35,000,000 negative impact to our 2025 earnings, net of our mitigation efforts.

Note that this impact is primarily expected in the second half as the year to date impact has been minimal. As a reminder, our tariff exposure is primarily in our backlog as we have adjusted contract terms and pricing for the current environment. Therefore, after execution of the backlog, the impact of the new tariffs on our results should be offset by pricing and contract language. Turning to our financial outlook at Slide 11. We currently expect adjusted operating profit to grow $55,000,000 to $105,000,000 on an actual currency basis, including the impacts of tariffs.

This growth is driven by the strength of our Service segment as well as cost savings from Uplift and our China transformation. Adjusted operating margin is expected to expand 30 basis points, driven by expanding service margins and mix, offset by declining new equipment margins from tariffs as well as the flow through of last year's backlog and regional mix. Adjusted free cash flow is now expected to be between $1,400,000,000 to $1,500,000,000 for the year. The decline from our previous forecast is primarily driven by our reduced outlook for new equipment sales as well as the impact of the mix. As new equipment sales are more favorable to working capital, we continue to anticipate approximately $800,000,000 of share repurchases for the year.

Moving to the 2025 EPS bridge on Slide 12. Our adjusted EPS outlook for the year remains $4 to $4.1 per share. This represents 4% to 7% growth compared to the prior year, driven by a strong operational growth from our Service segment. The new equipment segment remains a headwind due to soft economic conditions in China and the impact of global trade policy in The U. S.

Favorable foreign exchange rates and a lower share count are expected to offset the impact of tariffs and a higher interest expense. And while conditions remain challenging for our new equipment business in the near term, our U. S. Backlog is growing and China orders are expected to stabilize in the coming quarters. And furthermore, the resiliency of our service business continues to drive earnings on the back of mid single digit top line growth and continued margin expansion.

We are also continuing to execute our Uplift and China transformation initiatives, which will allow us to better serve our customers, while driving $240,000,000 of run rate cost savings by year end. We have good line of sight to deliver our targeted savings and as uplift is approaching the end of the program in the second half of the year. We are making good progress with our China transformation. And as I previously mentioned, we are raising our cost savings target to $40,000,000 due to additional restructuring actions underway. Looking at the third quarter, we expect new equipment organic sales growth roughly in line with our full year guidance with sequentially lower margins in the quarter.

This margin pressure is due to lower volumes that will be more acute in the third quarter. This is due to the execution of cost mitigating actions such as a temporary furlough of some of our production facilities. Service organic sales are expected to ramp to around 5% and we anticipate solid year over year margin expansion with positive contribution from uplift as we execute the last wave of the program. Taken together, we expect the third quarter adjusted EPS growth of around 5% followed by a strong fourth quarter to deliver 6% full year growth at the midpoint of our guide. With that, I will kindly ask Tina to please open the line for questions. Thank

And our first question comes from the line of Jeff Sprague with Virtual Research. Please go ahead.

Hey. Sprague here at Virtual. Good morning, everyone.

Hi. How are you doing? Judy, I I wonder if you could just maybe unpack service growth a little bit more for us. And the spirit of my question is, I think we've got two quarters in a row here now where service revenue growth organically is equal to portfolio growth, where historically, you know, revenues outperformed, portfolio growth. So you mentioned churn and mix.

I guess I'm particularly interested in churn in this kind of economic period of uncertainty. Are you seeing leakage in retention? Or really what's going on underneath the surface there?

Yes. Thanks, Jeff, and good morning. Apologies about your name. So listen, the service is continuing to perform. We're going to be maintenance and organic sales were up 4%.

It was driven by 4% growth in the portfolio. We did have positive service pricing. Like for like pricing increased three points in the quarter. That's a little lower than we had in previous years, but inflation is not as high in certain parts of the world. In the developed mature markets, the service pricing performance was really excellent.

EMEA was up low single. Our Americas team drove mid single digit pricing, so really pleased with that. The main changes, the two elements I'd call your attention to this quarter versus last quarter, Repair sales snapped back. They were 1% in first quarter. This quarter, they're 6%.

