Otis Worldwide Corporation 2026 Q3 Earnings Call

Thank you, Sarah. Welcome to Otis's third quarter 2026 earnings conference call. On the call with me today are Judy Marks, Chair, CEO, and President, and Cristina Méndez, 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 forms 10-K and 10-Q, provide details and important factors that could cause actual results to differ materially. Now, I'd like to turn the call over to Judy.

Thank you, Sofya, and we are so pleased to have you joining our Otis team. Good morning, afternoon, and evening, everyone. Thank you for joining us. We hope that everyone listening is safe and well. Starting on slide 3, we delivered a solid third quarter with continued progress across the business, which reflects the steps we're taking to build a stronger foundation for sustained growth. When we take a look at the business, we see healthy demand and strong momentum in service. We also view modernization as one of the most attractive opportunities across our business, supported by our large and aging installed base. For the quarter, organic sales increased 6%, led by 7% growth in service and 3% growth in new equipment. Service operating margins grew 100 basis points sequentially to 24.2%. Maintenance and repair had organic sales growth of 4%, with repair sales up 9% in the quarter.

This builds on the solid trend we've seen over recent quarters. Modernization organic sales were up 20% in the quarter, with orders increasing 10% and backlog growing 20% at constant currency. These results reinforce our confidence that the investments we have been making are fueling continued service momentum and our service flywheel. In new equipment, organic sales increased for the first time since 2023 to 3%. The Americas new equipment organic sales increased 13%, supported by a strong backlog conversion. EMEA and Asia Pacific also delivered strong organic growth, with both regions improving sequentially. Although China remained weak, with new equipment sales decreasing more than 20%, the rate of decline for orders and backlog moderated sequentially to a low teens and a mid-teens rate, respectively.

Overall, new equipment orders grew 1% and 5% excluding China, as demand across the rest of the world remained strong, particularly in the Americas, where orders grew for the ninth consecutive quarter. We remain disciplined in project management and pricing, with a continued focus on maintaining backlog quality. From a cash perspective, adjusted free cash flow reached approximately $272 million in the quarter and $834 million through the first nine months of the year, an increase of 9% compared with the prior year-to-date period. We continued to execute the service investments we announced at the beginning of the year, focused on growing field and pricing capabilities and improving service quality. We are encouraged by the results we are seeing with strong service growth and reaching target levels on service quality, providing early evidence these investments are positioning Otis for future service success.

Beyond our solid financial performance, we continue to advance and deploy our AI-enabled and digital initiatives, reflecting our ongoing commitment to innovation as a tool to improve our business and performance. In service, we are applying technology to help our teams better serve our customers and improve operational execution. For example, our internal data intelligence tool helps identify repair and modernization opportunities, enabling more proactive customer conversations and helping customers address the needs of their equipment. In pricing, our AI-enabled micro-pricing capabilities support more consistent and disciplined pricing decisions. We are also progressing the rollout of field service tools, which are helping us to optimize scheduling, dispatch, and mechanic routes to reduce travel time, improve productivity, and drive greater consistency in service delivery. Collectively, these capabilities will enable us to operate more efficiently, deliver a more consistent experience for our customers, and support continued service growth.

Turning to our orders performance on slide 4. We continued to see healthy orders. Combined new equipment and modernization orders increased 4% driven by Americas and EMEA, while backlog grew 7%, and excluding China, backlog was up 10% at constant currency. New equipment orders increased 1%, up 5% excluding China. We saw strength in the Americas, where orders grew low teens, with North America delivering order growth for the ninth straight quarter. EMEA grew low single digits, led by another strong quarter in Europe, where orders increased low teens, partially offset by the Middle East. Asia Pacific also grew low single digits, while China orders declined low teens, showing a sequential improvement. New equipment backlog increased 4% at constant currency and 8% excluding China. Modernization continued to be the growth driver in this quarter, with orders increasing 10%. Growth was led by China, where modernization orders increased more than 20%.

This continues to reinforce our strategic pivot to service, particularly modernization in China. EMEA delivered mid-teens growth, and Americas grew approximately 10%. Asia Pacific declined mid-single digits due to project timing. Customer demand for modernization solutions remains healthy. We ended the quarter with modernization backlog up 20% at constant currency. This strong backlog provides a good runway for the future and reinforces our confidence in the multiyear modernization opportunity ahead. Our teams around the world continue to improve our execution and delivery, securing customer wins that demonstrate the breadth of our capabilities and the value we are bringing across the entire asset life cycle. As we install, modernize, and maintain equipment, we deepen relationships with customers, expand our service footprint, and create opportunities for long-term recurring revenue growth. For example, in the Americas, we are pleased to expand our longstanding partnership with Rutgers University through our commitment to two significant projects.

