The paragraph is from Otis' Fourth Quarter 2024 Earnings Conference Call. It begins with an introduction by the operator and is followed by Rob Quartaro, the Vice President of Investor Relations. He introduces key company figures, Judy Marks and Cristina Mendez. The discussion focuses on Otis' financial results from continuing operations, excluding restructuring and significant one-time items, with a caution about forward-looking statements. Judy Marks then expresses gratitude for the dedication of Otis' global colleagues, highlights strong results for the fourth quarter and full year of 2024, and emphasizes optimistic momentum for 2025. She notes a 1.9% organic sales growth in the quarter, primarily driven by a robust 7.8% growth in their Service sector, including Maintenance, Repair, and Modernization.

The company experienced significant growth in its Maintenance portfolio, reaching approximately 2.4 million units and maintaining leadership in the industry. Modernization efforts were particularly successful, with a 13% increase in backlog and an 18% rise in orders, positioning the company well for future growth. The company generated $682 million in adjusted free cash flow, largely due to strong collections and reduced net working capital. The UpLift program contributed to increased cost savings expectations of $200 million by late 2025. The company also focused on transitioning its China business away from new equipment towards Service and Modernization. Progress on ESG initiatives was affirmed by receiving a gold rating from EcoVadis for the third consecutive year. The company achieved organic sales growth for the fourth year, with a 50 basis point expansion in operating profit margin. Despite industry challenges, the company maintained a 20% share in new equipment.

The paragraph highlights the company's financial performance and order trends for the year 2024. Adjusted EPS grew by 8.2%, and the company generated $1.6 billion in adjusted free cash flow, which was returned to shareholders through dividends and share repurchases. The New Equipment orders declined 4% mainly due to challenges in China, though excluding China, orders increased by 11%. The Americas and Asia Pacific regions saw significant growth in orders, while EMEA experienced a decline but ended the year positively. China's orders decreased substantially, but the Modernization segment showed a strong recovery with 18% growth, particularly in China. The New Equipment backlog decreased overall, while the Modernization backlog rose by 13%. The company's Service portfolio grew by 4.2%, consolidating its leading global position, with all regions contributing positively to growth.

The paragraph discusses the company's global growth and strategies, including maintaining net churn at zero for the third consecutive year and reaching around 1 million connected units by the end of 2024. The company is focusing on innovation to meet market demands, such as launching the Gen3 elevator platform in Asia Pacific and enhancing its Public Escalator globally. Modernization of older units offers significant growth opportunities, with 8 million of the 22 million installed units ready for upgrades. Research and development remain stable, supporting innovation and project wins. Notable projects include installing 142 units for the Mexican Social Security Institute and 21 units in Hyderabad's Trilight Towers.

The paragraph discusses Otis's recent projects and financial performance. Otis India will use the Otis Compass 360 system in a residential project with towers up to 60 floors. In China, Otis will modernize over 120 units, including moving walkways and elevators at Xi'an Airport and escalators in Wuhan's Metro Line 2. In the UK, Otis will install elevators at the Ellison Institute of Technology's Oxford campus. Financially, Otis reported $3.7 billion in net sales for the fourth quarter, with a 1.9% increase in organic sales and a $22 million increase in adjusted operating profit, mainly driven by the Service segment. The adjusted EPS grew by 7%. The segment sales performance indicated a 7.8% growth in Service sales, but a decline in New Equipment sales, particularly in China due to a lower backlog and strict credit controls. However, other regions like India, Spain, and Latin America showed growth.

In the best performing quarter of the year, service organic sales increased by 7.8% with growth across all regions and business lines. Maintenance and Repair sales rose by 5.6% due to strategic pricing and portfolio growth, while Repair volumes grew by approximately 10% and Modernization sales accelerated by 18%, particularly in the Asia Pacific region. Segment operating profit saw New Equipment operating profit fall by $24 million, impacted by lower volumes and product mix, though partially offset by productivity improvements. Operating profit margins were consistent, ending the year with a 6.1% margin for New Equipment. Service operating profit increased by $54 million to $569 million, driven by higher volume, favorable pricing, and productivity, despite wage inflation. Service operating profit accounted for 93% of the overall profit, up from 89% the previous year. Adjusted EPS for the year grew by $0.29 or 8.2%, supported by strong service performance.