And we anticipate incrementally that to increase in the third quarter and even more in the fourth quarter. Our repair backlog is up 8%. So we've got good backlog to work on as we look through the remainder of the year. Mod revenue was down to 5%, and that was a combination of a lot of major projects that we had won. You saw our mod orders were up 22%, really phenomenal performance, three of our four regions up 20%.

And the U. S.-Canada team, our North America team, mod orders were up over 50% this quarter. So they have continued to drive significant growth. Now we've got to convert it. It's a fair expectation, and we have the expectation that, that will grow to 10% over the next two quarters for mod revenue because our backlog is at 16%.

So it was a combination of major projects and some other items, but it's not a resourcing issue with us. So that's why we took the guide, the outlook down to 5% for year end. We're at 4% through the first half. You're going to see an incremental step up as we go through third quarter, and then you'll see even more in fourth quarter. I've got full confidence in the service flywheel.

We're seeing it everywhere. We're seeing the portfolio growth sustain itself at 4% now for almost for multiple years. And I think you're going to see that I know you're going to see that come through in the next two quarters. The operating profit shows that service impact. As Christina mentioned, we had a record since spin, 24.9% operating margin in service.

And that will continue to drive our growth in operating profit as we go through. And we've had operating profit now in service. This is the twenty first straight quarter. So you're going to continue to see that. But we know it's a growth story on top line.

We own that, and you will see that as we go through the second half of the year.

Thanks for that. But just to be clear then, I mean, if units are up four and service price is up three, the fact that organic revenues are only up four is a function of new equipment mix, project related stuff you're talking about, or is it or is it retention?

No. It's the retention actually was slightly better in the second quarter than the first quarter. But it's a mix and churn effect because as the portfolio grows, the mix is it's growing more in the less mature markets, which have lower contribution, especially in China where we're growing in the teens. So it's really a mix and churn effect there. And then as you know, even with the units that when we lose them and we don't retain them and replace them with a recapture, that does come at a lower margin and a lower price.

Right, right. Okay. Thanks. I'll leave it there. Good luck.

Our next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Got my name right. That's encouraging. Good morning. Thanks for the question.

Just on retention, Judy, I know you said it improved slightly Q over Q. Maybe you could maybe just put a final point and quantify that. But I'm just curious really on it sounds to me like you're pointing to new equipment orders inflecting in The Americas. Just given the continued drag in multifamily, it's surprising to see this. I'm curious what you're seeing in pockets of growth in The Americas.

And then maybe just touch on China as well. I think you said expect year over year growth in the coming quarters. So just curious if that's just easier comps? Or are we seeing some benefit from the stimulus efforts in China?

Yes. So Nigel, we'll provide all the retention data once a year. So you'll that part I won't elaborate on. In terms of The U. S, as I said, fourth strong quarter with teens growth.

North America was up 15% new equipment orders this quarter. We saw some contraction in Latin America, Brazil, Mexico, Chile, but North America is so much more of our business as you know in The Americas. Really strong performance in infrastructure. We saw resi was flat this quarter. So when we talk about multifamily, our orders were flat year over year.

So I view that actually as positive versus the kind of pullback we had seen in multifamily over the past few quarters, and then commercial was down. And so again, it was a strong infrastructure job, a lot of major projects, and a lot of volume business too. And I couldn't be really more pleased with our performance in North America. Really, really strong four quarters in a row after almost six quarters where we had orders contraction, which is the backlog we're living through in new equipment in North America. So that's strong.

In China, listen, the new equipment market, it does remain weak, down 15% first and second quarter, and we see it improving to 10% in the second half. The comps will help, but there was not a single vertical in the second quarter that grew nor a single tier city that grew in the second quarter. Tier one did better than the others, but none of them grew. So the best verticals in China for the second quarter for us were infrastructure and industrial buildings, which are becoming more stable. But both commercial and office were down double digit, and resi was down high teens to double digit.

