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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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Q4 2024

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

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Otis Worldwide

otis worldwide

Good morning, and welcome to Otis' 4th Quarter 2024 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 it over to Rob Cotaro, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Welcome to Otis' 4th quarter 2024 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President and Cristina 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 non recurring 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 ease could cause actual results to differ materially. Now, I'd like to turn the call over to Judy.

Thank you, Rob. Good morning, afternoon and evening everyone. Thank you for joining us. We hope that everyone listening is safe and well. We finished 2024 with solid results both for the Q4 and full year and we enter 2025 with momentum and confidence in our service driven business model.

We achieved these results through the dedication of our colleagues around the globe, so I want to express my gratitude for their hard work, execution of our strategy, commitment to our customers and demonstration of our Otis Absolutes. Starting on Slide 3, we achieved organic sales growth of 1.9% in the quarter, driven by continued strong performance in service, which grew 7.8% with great performance in both maintenance and repair and modernization. We grew our maintenance portfolio by more than 4% for the 3rd consecutive year and our portfolio now stands at approximately 2,400,000 units, leading our industry and validating the impact and contribution of our service flywheel. Modernization was a highlight in 2024. We ended the year with our backlog up 13% at constant currency, while modernization orders grew 18% in the quarter, which sets us up well for the year ahead.

We generated $682,000,000 of adjusted free cash flow in the quarter, which is our highest quarterly results since spin. Cash generation was driven by excellent collections and a reduction in our net working capital. Additionally, we continued the strong execution of our customer centric uplift program, enabling us to now increase the expected annual run rate savings to $200,000,000 by the second half of twenty twenty five. In addition, earlier this month, we announced a transformation of our China business to better position ourselves for growth in service and modernization in the current and evolving China market environment. We are well underway in transitioning our revenue and profit streams in China from our new equipment to our service and mod flywheel.

We also made meaningful progress on ESG initiatives that are aligned with our business strategy. In the Q4, we received a gold rating for the 3rd year in a row from Ecovadis. Many of our customers around the world take ESG strongly into consideration as they make procurement decisions, and this recognition demonstrates that we continue to pursue and execute on sustainable strategies that drive value for our stakeholders. In 2024, we delivered organic sales growth for the 4th consecutive year since Spin and 50 basis points of overall adjusted operating profit margin expansion. We have expanded company margin by 30 basis points or more every year since Spin.

Despite the new equipment macro headwinds our industry faced in 2024, we maintained our new equipment share at 20%. We grew adjusted EPS 8.2% and finished the year strong with approximately $1,600,000,000 of adjusted free cash flow in 2024 allowing us to return $1,600,000,000 of cash to shareholders through dividends and share repurchases. We believe our shareholder driven management strategy is sustainable. Turning to our orders performance on Slide 4. New equipment orders declined 4% in the quarter due to continued challenging market conditions, primarily in China.

Excluding China, new equipment orders increased approximately 11%. The Americas delivered a strong second half of the year, growing orders high teens in the last 6 months, including mid teens growth in Q4 with strong performance in Latin America. Asia Pacific delivered greater than 20% growth with solid results across the region. Orders declined by high single digits in EMEA in the quarter, including weakness in Western Europe, but finished the full year up 3.7%. In China, orders declined more than 20% in the quarter due to continued soft demand.

Our new equipment backlog at constant currency was down 4% versus the prior year, although excluding China it was up low single digits. Modernization orders bounced back in Q4 as expected with as I noted 18% growth. Growth was widespread, including China up greater than 20%. We ended the year with modernization backlog up 13% versus the prior year at constant currency. New equipment and modernization orders combined grew in the quarter, with backlog down 1 point as we continue to drive a shift in mix from new equipment to modernization in China and other mature markets, where there's a higher concentration of aged units in need of modernization and refurbishment.