In 2024, the company saw a decline in its adjusted effective tax rate to 24.8% due to optimized tax strategies, which, along with reduced share count, offset increased interest expenses. They ended the year with strong cash flow and improved working capital, largely from excellent collections. Despite challenges in China's new equipment market, the company achieved high single-digit EPS growth through its service-driven business model. Looking ahead to 2025, the Americas are expected to see low-single-digit market growth, while EMEA's market, though still in decline, will see moderated reductions. The Asian market is down, driven by a significant drop in China, though partially mitigated by growth in Asia Pacific.

The paragraph outlines expectations for the 2025 market, projecting a 10% decline in China, but stabilization later that year. Growth is anticipated in the Asia Pacific region driven by India and Southeast Asia, while Korea and Japan may see declines or flat performance. The global New Equipment market is expected to decrease mid-single-digits in units, offset by growth in the Americas, Asia Pacific, and EMEA. Service growth is expected to continue, reaching around 23 million units globally. Financially, net sales are projected to reach $14.1 to $14.4 billion, with adjusted operating profit of $2.4 to $2.5 billion, and adjusted EPS between $4 to $4.10. Adjusted free cash flow is estimated at $1.6 billion, with plans to repurchase $800 million in shares, increase dividend payouts, and pursue $100 million in M&A. The market in China has seen significant changes over recent years.

After over 20 years of high growth, the market is transitioning into a strong but mature stage. The company anticipated this shift and adjusted its business model to focus on deriving value from long-term customer relationships, emphasizing Maintenance, Repair, and Modernization (MRM) sales. China's construction boom resulted in a large installed base, comprising 40% of global units, which now requires regular maintenance and presents a growing modernization opportunity. The company is transforming its China operations to capitalize on this, aiming to grow its service portfolio, supported by investments in its service business and engagement with its distributor network. The goal is to achieve high annual growth in service and modernization orders. Meanwhile, the new equipment market, after years of rapid growth, is expected to stabilize following a decrease in units.

The company is restructuring its operations in China by consolidating brands to boost efficiency and achieve cost savings, projecting $20 million savings in 2025 and a $30 million annual run rate thereafter. Alongside their successful UpLift program, which unlocked $70 million in savings projected to reach a $200 million run rate by late 2025, the company aims for $90 million savings in 2025 with a $230 million run rate. These initiatives are intended to drive growth in the Chinese market, viewed as a significant service sector, despite an expected decline in new equipment sales in China. Overall, organic sales are poised to rise by 2% to 4%, with expansion in the Asia Pacific mitigating declines elsewhere.

The paragraph discusses the anticipated financial performance and strategic focus of a company. In the EMEA region, sales are expected to grow in the low to mid-single digits, with organic sales in the Service sector projected to increase by 6% to 7%. Maintenance and Repair are expected to grow in the mid-single digits, and Modernization up in the high-single digits. Since the company’s spin-off, it has consistently achieved profit growth, expanding operating profit margins by 220 basis points. The company plans to focus on expanding its Maintenance portfolio, leveraging its Modernization backlog, and enhancing productivity through initiatives like UpLift and the China transformation. In 2025, the company expects margins to expand by 60 basis points, leading to $120 million to $150 million growth at constant currency. Adjusted EPS is projected to be between $4 and $4.10, with operational performance contributing to growth and mitigations offsetting foreign exchange and interest rate headwinds.

