Release Date: January 29, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Otis Worldwide Corp (OTIS, Financial) achieved organic sales growth of 1.9% in the fourth quarter, driven by a strong performance in the service segment, which grew 7.8%.
- The company reported its highest quarterly adjusted free cash flow since its spin-off, amounting to $682 million, driven by excellent collections and a reduction in networking capital.
- Modernization orders grew 18% in the fourth quarter, with a backlog increase of 13% at constant currency, positioning the company well for future growth.
- Otis Worldwide Corp (OTIS) received a gold rating from EcoVadis for the third consecutive year, highlighting its commitment to ESG initiatives.
- The company expanded its maintenance portfolio by more than 4% for the third consecutive year, reaching approximately 2.4 million units, leading the industry.
Negative Points
- New equipment orders declined 4% in the fourth quarter, primarily due to challenging market conditions in China, where orders fell more than 20%.
- The new equipment backlog at constant currency was down 4% compared to the previous year, with a significant decline in China impacting overall performance.
- Despite strong service performance, new equipment organic sales were down 6.8% in the quarter, with China experiencing a decline of over 20%.
- The company faces continued macroeconomic headwinds in the new equipment market, particularly in China, which is expected to decline approximately 10% in 2025.
- Otis Worldwide Corp (OTIS) anticipates a challenging first half of 2025 for new equipment, with expected declines in the Americas due to a lower backlog and market pressures.
Q & A Highlights
Q: Can you expand on the China cost initiatives and the opportunity for savings?
A: Judith Marks, CEO, explained that Otis is restructuring its business in China to pivot towards a service-oriented model due to market maturity. The company announced changes in early January and expects to achieve a $30 million run rate in cost savings by year-end. Cristina Mendez, CFO, added that the savings are primarily in new equipment, with a focus on rightsizing the organization and investing in service growth.
Q: What caused the sequential decline in service margins in Q4, and how do you see this moving forward?
A: Judith Marks noted that Otis made a significant investment in its service workforce, adding 2,000 field mechanics, which impacted margins. This investment is crucial for future growth in service and modernization. Cristina Mendez added that the decline is seasonal, with Q4 margins still showing a 50 basis point improvement year-over-year.
Q: How is Otis addressing the challenges in the new equipment market in China, and what is the outlook for 2025?
A: Judith Marks stated that Otis is adapting to a more mature market environment in China by focusing on service and modernization. The company expects the new equipment market to stabilize between 350,000 and 400,000 units by late 2025. Cristina Mendez added that Otis is targeting cost savings and efficiency improvements to offset pricing pressures.
Q: Can you discuss the growth expectations for modernization (MOD) and its impact on service margins?
A: Cristina Mendez explained that Otis expects high single-digit growth in MOD, with margins improving due to standardization and efficiencies. While MOD margins are lower than maintenance and repair, they are increasing and have surpassed new equipment margins. The focus is on executing the strong backlog and ramping up resources.
Q: What is the strategy for improving service portfolio growth and retention rates?
A: Judith Marks highlighted that Otis is using data to enhance portfolio quality and profitability. The company is focused on conversions and recaptures, with a net neutral churn rate. The strategy includes growing the service portfolio through targeted conversions and improving retention by ensuring high-quality service delivery.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