Our service portfolio grew 4.2% and now stands as noted at approximately 2,400,000 units, strengthening our number one position globally. All regions contributed positively with mid teens growth in China, mid single digit growth in Asia Pacific and low single digit growth in both the Americas and EMEA. Globally, our recaptures and cancellations were approximately net neutral for the 3rd consecutive year, leaving net churn at 0 and driving growth through conversions. As of year end 2024, we have approximately 1,000,000 connected units globally. We continue to innovate to adapt to changing market demands and to better serve our customers, while driving growth and profitability across our business.

For example, we continued to roll out our digitally connected elevator platforms, launching Gen 3 across Asia Pacific, where smart cities are being increasingly developed in major urban areas. In addition, we launched the enhanced public escalator globally, a flagship infrastructure product that provides new features that are critical to our customers' needs. We also rolled out new global modernization packages to help our customers proactively plan to upgrade their units to the latest safety standards and to provide a more comfortable experience for their passengers. With 8,000,000 of the 22,000,000 global installed units aging and ready to be upgraded, this is a significant opportunity for our modernization business, which is a growth lever for our service portfolio. Overall, R and D and strategic investments remained relatively stable at about 1.4% of sales for the year, reflecting our ability to invest and innovate efficiently.

We continue to win many exciting projects based on our innovation, ability to deliver and the trust our customers have in us. For example, in Mexico, Otis will install 142 units at the Mexican Social Security Institute's facilities. Our elevators will help support the agency's mission by providing safe and reliable vertical transportation at 41 public clinics and hospitals across the country. And upon completion, will be added to our maintenance portfolio, joining the nearly 600 existing IMSS elevators already serviced by Otis. In Hyderabad, India, Otis will install 21 units in the TriLite towers, a set of luxury high rise residential apartments.

These towers, which stand up to 60 floors tall, will be Otis India's first use of the Otis Compass 360 destination management system in a residential project. In China, Otis will modernize more than 120 units across 2 infrastructure projects. At the Xi'an Airport in Northwest China, we will upgrade 22 moving walkways and 58 elevators. And in Wuhan, we will modernize 46 escalators across 8 stations on the city's Metro Line 2. Finally, in the UK, Otis will install 17 elevators and 1 platform lift at the Ellison Institute of Technology's Oxford Interdisciplinary Research and Development Campus that will incorporate more than 30,000 square meters of research laboratory space and oncology and preventive care clinic and educational and gathering spaces.

Turning to our Q4 results on Slide 5. Otis delivered net sales of $3,700,000,000 with organic sales up 1.9%. Adjusted operating profit, excluding a $5,000,000 foreign exchange headwind was up $22,000,000 driven by the service segment. Adjusted EPS grew approximately 7% or $0.06 in the quarter with strong operational performance and the benefit of a lower share count. With that, I'll turn it over to Cristina to walk through our 2024 results in more detail.

Thank you, Judy. Starting with segment sales performance on Slide 6. Total organic sales growth in the quarter was driven by service, which was up 7.8%. New equipment organic sales were down 6.8% with Americas, EMEA and Asia Pacific growing mid single digits on the back of a strong backlog execution. Within China, the backlog heading into the quarter was down mid teens.

This, together with a strict credit controlling shipments, led to China new equipment sales declining greater than 20%. This decline was partially offset by growth in each of the other regions, with notable strength in India, Spain and Latin America. Service organic sales were up 7.8%, which is our best performing quarter of the year, with mid single digit or greater growth in all regions and all lines of business. Maintenance and repair sales were up 5.6 percent with maintenance benefiting from our continued efforts in driving portfolio growth together with disciplined pricing strategy. Pricing was up 4 points, excluding the impact of mix and churn.

Repair volumes continued growing approximately 10% and modernization sales further accelerated to 18% growth in the quarter, with growth across all regions, including more than 20% growth in Asia Pacific each quarter this year. Turning to segment operating profit performance on Slide 7. New equipment operating profit of $64,000,000 was down $24,000,000 at constant currency, driven by the headwinds of lower volume and regional and product mix that were partially offset by productivity, including the benefits from uplift and lower commodity costs. Operating profit margins came in largely as expected at 4.7%. For the full year, new equipment operating profit was down $44,000,000 at constant currency, and operating margin finished at 6.1%, 50 basis points lower versus the prior year, with the softness in China being partially mitigated through productivity, pricing and commodity tailwinds.