So that market is still stressed. But again, now it's now it's about sequential and looking at how we can perform quarter over quarter. We focused in new equipment in China really on value, really two things. Value in terms of because it's very competitive and the prices are very, very, very low, so we focus on value, and then we focus on our ability to retain it in our service portfolio. And where there was other opportunities for margin or for volume, where we weren't going to get any margin or get the service attachment rate, we walked away from those.

So I think our team is being very disciplined to be in a much better place in terms of our backlog. And you look at our new equipment backlog for the company. So our new equipment orders decreased 1%. But if you take out China, the other three regions were up 11%. If you look at our backlog for new equipment, even though it declined 3%, if you take China out, we're up 8%.

So I'm actually very encouraged for rest of world ex China. China stabilizes, and Rest of World is growing now almost our backlog is up high single digit at 8%.

Okay. That's great. Thanks, J. D. That's great color.

And then my quick follow on is, I think, for Christina. So it seems like your 3Q and it points like $1 per share of earnings. I think the midpoint implies a step up in earnings from 3Q to 4Q. That would be quite unusual. So just wondering how we should be phasing thinking about the second half and thinking about that step up in earnings in the fourth quarter?

Yes. Nigel, thank you very much for the question. So let me give you some color on Q3 outlook, but also the calendarization between Q3 and Q4. So starting with Q3 on the new equipment side, we expect revenues to be in line with the midpoint of the guide around minus 7%. With margin sequentially down, margin will be around 3% for new equipment in the quarter.

The reason being is because we are anticipating the volumes drop in the second half and we are executing cost mitigating actions. Among others, we will implement furloughing some production facilities. That will mean that the volume shortfall will be more acute in Q3 and will come back to regular level in Q4. On the service side, however, as Judy said, we accelerating execution both on repair and modernization. They are going to be around 8% growth in the quarter. And we have very good line of sight to execute repair because our ending backlog in was around 8%.

So it's the execution of the backlog. And margin is going to go up sequentially too. We also have an easier compared to Q3 last year. So total operating profit will be around 2% up and EPS will be around 5% up. That means that for the calendarization of EPS growth in the year will be $03 first half, 0.5 Q3 and around $0.14 Q4.

So it is kind of a back loaded profile. And the growth in Q4 is based upon three areas. One is on the new equipment side, we expect a better stabilization in China in terms of shipments coming from better liquidity conditions in the market, but we also have an easier compare in China versus Q4 last year. So new equipment contribution in Q4 will be back to normal levels around $70,000,000 in the quarter. And on the service side, we expect an additional acceleration of repair and mods will be around low mid teens in the quarter.

That implies for repair a ramp up in orders, but also ramp up in execution. And we do have the resources. You may recall that last year, we hired around 2,000 mechanics. Those mechanics are productive now. And we are also this year selectively hiring in those countries where we see further growth potential of the backlog.

And on the Mod side, it will be around 15%. This is based upon the acceleration of Mod in China on what we call the bond projects. These are the governmental subsidies. And you may recall that last year, we had a similar acceleration because the subsidies come to an end at the end of the year, so they need to be used. And this year, we are planning to do the same with a bigger scale because the program this year is bigger.

It's around 100,000 units versus 40,000 units last year. The acceleration in Q4 is based upon new equipment, repair and mode.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please go ahead.

Thank you so much. Maybe we could just start with the China transformation savings. You guys are very clear about the what you're adding. But I guess what does that mean for carryover savings into 2026? Is there anything that we should be thinking about next year?

Yes. So the China transformation savings at the beginning of the year, we guided $20,000,000 in GR, dollars 30,000,000 run rate. We are executing according to the plan. We have $5,000,000 in the first half of the year and the remaining $50,000,000 will come in the second half. But because of the more acute decline of volumes, we are taking additional cost reduction actions.

That's why we have increased the run rate from $30,000,000 to $40,000,000 So this is going to be an incremental savings for 2026. And when you step back and you look at our overall picture of new equipment in the year, new equipment sales are going to decline around $400,000,000 versus $450,000,000 last year. This is a very similar decline. In terms of contribution, last year, decline was $44,000,000 This year, excluding tariffs, this is an extraordinary effect, we are going to decline $60,000,000 with an incremental decline of $15,000,000 But we are facing new headwinds. One is the price because price in the backlog in China became negative last year as we deteriorated prices, the market deteriorated prices.