The company is projecting high-single-digit adjusted EPS growth year-over-year, with EPS expected to be flat in the first half of the year and stronger growth anticipated in the second half. This growth is driven by their Modernization backlog, cost savings from the UpLift and China transformation initiatives, and positive trends in China and Americas New Equipment. Maintenance and Repair are expected to remain steady throughout the year, highlighting their Service business's strength. For 2025, the company anticipates strong profit growth, guided by a 6% increase in adjusted operating profit and a 60 basis point margin expansion. They forecast approximately $1.6 billion in adjusted free cash flow, facilitating $800 million in share repurchases and a 40% dividend payout. There is a focus on cost initiatives in China, particularly in New Equipment, with targeted savings around 2% of the New Equipment revenue pool, estimated at $2 billion. The company is committed to customer service, growth, and long-term shareholder value.

In the paragraph, Judy Marks discusses Otis's strategic shift toward becoming a more service-oriented business, particularly in China, where they are adapting to structural changes and aiming to increase their market presence in a mature market. They have achieved a mid-teens growth in their portfolio for 13 consecutive quarters, ending with 435,000 units, which reflects significant growth since their spin-off. They are focusing on investing in mechanics and necessary skills to succeed in both the Service and the growing Modernization (Mod) business, where recent orders have been strong, notably with China Mod orders doubling in the fourth quarter. Marks also mentions leveraging refurbishment stimulus to capture market share, while Cristina Mendez adds that the $30 million run rate will primarily impact the New Equipment side. Overall, the organization is working on tuning operations, reducing costs, and driving a market-driven approach.

The paragraph discusses the company's strategic plans and expectations for its operations in China, particularly focusing on New Equipment and Service segments. They anticipate a stabilization in the new equipment market by the end of 2025, but with pressured margins due to a lower backlog and reduced pricing from 2024. To adapt, they plan to right-size the organization, targeting $20 million in savings, primarily through cost reductions and real estate cuts. Simultaneously, they see vast opportunities in their Service segment, which constituted a third of China's revenues in 2024. With a small market share, they aim to expand by consolidating teams and brands to improve service coverage, optimizing their portfolio, and enhancing their distribution networks to boost modernization growth. Joseph O'Dea asks about fourth-quarter service margins, which were below expectations, and Judy Marks mentions their focus on investing in the Service flywheel.

The paragraph discusses an increase in the number of field mechanics and professionals in 2024, adding 2,000 to the existing workforce for a total of 44,000. This 5% increase aims to prevent a future labor shortfall and support growth in both service and modernization, despite a learning curve for newcomers. There was some underestimation of productivity from these additions, impacting costs but deemed a crucial long-term investment. Sales in modernization grew by 18% in Q4, contributing to a 50 basis point increase in service margin rates compared to 2023. The discussion concludes with a Q&A, where Rob Wertheimer asks about productivity trends among the current workforce.

In the paragraph, Judy Marks discusses the challenges in the construction market related to workforce, highlighting the need for skilled labor due to an aging workforce. To address these challenges, the company has invested in workforce development globally, recruiting apprentices and skilled workers from other companies to meet immediate maintenance and repair needs. This investment is seen as necessary for growing their service portfolio and maintaining equipment like elevators and escalators. Although this has impacted service margins in the short term, Marks views it as essential for long-term success and meeting customer needs. The company has grown to 72,000 employees, with a focus on reducing indirect headcount and ensuring they are well-positioned for future growth.

Amit Mehrotra asks Judy Marks about the impact on New Equipment margins as the company transitions more towards Service, particularly given the challenges in the China market. Judy Marks responds by acknowledging the significance of China in Otis's revenue, noting it accounted for 13% of total revenue and highlighting past profitability despite a more competitive and deflationary market. She emphasizes efforts to reduce costs and improve productivity, particularly through modularization and modernization packages. By expanding their Service portfolio and enhancing recapture efforts, Otis aims to boost profitability in China.

The paragraph discusses the importance of building service density to drive profit margins, specifically focusing on the Chinese market. The company has been improving its service portfolio growth and aims to capture and convert units strategically to enhance service margins in China, which have traditionally been low due to a lack of density. There is an emphasis on the modernization (Mod) segment, which now exceeds new equipment margins globally, with expectations for continued growth and improvement to double-digit margins over the medium term. Amit Mehrotra asks Cristina Mendez about modernization growth expectations and its impact on service margins, and Cristina confirms his understanding.