Service operating profit of $569,000,000 increased $54,000,000 at constant currency with higher volume, favorable pricing and productivity, including the benefits from uplift, more than offsetting annual wage inflation. Operating profit margins expanded 50 basis points to 24.5% in the quarter and 60 basis points to 24.6% in the full year. Service operating profit in 2024 accounted for 93% of our overall operating profit compared to 89% last year. Moving to the full year 2024 adjusted EPS bridge on Slide 8. Adjusted EPS in the year grew $0.29 or 8.2%, including $0.22 operational growth at constant currency, fueled by our continued solid service performance.

Below the line, our adjusted effective tax rate declined by more than 1 point in 2024 to 24.8%, driven by continued focus on optimizing the effective tax rate. Reduced tax rate and NCI, together with a lower share count, more than offset headwind from increased interest expense. Additionally, we finished the year with our highest quarterly cash flow since spin, delivering the expected improvement in working capital in Q4, mainly driven by excellent collections. Overall, solid performance throughout 2024 with a strong finish to the year. We continue to deliver value to shareholders on the back of sustained execution of our services strategy.

Despite challenging new equipment market conditions in China, we have delivered high single digit EPS growth as anticipated, proving the resilience of our service driven business model. I will now turn it back to Judy to discuss our 2025 outlook.

Thanks, Christina. Starting on Slide 9 with the market outlook. For new equipment in the Americas, the market was up mid single digits in 2024 with mid single digit growth in Latin America and low single digit growth in North America. We expect that the market improvement that started in the second half of twenty twenty four will continue and anticipate that in 2025, the Americas market overall will be up low single digits. In EMEA, the market was down mid single digits in 2024, primarily driven by Western and Central Europe.

Although we anticipate that these two markets will not recover in 2025, the decline is expected to moderate compared to 2024. In total, the overall EMEA market is expected to increase low single digits. In Asia, the market was down about 10% in 2024 with solid growth in Asia Pacific up low single digits, partially offsetting the continued decline in China, which we estimate was down approximately 15%. We've seen an approximately 35% reduction since the height of the China new equipment market in 2021. Although the situation remains fluid, we expect the China market to decline approximately 10% in 2025.

We believe the China market will stabilize late in 2025 resetting to this new level. Asia Pacific is expected to be up mid single digits with India and Southeast Asia driving the growth, while Korea is expected to be down again and Japan is expected to be flat. Overall in 2025, we expect the global new equipment market will be down mid single digits in units with the growth in the Americas, Asia Pacific and EMEA more than offset by the decline in China. This represents a sequential improvement in new equipment market trends in 2025 compared to 2024. In service, the global installed base continues to grow mid single digits, reaching approximately 22,000,000 units at the end of 2024.

As we turn to 2025, we anticipate continued mid single digit growth, driven by growth in all regions. Taken together, we expect the global installed base to reach approximately 23,000,000 units at year end. Turning to our financial outlook for 2025. We expect net sales of 14.1 to $14,400,000,000 growing 2% to 4% organically and down 1% to up 1% at actual currency. Adjusted operating profit is expected to be between 2.4 $1,000,000,000 $2,500,000,000 up $55,000,000 to $105,000,000 in actual currency or $120,000,000 to $150,000,000 excluding foreign exchange headwinds.

We expect adjusted EPS in the range of $4 to $4.10 up 4% to 7% or more than 20% versus the prior year at the midpoint of the guide. Finally, we expect adjusted free cash flow of approximately $1,600,000,000 We will continue to execute on our disciplined capital allocation strategy and expect to repurchase approximately $800,000,000 in shares in 2025, grow our dividend payout and pursue approximately $100,000,000 of bolt on M and A. Turning to Slide 10. As we've discussed over the last several years, the market in China has shifted dramatically. After over 20 years as a high growth market, it's now resetting as a strong, but mature market.

