The speaker, Michael Rednor, welcomes listeners to Otis' third quarter 2023 earnings conference call. He introduces the presenters, Judy Marks and Anurag Maheshwari, and reminds listeners that the presentation contains forward-looking statements. Judy Marks then highlights Otis' strong results in the third quarter, including organic sales growth, operating profit margin expansion, and adjusted EPS growth. She also mentions the company's consistent execution and strong strategy, as well as growth in maintenance portfolio and backlog.

In the third quarter, Otis announced the launch of their Gen 3 core elevator in North America and achieved a gold rating from EcoVadis for their ESG efforts. They were also recognized by Newsweek as one of the world's most trustworthy and greenest companies. Customer highlights include providing elevators for a mixed-use development in British Columbia, improving accessibility in Hong Kong, modernizing elevators at a bank headquarters in Saudi Arabia, and maintaining elevators at Shanghai's Pudong Airport.

In the third quarter, we announced our uplift program and began executing initiatives to gain scale, standardize processes, and optimize spending. These efforts will result in $150 million in savings by mid-year 2025. Organic sales grew 5.2%, with service up 8.4% and new equipment up 1%. Our share remained flat, but we have gained approximately 50 basis points year-to-date. Modernization orders were strong, up 13%, and backlog increased by 15%. We expanded margins by 60 basis points and generated $272 million in free cash flow.

Despite facing a weaker macro environment, we successfully executed our strategy and saw growth in our portfolio, new equipment and Mod backlogs, leading to a strong base for the next few quarters. However, we anticipate a decline in global new equipment bookings of approximately 10% due to challenges in the macro environment. On the other hand, we expect the service installed base to grow by 5% this year. As a result, we project organic sales growth of 5.5% and adjusted operating profit of $2.265 billion at constant currency.

In the third quarter, the company's adjusted operating profit is expected to increase by $140 million, with adjusted EPS expected to be $3.52, up 11% from the previous year. Free cash flow is expected to be $1.5 billion, with share repurchases of $800 million. Net sales grew 5.4%, with organic sales up 5.2%. Adjusted operating profit increased by $52 million, with margins expanding 60 basis points. Adjusted EPS increased by 19%, with over half of the improvement coming from strong operational performance. Free cash flow was $272 million, up $57 million from the previous year. New equipment orders declined 10% at constant currency.

The company's new equipment backlog increased globally, with strong growth in Asia Pacific and stable numbers in other regions. Pricing on new equipment orders also improved, except in China where it was down due to macro challenges. New equipment sales and operating profit increased, driven by productivity and pricing. In the service segment, maintenance units and modernization orders grew in all regions, with particularly strong growth in China.

In the Asia-Pacific region, Otis experienced double-digit growth due to volume and major project wins, with North Asia performing particularly well. In EMEA, Mod orders grew 10% thanks to major project wins. The company's Mod backlog increased by 15% across all regions. Service revenue exceeded expectations, with all lines of business contributing to organic sales growth of 8.4%. The service adjusted operating profit margin also expanded by 90 basis points. Overall, Otis is pleased with their results in the quarter and year-to-date. The company has revised its outlook, with a projected 5.5% increase in organic sales and $170 million in adjusted operating profit growth at constant currency. However, the company expects a slightly higher foreign exchange headwind due to changes in the euro and weakening Asian currencies.

The company's margin expectations remain unchanged, with service margins expected to expand 50 basis points and new equipment margins expected to expand 20 basis points. Operating margins are expected to increase by 30 basis points. Adjusted EPS is expected to increase by 11%, with $0.04 more than the previous guidance. The company expects to generate $1.5 billion in free cash flow and return it to shareholders through dividends and share repurchases. Organic sales growth is expected to be 3% for new equipment and 7.5% for service. Adjusted EPS is expected to increase by 11%, with $0.30 of operational improvement. Despite an uncertain economic environment, the company is executing well and experiencing profitable growth.

The company is confident in their strong performance so far this year and has raised their EPS outlook for the fourth quarter. They are also well-positioned for future success. During a Q&A session, the company discussed their outlook for new equipment markets in the Americas and China, stating that the Americas market is expected to decrease due to high interest rates, but they have a strong backlog and good line of sight for the next 12-18 months.

The writer discusses the potential for the current housing market to become the new normal and believes that people will adjust to the changes. They mention that there has not been a decline in interest or proposals for new projects, but developers need to have conviction to start them. The Chinese market for new equipment remains weak, but the company's team has been successful in offsetting this through maintenance and material productivity. They have also picked up share in China and have seen growth in their service sector. Despite China's decline, the company's other regions have helped maintain margins and organic growth.

The speaker discusses the impact of stimulus measures and the launch of a new program on company results. They also mention weakness in global markets and potential product cancellations due to rising interest rates. In terms of China, they note a decrease in pricing and express concern about potential further deterioration in the market.

