Otis Worldwide Corp Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Achieved organic sales growth of 1.9% in Q4, driven by Service growth (7.8%) with Maintenance up over 4% for 3 consecutive years (portfolio ~2.4 million units) and Modernization orders up 18% in Q4, backlog up 13% at constant currency.
• Generated $682 million adjusted free cash flow in Q4 (highest since spin), cash generation from excellent collections and net working capital reduction. UpLift program expected to save $200 million annually by H2 2025.
• Announced transformation of China business to focus on Service and Modernization. Received EcoVadis gold rating for 3rd year in a row.
• 2024: Organic sales growth for 4th consecutive year since spin, 50 basis points adjusted operating profit margin expansion, maintained new equipment share at 20%, adjusted EPS up 8.2%, $1.6B adjusted free cash flow, returned $1.6B to shareholders.
• Orders: New Equipment orders down 4% in Q4 (down >20% in China, up ~11% ex-China); Service portfolio grew 4.2%, ~2.4 million units globally.

Segment Performance

• New Equipment: Organic sales down 6.8% in the quarter. Operating profit $64 million, down $24 million at constant currency, margin 4.7%. Full-year New Equipment operating profit down $44 million at constant currency, margin 6.1% (50 basis points lower than prior year).
• Service: Organic sales up 7.8% in the quarter. Operating profit $569 million, increased $54 million at constant currency. Margin 24.5% in the quarter and 24.6% for the full year, accounting for 93% of overall operating profit in 2024 (up from 89% in 2023).

Guidance

• 2025 net sales expected $14.1B-$14.4B (2%-4% organic growth, -1% to +1% actual currency).
• Adjusted operating profit expected $2.4B-$2.5B (up $55M-$105M actual currency, $120M-$150M excluding FX).
• Adjusted EPS range $4-$4.10 (up 4%-7% or more than 20% vs prior year midpoint).
• Adjusted free cash flow ~$1.6B. Plan to repurchase ~$800M in shares, grow dividend, pursue ~$100M bolt-on M&A.
• New Equipment market: Global down mid-single-digits units in 2025; Service installed base expected ~23M units by year-end.

Risks

• China market softness: New Equipment orders declined >20% in Q4, expected to decline ~10% in 2025.
• New Equipment macro headwinds: Industry faced challenges in 2024, though maintained share at 20%.
• Labor challenges: Investment in field professionals (added 2,000) impacted short-term Service margins but critical for long-term capability.

Question and Answer Q: Expand on China cost initiatives and UpLift savings.

A: Judy and Cristina discussed China transformation to focus on Service and Modernization, targeting $20M in-year savings from New Equipment rightsizing and $70M from UpLift, with UpLift run rate savings to $200M by H2 2025.

Q: Service margin decline in Q4.

A: Judy noted investment in 2,000 field professionals impacted short-term margins but critical for long-term capability.

Q: China New Equipment market impact on margins.

A: Judy and Cristina discussed pivoting to Service and Modernization to improve margins, with Modernization margins exceeding New Equipment globally.

Q: Mod margins and growth.

A: Cristina mentioned Mod growth guidance, with margins exceeding New Equipment and expected to increase further, though Mod growth in guide is conservative due to resource ramp-up.

Q: New Equipment backlog and outlook.

A: Judy discussed New Equipment backlog trends, with Americas, EMEA, AP showing growth offsetting China decline, expecting stabilization in China later in 2025.