We foresaw this and have been working to evolve our business model, shifting from an emphasis on new equipment sales to deriving value from the lifetime of a customer with our margin accretive emphasis on maintenance, repair and modernization sales. The construction boom in China delivered an installed base that is approximately 40% of total units installed globally today. That's a very large and important market. Each unit requires regular maintenance, repair and over time modernization. The many units built over the past 15 to 25 years are entering the prime age for modernization.

The modernization opportunity is large and growing. China now presents a tremendous opportunity to drive modernization orders, expand our maintenance portfolio, and deliver significant growth in our service driven business model. We are transforming our China operations in both service and new equipment to deliver on our China service flywheel strategy. We are investing in our service business to profitably grow our portfolio through conversions and recaptures. Through our efforts, we are targeting low teens annual performance growth portfolio growth with a focus on quality and margin expansion.

Our service revenue is now approximately 1 third of our total China revenue. To win an increasing share of modernization, we're engaging our new equipment agent and distributor network to accelerate growth. We see a multi year opportunity and we're targeting greater than 20% annual modernization order growth. Within new equipment sales, we're adapting for the more mature market environment as well. After growing at a mid teens CAGR for more than 20 years, the new equipment market peaked at approximately 650,000 units in 2021.

Since then, industry new equipment units have declined approximately 35% to 420,000 units in 2024. We believe it will stabilize in late 2025 between 350,000,400,000 units. We currently operate through 2 brands in China, which have largely operated independently. The structure has served us well historically and enabled us to grow our new equipment business over 700% from 2000 to 2021. To deliver our flywheel strategy, we are consolidating our operations from manufacturing to sales in addition to rationalizing and simplifying our product portfolio.

This will drive additional efficiencies separate from uplift of approximately $20,000,000 in cost savings in 2025 and exiting the year with a $30,000,000 annual run rate. Taken together, all these initiatives, which have been underway for a while, position Otis to grow revenue and margin in China, which will continue to be a large and important service market. Turning to slide 11, we've had tremendous success with our uplift program and have unlocked approximately $70,000,000 of savings in 2024. We now expect to deliver a run rate savings of $200,000,000 by the second half of twenty twenty five. Taken together with our China transformation, we are targeting in year savings of approximately $90,000,000 in 2025 and exiting the year with a target run rate savings of $230,000,000 With that, let me hand it back to Christina to outline the 2025 segment outlook in more detail.

Thank you, Judy. Taking a more detailed look at our outlook and starting with sales on Slide 12. Total organic sales are expected to be up 2% to 4%, driven by continued strong performance in our Service segment. We expect new equipment organic sales to be down 1% to 4%, driven by a decline in China due to continued soft demand, although this represents a sequential improvement versus 2025. Total Asia is expected to be down lowtomidsingledigits with a strong growth in Asia Pacific helping to partially offset the decline in China.

We foresee the Americas to be down low single digits as we work through a lower backlog, impacted by market pressures in the first half of last year. EMEA is anticipated to be up lowtomidsingle digits. We anticipate continued strong performance in service with overall organic sales up 6% to 7%, in line with our growth in 2024. This includes maintenance and repair that are expected to grow mid single digits on the back of sustained portfolio growth over 4% and modernization up high single digits as we continue to execute on our strong backlog from year end. Turning to Slide 13.

We have delivered profit growth every year since spin, expanding operating profit margin by 220 basis points on the back of consistently strong performance in service. We remain focused on growing our industry leading maintenance portfolio, executing on our strong modernization backlog and increasing productivity, including benefits of Uplift and the China transformation. With our proven services strategy, we will continue setting the industry benchmark in terms of profitability. In 2025, we expect to expand margins in line with 2024. The sustained and solid performance in service is anticipated to offset headwinds in the new equipment business, including pricing, volume and mix.

Commodities were tailwinds in 2024. However, we estimate their impact to be approximately flat in 2025. Meanwhile, productivity, including the benefits from Uplift and our China transformation, is expected to be a positive contributor. All in all, we foresee operating margin expanding 60 basis points in 2025, delivering $120,000,000 to $150,000,000 growth at constant currency. Moving to the 2025 EPS bridge on Slide 14.