In this paragraph, Judy Marks and Anurag Maheshwari discuss the impact of project cancellations and China's market on revenue and margins for their company. They state that project cancellations are not unusual and that China now represents 17% of their global revenue. They also mention that the company has seen positive or neutral price costs in China and have been able to offset the decline in China's market with material productivity and pricing discipline. They expect the new equipment margin to be around 7% in the fourth quarter, despite the decline in China.

The company has seen an increase in pricing and a tailwind in commodities, which should make up for the China mix and result in a sustainable margin rate. They are not yet able to provide guidance for cost savings and restructuring for 2024, but the program is off to a good start. The restructuring cost is expected to be $150 million, with savings starting next year.

Anurag Maheshwari, responding to a question about the global new equipment revenue outlook, stated that their backlog is currently up 2% and they expect it to be flattish to slightly up by the end of the year. He also mentioned that the backlog for America's, Europe, and Asia Pacific is up low to mid-single-digit, which represents two-thirds of their new equipment revenue. However, the biggest variable is China, which currently has a backlog down low-single-digit and could potentially go down mid-single-digit by the end of the year. Maheshwari predicts that if the market in China goes down next year, their new equipment revenue could be flattish.

The speaker discusses the potential revenue and profit impact of a 2-3% change in new equipment sales. They mention the strong performance of the service business and anticipate being able to make up any potential losses through that sector in the following year. The listener asks about the service margins and the speaker explains that the guide implies a 24% margin for the fourth quarter, which is down slightly from the previous year but still a healthy rate. They attribute the difference to a change in mix and point out the strong performance in the third quarter.

The speaker discusses the company's portfolio growth, pricing, backlog, and repair business. They mention the team's strategy of penetrating more of the portfolio and the impact on margins. They also address wage inflation and their ability to offset it with productivity and price increases. The speaker expresses confidence in their service pricing for the next year and their negotiations with collective bargaining.

Anurag Maheshwari from the company is answering questions from Joe O'Dea from Wells Fargo. Joe asks about the backlog and how much revenue the company has visibility into for the next 12 months, specifically in America, Europe, and China. Anurag explains that the backlog is significantly more than 12-month revenue and that they have high visibility for America and Europe, with about 80-90% of revenue coming from backlog. Asia-Pacific Ex-China also has a healthy backlog, while China has a higher book-and-ship mix. Anurag estimates that two-thirds of revenue in China will come from backlog and one-third from book-and-ship. Joe also asks about China's unit volumes, but Anurag does not provide a specific answer.

Judy Marks, CEO of Otis, discusses the current state of the Chinese market and how it compares to previous years. She notes that the market has been declining for the past two years, but it is still a healthy market with 450,000 units sold. Otis has gained market share in China and is focusing on key accounts and Tier 1 cities. An analyst asks for clarification on the difference between Otis' performance and a competitor's recent large orders in China.

Judy Marks, CEO of Otis, explains that orders and share are both lumpy and difficult to measure on a quarterly basis. However, the China team has been executing their strategy well, driving growth in all lines of business, especially in service. The modernization business in China has grown double-digits this year, and the company is focusing on optimizing costs and increasing their portfolio of units. They are on track to end the year with 2.3 million units in their portfolio, a significant increase from before they spun.

The speaker discusses the strong performance of the service-driven growth strategy and the potential for further growth in the $21-22 million segment. They also mention a tweak in cash flow due to lower down payments and a growing repair business. The speaker assures customers that repairs will be completed and bills will be collected. There is also mention of volatility in the multifamily market in the U.S., which had a negative impact on the company's performance in the past quarter.

The developers in the housing market are slowing down their projects due to the decrease in demand and record high prices. However, there is still demand for housing and the backlog for projects in North America is strong. The company is confident in their ability to generate cash flow and does not anticipate a need to reset their targets. The company also expects to see an increase in cash flow as they execute on high backlogs and convert repair revenue. There is no need to reset targets for cash conversion despite lower orders. The competitive dynamics in the modernization sector are not expected to affect the company's cash flow targets.

Judy Marks, CEO of Otis Elevator, confirms that the company's modernization efforts in China often involve units from competitors, but it is difficult to determine which specific competitors. Otis has developed innovative packages to update and convert these units into their own portfolio. Anurag Maheshwari, Otis' CFO, explains that escalator business next year is expected to be comparable to this year, with high inflation rates in Europe being a major factor.

The speaker discusses the company's contracts, which are currently being negotiated and linked to an index. They anticipate a mid-single-digit price increase in Europe and a similar trend in America due to inflation. The rest of Asia will see a low to mid-single-digit increase, while China has more price discipline. This, along with portfolio growth, should result in a mid-single-digit plus growth in the maintenance business. The speaker also mentions that the company will share statistics on churn and service renewals in the next quarter. The company's service-driven business model has been successful, with 2.3 million units in their portfolio by year-end and a focus on creating value for shareholders.

This summary was generated with AI and may contain some inaccuracies.