We will install six Gen3 elevators and three SkyRise elevators, including our Compass dispatching and EMS Panorama technology at The Helix, a mixed-use healthcare, biotech, and pharma innovation hub in New Brunswick that combines specialized laboratory, commercial, and residential space. We will also modernize six elevators at the Rutgers Stanley S. Bergen Jr. Building in Newark, including new machines, controllers, and doors. Both of these projects use our Otis ONE IoT technology and build on our existing relationship with Rutgers, where we maintain and service more than 420 elevators and escalators across the university's three-campus network. In China, where we continue to lead in high-value infrastructure, we secured both new equipment and modernization contracts with the Wuhan Metro system. For new equipment, we will provide 113 elevators and escalators for Line 11, including 81 of our public escalators, 30 Gen3 elevators, and two freight elevators.

For the modernization project, the largest elevator modernization contract in the Wuhan Metro system's history will modernize 147 elevators across 72 stations using our Gen3 MOD technology. Both orders include our Otis ONE IoT service platform. These contracts build on our successful escalator modernization work completed for the Wuhan Metro system in 2024 and highlight the growing opportunity to upgrade critical transportation infrastructure while improving safety, reliability, and the passenger experience. In the U.K., Otis was selected for the redevelopment of 99 City Road in London. Otis will provide 27 units, including SkyRise, Gen3 Peak, and Gen3 Robusta systems, as well as Compass 360 destination dispatching, EMS Panorama 2.0, and the Otis ONE connected platform. This project demonstrates our ability to deliver integrated mobility solutions for some of the world's most demanding commercial environments.

In Southeast Asia, we are proud to support the modernization of UOB Plaza, a prominent Grade A office tower in Jakarta's central business district. Otis will modernize the building's vertical transportation system with 12 SkyRise elevators, complemented by the Compass 360 destination dispatch system, integrated with third-party facial recognition technology at the turnstiles, and EMS Panorama 2.0 monitoring solutions. The win reflects our strong customer relationships, technical expertise, and collaborative approach with Otis as a trusted partner to enhance building performance, passenger experience, and long-term reliability at one of Jakarta's landmark commercial buildings. Now turning to our third quarter results on slide 5. Otis delivered net sales of $3.9 billion, with organic sales up 6%. The quarter also marked our strongest organic sales growth performance in 13 quarters, driven by continued strength in service and growth in new equipment.

Adjusted operating profit, excluding a $3 million foreign exchange headwind, decreased $3 million in the quarter. Adjusted operating margin contracted by 110 basis points to 16%. Adjusted EPS was flat year-over-year as the benefits from a lower share count and minority interests were offset by a higher tax rate, higher interest, and unfavorable foreign exchange rates. I want to take a moment to mention that this quarter, Otis was honored to be named among TIME's World's Best Companies, and for the fifth consecutive year, recognized as one of Forbes' World's Best Employers. These recognitions reflect the dedication of our amazing colleagues around the world, our steadfast commitment to our customers, and our continued focus on delivering sustainable value for customers, colleagues, shareholders, and the communities we serve. With that, I will turn it over to Cristina to walk through our results in more detail.

Thank you, Judy. Starting with service on slide six. Service organic sales increased 7%, with broad-based growth across all lines of business, reflecting the continued momentum we saw in the first half of the year and the strength of our service-driven business model. Maintenance and repair organic sales grew 4%. Maintenance increased 2%, driven by 3% portfolio growth and 3% pricing, partially offset by mix and churn. Our repair business continued to perform well, delivering high single-digit organic growth. This reflects healthy customer demand across our installed base and traction from our proactive approach to repair, which increases uptime and customer satisfaction. We are pleased to see the flow-through of our micro-pricing strategy in repair, as anticipated, given the backlog entered in the quarter. Modernization remained a significant growth engine.

Modernization sales increased approximately 20%, supported by strong execution and the conversion of a robust backlog entered in the quarter. Service operating profit of $633 million increased $20 million at constant currency, which reinforces our strategy of growing profit dollars. Higher volumes and favorable pricing more than offset higher labor costs, net of one-time benefits, continued investments in service quality, productivity, and growth initiatives, and an unfavorable business mix. Service operating margin was 24.2%, down 130 basis points year over year, but improved 100 basis points sequentially. The sequential improvement was driven by repair pricing, operating leverage from modernization and repair volumes, and lower SG&A, including one-time benefits consistent with our expectations. Turning now to new equipment on slide seven. New equipment organic sales increased 3% in the quarter. Performance was led by the Americas, where sales increased 13%, reflecting continued strength across the region.