Our guidance for adjusted EPS is $4 to $4.10 with a strong operational performance driving approximately $0.20 of growth and along with the benefits from a lower share count will mitigate around $0.10 on foreign exchange and $0.04 in interest headwinds. Note that our guidance is based on current spot foreign exchange rates. Excluding this impact, the midpoint of our guide would represent a high single digit adjusted EPS growth year over year, in line with our midterm guidance. We expect EPS in the 1st and second quarters to be relatively flat, with a stronger growth in the second half of the year, driven by execution of our modernization backlog, realization of cost savings from our uplift and China transformation initiatives and improving trends in China and Americas new equipment. Maintenance and repair are expected to be level loaded through the year, reflecting the strength and resiliency of our service business.

Turning to Slide 15. Our outlook for 2025 reflects another year of consistent performance and strategic execution led by our resilient service business and our uplift and China transformation programs. We project another year of strong profit growth with the midpoint of our adjusted operating profit guidance up 6% at constant currency, driven by approximately 60 basis points of margin expansion. Our adjusted free cash flow forecast is approximately $1,600,000,000 which will support $800,000,000 of shares repurchases and a 40% of dividend payout. We remain committed to serving our customers, delivering growth through our service driven business model and generating long term shareholder value.

With that, I will ask Sarah to please open the line for questions. Thank you.

Thank you. Your first question comes from the line of Joe O'Dea with Wells Fargo. Your line is open.

Hi, good morning. Thanks for taking my questions. Can you expand on the China kind of cost initiatives? If we think about that as roughly a $2,000,000,000 revenue pool in China, maybe 2 thirds of it that's more equipment oriented. It would seem like that the targeted savings are around 2% of that new equipment revenue.

And just trying to get a little bit of context around the opportunity here. And with the upward sort of revisions that we've seen in uplift trying to think about that $30,000,000 and where it could go over time?

Yes, let me start, Joe. Thanks for asking the question. Listen, I think we have and Sally and the team have really focused on really resetting our business. We have seen structural change in China and we are structurally changing Otis to pivot and to continue our journey to move to becoming more of a service oriented business and it's become more of a mature market. So we've made this change.

We announced it the 1st week of January and we're working through it. And our best estimate right now is what you see in terms of run rate as we exit the year. We're looking at every opportunity possible, but we also want to ensure since China is 40% of the installed base, we ended 2024 with our portfolio again up mid teens for the 13th straight quarter, but we ended our portfolio with 435,000 units, which is more than twice what we started at Spin. So we've been on this journey, but that's still if you assume that that's for China, that's still 4% to 5% market share. So we want to make sure that we're investing and we keep our mechanics and we keep all of the key skills we need to succeed in service and now in the growing mod business.

Our mod orders as you saw were pretty strong for Q4. We're really proud of them. China mod orders doubled in the quarter. And that we think is a combination of focus and also a combination of this the stimulus that was introduced for refurbishment, where we estimate that we secured about 8% to 9% market share on that refurbishment first tranche. So again, for us, it's about tuning the organization, stripping out excess overlapping costs and now creating a very market driven service and mod business.

Yes. And Judy, I can complement with financials. So the €30,000,000 run rate are expected to be primarily in the new equipment side. So new equipment in China in 2025, from a revenue standpoint, is going to moderate because we expect a stabilization of the

But the margins are going to 2024, pricing in China was down 10%. So with this transformation program, we are going to right size the organization, specifically on new equipment, in order to adapt to the new market size. We are targeting £20,000,000 in year savings that will be approximately low to mid teens reduction of indirect cost and 30% reduction in real estate. Now the program is not only about rightsizing the equipment, it's also about investing into service because here the opportunity is enormous. So service is as of 2024, onethree of the revenues of China.