The paragraph discusses a conservative approach to guiding resource allocation to handle a strong backlog, aiming for high-single-digit growth. There is a focus on increasing modernization margins within the service sector compared to repair and maintenance, noting that modernization had surpassed new equipment margins earlier in the year. The trend of growing modernization margins continues, contributing positively in dollar terms despite being a headwind for service margin rates. Nigel Coe from Wolfe Research inquires about expectations for modernization margins in 2025 versus 2024 and cost savings across programs, mentioning their improvement from low to mid-single-digit figures. Judy Marks confirms that modernization margins have surpassed new equipment margins for the year, indicating continued improvement.

The paragraph discusses a financial strategy and projections. Cristina Mendez reports that by 2025, a transformation program in China is expected to generate $20 million in the New Equipment sector to counteract pricing headwinds. The UpLift program's target has been increased to $200 million, with a $120 million run rate anticipated by the end of 2024 and $70 million in savings expected in 2025, primarily in the Service sector. Despite these savings, positive growth from operational performance is expected. Nigel Coe inquires about a $250 million restructuring target mentioned on Page 26, related to completing the UpLift program. By the end of 2024, approximately $140 million has been spent on restructuring, setting the stage for a $200 million run rate by 2025.

In 2025, Otis plans a major transformation involving a cost restructure of up to $300 million and an additional $40 million from China-related changes. Judy Marks describes 2025 as a pivotal year for the company, marking the culmination of their UpLift program and transition to Global Business Services. This transformation aims to streamline costs while maintaining operational excellence, particularly in their Service business, setting up for stronger performance in 2026. Otis has seen positive market responses, especially in the Americas and Asia Pacific, and expects to have an optimized cost structure, improve customer focus, and a strong workforce in place to execute their strategy effectively.

In this exchange, Julian Mitchell from Barclays seeks clarification on the company's projected earnings performance for the year. Cristina Mendez responds that the first half of the year will see flat to slightly increasing organic sales due to challenges in the New Equipment segment and slight operating margin improvements. Service sales and margins are expected to grow steadily throughout the year, driven by portfolio growth and modernization efforts. New Equipment sales will face hurdles in the first half due to lower backlog and tougher comparatives from the previous year but will improve in the second half as transformation initiatives take effect, leading to a stronger EPS growth. Foreign exchange (FX) rates will also impact the first half more significantly. Judy Marks adds that they will update currency impacts quarterly, noting the significant portion of revenue in non-US currencies.

In the conversation, Julian Mitchell asks Judy Marks about the outlook for the New Equipment backlog, particularly regarding China, the Americas, and EMEA (Europe, the Middle East, and Africa). Judy Marks notes that the New Equipment backlog decreased by 4%, with the Americas seeing strong revenue despite a mid-single-digit backlog decline. EMEA shows a solid increase in backlog, and Asia Pacific is up by low teens. Marks acknowledges a mixed backlog situation with China's decline. However, there's optimism about market segments growth in three of the four markets. She also mentions assumptions about China's stabilization later in the year, which may relate to property developer interactions or potential stimulus measures.

The paragraph discusses the current state and challenges of local economic ownership in China, particularly in relation to stimulus activities that occurred in 2024 but have yet to influence buyer sentiment significantly. With the Chinese New Year and Lunar holiday underway, there is cautious optimism about reaching a stable foundation in the real estate market. Additionally, during a conference call, Jeffrey Sprague asks Judy Marks about China's service conversion rates, noting that China's conversion rate is 51% compared to 66% globally and approximately 90% in other countries. Judy acknowledges the difference and mentions efforts to improve conversion efficiency and effectiveness in China.

The paragraph discusses the integration and technology upgrades in Otis's China portfolio, using Otis ONE to enhance customer retention during and after the warranty period. It also addresses the slight decline in retention rates, attributing it partly to challenges in China and involuntary customer losses. The focus is on leveraging data for a more profitable service portfolio rather than merely increasing retention rates, despite some customers choosing to leave for various reasons.

