Otis Worldwide (US:OTIS)2022-07-27 15:57Financial Data and Key Metrics Changes - Otis reported net sales of $3.5 billion, down 5.8% primarily due to the strengthening of the U.S. dollar [19] - Organic sales increased by 0.4%, marking the seventh consecutive quarter of growth [20] - Adjusted EPS grew by 12% or $0.09, with a $0.06 headwind from foreign exchange translation offset by strong operational performance [22] - Free cash flow generation was robust at $326 million, with a total of $800 million for the first half of the year [10][30] Business Line Data and Key Metrics Changes - New equipment orders were up 16.5% at constant currency, with orders in the Americas increasing over 50% [23] - Service organic sales grew for the sixth consecutive quarter, up 5.2%, with maintenance and repair growing 4.9% [28] - Adjusted operating profit was down $21 million, but up $16 million at constant currency, driven by strong service performance [20] Market Data and Key Metrics Changes - Orders in China were down low teens, outperforming a market estimated to be down about 20% [24][49] - EMEA orders increased by 29%, with strong growth in both Europe and the Middle East [23] - The backlog in new equipment increased by 6% globally, with a 10% increase at constant currency [24] Company Strategy and Development Direction - The company is focusing on accelerating service growth, driving productivity, and optimizing the tax rate [33] - Otis plans to increase its share repurchase target from $500 million to $700 million, reflecting a disciplined capital allocation strategy [17] - The company aims to continue its bolt-on M&A strategy, particularly in the service business, to enhance growth [116] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the long-term sustainability of operations in Russia, leading to the divestment of that business [7][8] - The outlook for 2022 was revised, expecting organic sales growth of 2.5% to 3.5% and adjusted EPS in the range of $3.17 to $3.21 [15][36] - Management remains confident in the health of the business in China, citing strong performance and share gains despite market challenges [49][114] Other Important Information - The company completed $400 million in share repurchases year-to-date, contributing to adjusted EPS growth [22][30] - The service segment's profit at constant FX was up $39 million, with margins improving for ten consecutive quarters [29] Q&A Session Summary Question: Update on China market outlook - Management noted that the market growth estimates were reduced due to lockdown impacts, with expectations for a 10% decline in the market for 2022 [47] - Confidence in business health remains strong, with share gains and a focus on high-tier cities contributing positively [49] Question: Context on Americas orders and revenue slippage - Management indicated that orders were driven by volume rather than large projects, with strength seen particularly in residential sectors [59] - Revenue slippage was attributed to delays in general construction labor rather than issues within Otis [60] Question: Backlog and project cancellations - Management confirmed that while some projects may be canceled, overall trends remain stable with no significant changes year-over-year [70] Question: Tax rate reduction sustainability - The tax rate was reduced to about 26.5%, with ongoing efforts to lower it further, though the pace of reduction may not be as rapid in the future [76] Question: Margin profile of modernization - Modernization margins are slightly lower than new equipment but are still profitable and contribute to overall labor absorption [80] Question: Commodity pricing and hedging practices - The company is about 80% locked for the year on commodity prices, with expectations for a small tailwind in Q4 due to decreasing steel prices [106]