We have a small market share in service and we want to grow, and we are going to grow. And this is on the back of consolidating the teams, the 2 brands will be under the same umbrella. This will allow us to increase coverage in service. 2nd is consolidating also portfolio and rationalizing and being able to differentiate value and to address different customer needs. And last but not least, consolidating the agent and distribution networks that this would also help to accelerate modernization growth, as Judith has said, more than 20% targeted on an annual basis.

That's all helpful detail. And then just as it relates to the Q4 and the service margin there and sequentially down from the 3rd quarter, Looks like it may have come in a little shy of internal expectations. And so any color on that service margin and then how you think about that moving forward?

Yes. Let me start. Joe, what probably isn't obvious to everyone is we've made a focused investment in our service flywheel. We talk about it a lot, but the linchpin of that is having qualified mechanics and field professionals available throughout the globe. In 2024, we added 2,000 field mechanics and field professionals, which is a skilled craft to our prior 42,000 population.

So we increased 5% our direct field workforce. Because this is the life safety business, many of them come in as apprentices. They partner with experienced mechanics and the learning curve takes time. And we may have probably underestimated the productivity of bringing on those 2,000 to drive service, especially in the Q4, but we had the cost of them. But for me, it's an absolutely critical investment in our future so that we don't have a labor shortfall, we've got trained mechanics and we can grow both service and modernization.

So again, we're up to 44,000 field professionals, who every day are delivering for us, but a lot are have just joined us and it's a worthwhile investment.

And on the sequential comparison, Joe, so you are right, it's a decline, but this is a seasonal effect that you may see. And when you look back, it was even sharper in 2023 is because of vacation and absorption. But compared to 2023, our margin rate in service grew 50 basis points in 2024 versus 20 basis points in 2023. And this is despite of the acceleration we have had in mode. Modernization has grown 18% in sales in Q4, much more than in the past.

And because of the good performance on the field and efficiencies, including ABLIT, we are able to

in service compared to 2023. Faster in terms of margin rate in service compared to 2023.

The next question comes from Rob Wertheimer with Melius Research. Your line is open.

Hi, thank you. Judy, you mentioned the addition in the field professionals. And I'm a little bit curious if you have any thoughts on your decision process there. So what maybe what is your productivity trend on your existing base field professionals? Does that sort of anticipate as we can see in the mods, I guess, that you think you might grow above whatever that productivity labor productivity rate would be, maybe have an aging workforce to deal with until there's some replacement there.

Just thinking about your decision process as you expand workforce.

Yes. No, thanks, Rob. I think we're seeing challenges across the construction market in general for workforce and for us because this is such a skilled craft. We made the conscious decision to invest and that investment has occurred in many markets across the globe. So we want to be prepared.

We know we're going to continue to grow our service portfolio. We've got modernization revenue in the outlook for 2025 growing high single. Obviously, with the backlog, we'll try to do even better there. And you can see that just picking up year over year. So for us, we wanted to get these apprentices in and even some of the skilled journeymen who come from other companies, so that we can first fulfill the immediate maintenance and repair requirements we have.

Our repair business is still up about 10% for another year. So we have to no one wants their elevator or escalators down. We need that field workforce. So for us, it's a worthwhile investment. Again, I think it did have an impact on margins in 4th on service margins in 4th quarter.

But to me, that's a short term issue versus the long term capability to deliver. Again, we do have an aging workforce just like most industrials do. And we're up to 72,000 colleagues now, 44,000 in our field, which if you do the math, it means we've obviously reduced the indirect headcount, almost 1,000. So I think we're heading in the right direction for next year, but more importantly for Otis' future because we need to be able to fulfill the needs of our customers in the markets we serve and in those markets we need that workforce.

The next question comes from Amit Mehrotra with UBS. Your line is

open. Thanks a lot. Judy, I think the China new equipment market is highest market for the company on the new equipment side. You obviously the market could have get you there, but as you pivot maybe more proactively towards service, can you just talk about the impact to new equipment margins structurally? I know you're taking out costs and to maybe offset some of that mix impact, but structurally, where do you expect the mix of that business to go as you kind of pivot more proactively service?