The paragraph discusses a conversation involving Judy Marks, Cristina Mendez, and Jeffrey Sprague regarding the company's strategies and outlooks. They aim to maintain a high-quality portfolio and achieve net neutral churn, despite a declining retention rate, with expectations of the retention rate increasing again. Cristina Mendez mentions expectations for New Equipment pricing in China by 2025, indicating a neutral effect of price with cost, and Judy Marks explains that they are securing commodities globally, particularly in China's deflationary environment. The conversation briefly touches on New Equipment orders, highlighting a 15% difference in total orders when excluding China, shifting from a negative 4% to a positive 11%. Steve Tusa from JPMorgan seeks clarification on the orders percentage related to China from the previous year.

The paragraph is a conversation between Steve Tusa and Judy Marks discussing the decline in China's orders for a specific business segment. Steve Tusa suggests that China's orders are down significantly, possibly by over 50%, while Judy Marks indicates that the decline isn't as severe but still substantial. They discuss the impact of this decline on their backlog and profitability, noting that while China isn't a major profit source anymore, the declines are significant. Marks explains their traditional business model in China, including backlog and book-and-ship dynamics, and notes that the expected decline for the New Equipment segment in China is about 10%, projecting the market to stabilize between 350,000 and 400,000 units. Marks acknowledges that visibility on future performance is lower, similar to last year, and notes that the anticipated declines were worse in the previous year's fourth quarter, with no significant impact from stimulus measures.

The paragraph is a discussion between Chris Snyder from Morgan Stanley and Judy Marks about the performance of the Americas business in terms of order growth. Chris Snyder asks if the growth was primarily due to comparison with past performance or if there was actual growth in absolute terms. Judy Marks explains that despite a downturn due to economic conditions, like rising interest rates and developers' hesitance to make decisions, there has been a positive trend in new equipment orders, particularly in the latter half of the year. Cristina Mendez adds that there has been sequential growth in absolute dollars for new equipment orders throughout 2024, with a notable increase in the fourth quarter compared to the third.

The paragraph discusses the dynamics of a construction business, highlighting positive indicators such as the Dodge Construction Index and strong proposal activity. Despite a lower forecast for 2025, the company had a strong revenue year in 2024 and plans to refill its backlog. Challenges exist due to permitting and longer revenue recognition timelines. A discussion with Nick Housden from RBC follows, focusing on the breakdown of 4.2% growth in the installed base. Judy Marks explains the role of modernization conversions, distinguishing between on-portfolio and off-portfolio modernizations, with on-portfolio being less competitive due to established customer relationships.

In the paragraph, the speaker discusses the company's approach to Modernization (Mod) in their portfolio. They differentiate between Mod efforts that are part of existing customer retention and those that add new business to the portfolio. The company has strategically prioritized Mod across all aspects, from sales to manufacturing, and aims to enhance their supply chain for savings and growth. Initially, most of their growth in Mod is through service conversion, recapture, and retention, with a small portion coming from new Mod opportunities. They expect significant growth in the off-portfolio Mod space over time and will provide updates on this progress. Miguel Borrega then asks about the competitive landscape of the Mod market in China and if similar price pressures will be experienced as with new equipment.

The paragraph discusses the strategic advantage of having control over a customer relationship and portfolio in order to secure sole source contracts for modernization projects, particularly in China. It highlights that the lack of independent service providers (ISPs) in China's large and growing service market means less competition for modernization work, which requires more construction skills than regular maintenance. The speaker notes efforts to integrate modernization into new equipment production to benefit from economies of scale, aiming to expand the service portfolio rapidly in China and secure favorable pricing.

The paragraph discusses Otis's plans in China where they will deploy efficient installation teams for cost-effective operations, leveraging strategies that were successful in New Equipment installations. Judy Marks highlights 2024 as a strong year for Otis in terms of service and strategy, expressing confidence for 2025. The conference call ends with her thanking the participants.

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