This is a headwind of around 100,000,000 BPY this year. And the second one is commodities that last year was $20,000,000 positive. This year is flat. But we are only deteriorating incremental $15,000,000 So this shows you all the cost actions we are taking in new equipment that are the uplift program, but also the transformation of China and the usual productivity, material productivity actions. So there is a lot of cost mitigation in the new equipment side.

Nicole, let me put this in kind of the business perspective versus just the financials. We made a major organizational transformation change in China as we started the year. We went from basically two separate, almost wholly operating companies with very different brands to being more laser focused on new equipment and modernization together in China for good rationale and service. So we now offer both those brands and service, and we offer both those brands and new equipment and modernization. But now we have the ability to optimize, to have our agents and distributors and our direct sales folks make us more customer centric.

So we're going through this transition. And at the same time, obviously, conditions are a headwind in new equipment, especially. Service is growing nicely. Modernization is growing very nicely in China, over 20% mod growth in China, over mid teens portfolio growth in service. So we are preparing while we're taking this cost out, we're preparing for and implementing our new China approach to market, which will position us not just for the fourth quarter of this year to get to that stabilization point, but for 'twenty six and beyond to go to market in a different way than we have in the past twenty years.

Okay. Thank you. That was a very comprehensive answer. Appreciate that. And then just maybe a quick follow-up.

The discussion around 3Q versus 4Q cadence was really helpful. Just one follow-up to that. What about the cadence of free cash flow? Does that look more akin to normal seasonality? Or will it look similar to the earnings profile?

So cash flow in the second half of the year is going to be at the level of the second half in 2024. So we have a good line of sight to deliver as we delivered last year. Cash flow is weaker than what we expected, but it's primarily driven by the business mix. So we have seen new equipment deteriorating further and service remaining strong. And as you know, new equipment is favorable in working capital because of the advanced payments, but also because of billing according to milestones.

And for example, in the case of China, we don't ship unless we collect. On the other side, in service, we bill after rendering the service. So this is a headwind in working capital, but it's a temporary one as we stabilize new equipment. And for the second half of the year, we have good line of sight to deliver the cash flow. There is another component related to our uplift transformation.

We are transforming our processes while outsourcing our collections areas to a third party. The transition is progressing very smoothly. We are collecting with disruption in the business, and we are positive that as we end up the transition towards the end of the year, the support of our new partner is going to help us accelerate and optimize collections even further.

Our next question comes from the line of Steve Tusa with JPMorgan.

Hi, good morning. Can you guys just talk about how you're set up into like just mechanically what the backlog would suggest for next year in China? And I'm sorry, did you say that the orders there are looking to improve sequentially now? I didn't quite catch that in the beginning on any.

Yes. The orders will improve sequentially in China. Backlog for is actually let me just take you through the whole world in terms of backlog and how they're doing. If you look at let's start in The Americas, Steve. Our backlog as we ended last year was minus 4%, which is obviously where we saw some of the challenges in the revenue this year on new equipment, especially in North America.

We're ending this quarter up 5% there. So that plus the orders we anticipate through the rest of the year position us really well going into 2026%. Asia Pacific, really strong backlog, double digit. So we're really pleased there. And EMEA will be fine as we enter, especially based on The Middle East and Spain and some other locations.

So it leaves us with China backlog. And that's why we've been talking a lot ex China today. China was about 12% of our global revenue this year, 10% or this quarter, 10% last quarter. So it's still now that smaller contribution. So we're watching it closely.

We're rightsizing our costs to the best of our ability. But even with the mod backlog will be up, the service backlog will be up going into next year at China, but the new equipment backlog will be down.

Okay. So I mean that just sounds like on a like from a profile perspective, is China enough of a drag next year to completely offset what's happening in the other regions?

Otis Worldwide (OTIS) Q2 2025 Earnings Call Transcript

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