And maybe just related to that, the China market's obviously been this moving target. Can you just give us a sense of what's behind or maybe what's giving you confidence that in 2025 in terms of that $350,000 to $400,000 market?

Yes. No, thanks, Sameet. So listen, on China, as we wrap the year, ended up being 13% of total Otis revenue, which is where we kind of we saw it going 3rd Q4, and that's all in. So total China revenue versus total Otis revenue is 13%. Traditionally, as I said, with the incredible CAGR we had in China new equipment, it did become a very high volume business with high profitability.

It has become more challenging over the past 3 years as prices have become more competitive, but in a deflationary environment, our team has done an amazing job to get cost out, to get material productivity and to get installation productivity. What we want to do is take that same focus and that's why we're modularizing or making modernization packages. China gives us a unique opportunity in terms of both service and mod to improve our profitability in China. 1st, as we grow our service portfolio, especially through recaptures, we build density in a very large country. Again, 435,000 units as we end the year, up again mid teens for the year, but we need the ability to continue to build density because as you see with Otis and as you saw on Chart 13, it's that density that drives our service operating profit margin that has increased every year since spin actually it's increased every 19 straight quarters since spin.

So that's what we need to take to China. And we do that through, a little different lens. As we came out of spin, we focused on growing our service portfolio. 1% wasn't acceptable. We're now at 4% plus.

We have higher aspirations. But we have so much data available right now that we understand the value of each unit. We understand the quality contribution of each unit. And so in China explicitly as we focus on conversions and specifically on recaptures, we're doing it as we've done in other mature markets, placing it in a city or in a route where we can get that density and we don't have the same cost. That's going to help us make China service margins, which traditionally have been our lowest because a lack of density improve to at some point approximate mature markets.

The modernization opportunity will come at scale and we've moved mod margins. This is the for the full year mod margins globally exceeded new equipment margins and we're going to continue, as we said, to get to at least double digit margins for modernization over the medium term.

Okay. That's very helpful. And just one follow-up for Christine, if I could. So I think the expectation is mod growth to be up high single digit organic this year. I think orders were up low double digits last year.

They were up high teens in the Q4. Can you just talk about maybe the disconnect there? And are globally is mod growth mix, I guess, mix positive for service margins? Is it neutral? Can you just talk about the mix impacts from that outgrowth?

So on the guide, Amit, you are right. So I would say there is a little bit of conservatism in the guide that is based on we want to see the resources ramping up. And as we have mentioned, we in Q4, there was a good ramp up, but we need to continue in order to be able to execute on the very strong backlog. So this is an opportunity for the guide. We are guiding high single digit versus 13% exiting backlog, and we can do more getting the resources.

On the mix, so within service, modernization has lower margin compared to the repair and maintenance. Although modernization margins are increasing based on the standardization of packages, supply chain and efficiencies on the field because of the standardization. And you may recall that at the beginning of the year, modernization margins overpass new equipment. We continue that trend and they continue being above and growing. So gradually, the margins will get better, but it's going to be a headwind in terms of margin rate in service, but overall very positive dollars in terms of contribution.

Okay. Thank you very much. Appreciate it.

Your next question comes from Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning, everyone. I just want to follow-up on that mods question. Obviously, improving mod margins has been a big initiative. So where do we expect mod margins to be in 2025 versus 2024?

And I know that they were running low single digits. I think they're on a track towards mid singles plus. And then just maybe talk about the cost savings you've got coming through on both the on both programs. You've disclosed the total impact in 2025, but just curious where those lands between equipment services and perhaps corporate? Thanks.

Yes. So on mod margins, as we said, we now 4 quarters in a row full year, we surpassed new equipment margins, Nigel, which so obviously higher than the new equipment annual margin for 24%. So a little above mid single heading towards high, which has been our objective. And again, heading towards double digit and our teams responded well. Again, all part of our strategy to not just drive mod revenue, but then have that mod feedback into the portfolio.

