Otis Worldwide Morgan Stanley's 14th Annual Laguna Conference

From an Otis perspective, our forward-looking statements and disclaimers apply.

Thanks, Brandon. This is an exciting time for Otis, and I could not be more proud, and I really need to thank our customers around the world, but most importantly, our 72,000 colleagues. When you think about us really spinning out of a conglomerate after over 43 years and still leading our industry, creating our service business model, and being able to accomplish that regardless of what headwinds were thrown our way, I could not be more proud of our team, I could not be more proud of the results, and I could not be more proud of the people we support, 2.5 billion people a day who use our product. So it goes beyond financial metrics, although we have had a great return for our shareholders. When you look at the capital we have returned between dividends and share buybacks, it has been substantive, over $8 billion.

But most importantly, we've kept the world moving, and we've really committed to this high-quality service model that has tremendous growth ahead of it. What advice would I give is, I think the service flywheel and everything we're doing to lead this industry will continue. I believe our global reach will continue. We'll focus on scale, we'll focus on density, but most importantly, we'll focus on serving our customers and our communities. And we are entering this new chapter of top-line growth. For those of you who saw our second quarter, we had the highest service growth since spin. Organically, it was 9%, 6% maintenance and repair, 24% modernization. Elevators around the world and escalators are aging, and so we're entering this period, which is what we've been investing in, of significant growth in the service business that hasn't been seen in decades.

So to the next CEO, and I'm not going anywhere right now, I'm committed, working hard, but will help the board in terms of assisting in the succession, both internal and external candidates. To the next CEO, you're entering a growth phase for an industry that's traditionally had low growth. We're entering it from a service perspective where Otis has the lead, and we'll continue to build on that with our incredible 45,000 field mechanics and our amazing 2.5 million unit service portfolio.

So we've been on a trajectory of investment. It goes back a few years when we first recognized the modernization market was going to be a high-growth opportunity. When we talk modernization or refurbishment, we look at the 22 million units in the world, elevators, and escalators that are in use, and 9 million of those are in this modernization window. They're over 20 years old. They're ready for refurbishment, technology upgrades, and primarily full replacements or partials, but mainly full replacements. That creates a demand signal that we needed to be prepared for. We needed to industrialize how we were approaching modernization from in our factories where we were actually creating modernization packages to sell and to manufacture at scale. We needed to change our installation methods so we would get productivity in the field, and then we needed the ability to deliver those synchronously across the globe.

The modernization business is really what was growing, and we invested in that. We knew we needed more field professionals. Our mechanics are a craft skill. You're hearing a lot about trades these days, but elevator mechanics are a craft skill unto themselves. Our mechanics commit to this career. They don't become welders. They're not electricians. They are elevator constructors and mechanics, and incredible professionals. But we knew with the pending growth, we needed to invest in them. If you go back to 2024, 2025, even this year, we've added to our field workforce to prepare for this growth. And while all that has been happening, our repair business, because as units age, if people don't make this discretionary modernization decision, as units age, they break more.

This break, fix, repair business for us, where we would tell you it was a mid-single digit growth kind of business, is now a double-digit business. We grew 12% in the second quarter, and we see that double digit continuing, not just through the rest of this year, but ongoing. As we look out, top-line service growth is now a mid to high single for the medium term, with repair growing double digit and modernization growing mid-teens. It's an exciting time to be in the service business. It's over 90% of our profits, and for us, this investment needs to pay back in margin expansion. We've made the investments this year, and we expect some of them are one time, and we will continue to find this margin method of growing margins. But volume alone will create profit. And we're seeing the top-line volume.

That'll flow through. We're seeing pricing initiatives. That'll flow through 100%. But then this leverage we want on the rest of the service margins, we would tell you is going to come through the service operating model, which I think we're going to talk about later.

Retention to us is when a customer renews. We go through a maintenance period. Our first maintenance period starts after the warranty, and then on average, in most parts of the world, about four years later, we re-sign the customer, we retain them. Some of that is due to auto renewal, but a lot of that is due to continued service quality. As we exited 2024, we saw that our world-class retention rates, which had been over 95% since spin in ex China, had started coming down. It did create an area for us to focus on.

We stepped back and said, even though they are world-class, we are convinced they are the best in our industry, we said, "What do we need to do to increase that retention back to where we know we were at 95%?" What we did is we looked across the globe, because it is not a unique geography, it is not every one of our operating territories in one geography, but we had variability in these retention rates by operating territory. We have 1,400 branches or operating territories. We looked, and we started in North America, and we said, "Where are we below that median of 94.5? Which branches?" We did root cause to understand what was going on there.