Yes. On the savings, so in 2025, we are expecting to generate $20,000,000 in China coming from the transformation program. This is going to be all in new equipment and will help to compensate the headwinds that we see in the price from the backlog. And uplift will be we have raised the total program target. It's going to be €200,000,000 now.

We exited 2024 with €120,000,000 run rate, and we expect around €70,000,000 in GR savings in 2025. Approximately 65% of that will be in service, 35% remaining in new equipment with a very small piece in corporate. And when you look at our service growth in the guide, it's approximately CHF 180,000,000 BTY And out of that, you deduct the €40,000,000 coming from the uplift savings, you can see that there is still a very positive growth coming from operational performance.

Okay. Thanks, Kristine. Maybe just as well, if you just kind of talk about the $250,000,000 of restructuring that I think is sort of the total bucket that's on Page 26. Just wanted to understand that's a big number. Just wanted to understand that.

But maybe could you just maybe just expand on the service guides? The 24.5 exit rates in 4Q, we normally have richer margins in the second half of the year. So just wondering how we think about service margin expansion in the first half of the year just because I think the comps are quite tough there.

Yes. So with restructuring, we are guiding approximately EUR 250,000,000. It's a big number because we are finalizing the uplift program. So we will achieve the EUR 200,000,000 run rate by the end of 2025. Year to date, end of 2024, we have spent approximately €140,000,000 restructuring.

So the remaining up to the €300,000,000 cost to achieve in the program are to be spent in 2025. And in addition to that, you have the €40,000,000 restructuring from the China transformation. So it's going to be a very intense year in terms of restructuring in order to end up the year in a very good position from our cost base with all of the costs we are going to move out.

Yes. And we think Nigel this aligns nicely. I've called this the year of transformation for Otis in 2025. We've been in uplift. We've done the process definition.

We've done the organization design. We've implemented and announced and now we're making it happen across the globe in 2025. We're moving to our global business services activity as well. So there's cost to be had, but we're going to go through this transformation and simultaneously deliver with excellence operationally as you see with the margin expansion driven off our service business and following our strategy. Where we think that puts us is in a really stronger position for 2026 when this is all run rate behind we have the run rate benefit, but more importantly, we're focused on our customers.

And we've seen, it's been a nice bounce back in North America, actually all of the Americas in terms of orders in our EMEA business, couldn't be more pleased. We are outperforming the market even in Northern Europe, but we are outperforming the market, not just in orders, but in our revenue and across the board. And our Asia Pacific business just had a fantastic 2024 in every metric possible. So as the markets come nicely, as we kind of get to second half of 2025 and 2026, Otis is positioned. We've got the cost structure we want, we got the customer centricity we want, we have the workforce we want, which is why we made that investment.

We have the strategy to execute. And I really think it's setting up nicely for later 2025 and 2016.

The next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Maybe first just wanted to follow-up. I think, Christina, you talked about flattish sort of EPS in the first half and then a stronger second half. So just wanted to follow-up on that. Is the driver there in the first half kind of organic sales flat to up slightly just because of the new equipment declines and then operating margins up very slightly just because you have that new equipment margin decline being pretty steep.

And then I guess FX is a bigger first half headwind than second half. Kind of maybe just flesh out that a little bit, please.

Yes. So yes, it's broadly as you have described. So service is going to be very level loaded. Service will continue growing on the top line, mid single digit on the back of the portfolio growth plus modernization execution, and the margin expansion is also going to come gradually. On the other side, new equipment, first half of the year is going to be challenged.

You recall that it's not only the exiting portfolio, we also have a tougher compare because, for example, Americas started increasing orders in the second half of the year. So it's going to be a period until we execute this lower backlog and we also reflect the impacts from price. And in the second half of the year, we expect the flow through of all of the transformation initiatives into margins. That's why EPS is broadly flat in the first half and a strong increase in the second half. And FX is also going to impact because of a tougher compare in the first half of the year.

Yes. And as we shared the FX spot rates, it was the best we know to start the year. We shared that with you. We put that on the chart. We will update you every quarter.

Otis Worldwide (OTIS) Q4 2024 Earnings Call Transcript

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