Otis raises adjusted EPS outlook to $4.04–$4.08 while accelerating modernization growth in 2025

Earnings Call Insights: Otis Worldwide Corporation (OTIS) Q3 2025

MANAGEMENT VIEW

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CEO Judith Marks reported, "Otis delivered strong third quarter results and returned to growth, as we executed well on our service-driven business model. Organic sales in the quarter were up 2%, driven by Service, which grew 6%. Notably, modernization organic sales grew 14%. Adjusted operating profit margin expanded by 20 basis points overall, driven by Service margin expansion of 70 basis points." Marks highlighted that a lower share count contributed to a 9% increase in adjusted earnings per share for the quarter and that the maintenance portfolio continued to grow 4% with the service portfolio on track to approach 2.5 million units by year-end. Modernization order growth accelerated to 27% and backlog increased 22%.

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Marks stated, "We opportunistically completed approximately $250 million in share repurchases during the third quarter, bringing the year-to-date total to approximately $800 million, fulfilling our full year outlook." She also noted the launch of Otis Arise MOD packages in EMEA and several strategic project wins in the Americas, China, Dubai, and South Korea.

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CFO Cristina Mendez highlighted, "Service organic sales grew 6% with growth in all lines of business. This acceleration represents the highest organic Service sales growth this year, in line with expectations, and demonstrates the fundamentals of our Service flywheel. Maintenance and repair organic sales grew 4%, with maintenance driven by 4% portfolio growth and 3% positive price, partially offset by mix and churn." Mendez added, "Service operating profit of $621 million increased $49 million at constant currency... Operating profit margins expanded 70 basis points to 25.5% in the quarter, the highest margin expansion of the year, and marked another record quarter in Service margins since spin."

OUTLOOK

* Otis continues to expect net sales of $14.5 billion to $14.6 billion, with organic sales growth of approximately 1%. Adjusted operating profit outlook is $2.4 billion to $2.5 billion. The company has narrowed the range and increased the midpoint of its adjusted EPS outlook to $4.04 to $4.08, representing an increase of 5% to 7% compared to 2024. Adjusted free cash flow is anticipated at approximately $1.45 billion for the year. The company targets approximately 10% growth in modernization for 2025 and foresees repair sales to continue ramping up to 10% growth or above in the fourth quarter. Marks noted, "We are upgrading our outlook to up low single digits" in the Americas, driven by continued growth in the U.S. and Canada, particularly in infrastructure and residential verticals.

FINANCIAL RESULTS

* Net sales for the third quarter were $3.7 billion with organic sales up 2%. Adjusted operating profit margin increased by $16 million, driven by the Service segment. Adjusted operating margin expanded to 17.1%. Adjusted EPS grew approximately 9%, or $0.09, in the quarter. Adjusted free cash flow was $337 million in the quarter and $766 million year-to-date. New Equipment organic sales declined 5%, while EMEA sales grew 3% and Asia Pacific grew high single digits. China New Equipment sales declined approximately 20% in the third quarter. The company realized $30 million in-year savings from China transformation, capturing more than $20 million year-to-date.

Q&A

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Joseph O'Dea, Wells Fargo: Can you talk about efforts on the maintenance side for retention and recapture and growth pace? Judith Marks answered that returning to the 94% retention rate "will take sustained time to rebuild customers' trust," but the company continues to add units and expects sequential improvement.

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O'Dea followed up on Americas and New Equipment. Marks explained, "We're much more positive on Americas growth based on...the demand we're seeing," particularly in residential and infrastructure. She said, "the backlog growing in New Equipment in the Americas...was our fifth straight quarter of growth, in especially in Americas, about 4%."

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Nigel Coe, Wolfe Research: On repair growth and maintenance headwinds. Marks stated repair growth started at 1% in Q1, went to 6% in Q2, "7% this quarter, and we have line of sight to at least 10% in the fourth quarter." Mendez added that maintenance growth is stable at 3% with a focus on improving mix and churn.

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Coe also asked about Q4 New Equipment margins. Marks said margin expansion in Q3 was aided by China transformation and higher shipments from North America. Mendez said, "we expect margins to be around 4%" in Q4.

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Jeffrey Sprague, Vertical Research: On pricing dynamics. Marks said Service pricing increased 3 points in the quarter, while New Equipment pricing was up low single digit outside China and down roughly 10% in China.

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C. Stephen Tusa, JPMorgan: On retention and Services growth. Marks said retention is "very slightly improved" and that acceleration in repair will support Q4 Service growth at "around 6%." Mendez clarified New Equipment margin will be down 130 basis points for the full year.

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Amit Mehrotra, UBS: On Service margins. Mendez said, "we expect full-year margin for Service around 25%, which is going to be 40 basis points up."

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Christopher Snyder, Morgan Stanley: On retention and its impact on margin. Marks acknowledged retention challenges were "mainly about operational execution" and that loss of retention creates some margin headwinds.

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Nicole DeBlase, Deutsche Bank: On Q4 EPS and buybacks. Mendez cited "$0.11 of growth in Q4 versus $0.09 in Q3...coming from operating profit." Marks said they are "through" with $800 million in buybacks for the year, but have Board authority for more.

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Julian Mitchell, Barclays: On free cash flow dynamics. Mendez said temporary working capital buildup is affecting conversion rate, but expects to return to 100% conversion by 2026.

SENTIMENT ANALYSIS

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Analysts consistently pressed on retention, margin headwinds, and free cash flow conversion, with the tone neutral to slightly skeptical, particularly around the sustainability of margin improvements and the pace of retention recovery.

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Management maintained a confident but measured tone in prepared remarks, emphasizing operational execution, backlog growth, and cost discipline. During Q&A, management often acknowledged challenges but reiterated visibility and long-term confidence, using phrases like "we are confident" and "we have good line of sight."

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Compared to the previous quarter, management’s tone was more optimistic about Americas growth and Service acceleration, while analysts maintained similar levels of scrutiny.

QUARTER-OVER-QUARTER COMPARISON

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The company upgraded Americas outlook from a low single-digit decline to up low single digits, reflecting improved demand and backlog growth.

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Modernization order growth accelerated from 22% in Q2 to 27% in Q3, with backlog up 22% versus 16% in the prior quarter.

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Service segment saw an increase in organic sales growth from 4% to 6% and higher operating profit margins.

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Adjusted EPS growth improved from 2% in the first half to approximately 9% in Q3.

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Management’s confidence increased regarding the sustainability of repair and modernization growth, while analysts continued to focus on margin sustainability and working capital dynamics.

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Strategic focus shifted to execution on modernization and incremental opportunities in the Americas, as well as further cost savings in China.

RISKS AND CONCERNS

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Weakness in China New Equipment sales, with a 20% decline in Q3 and continued price pressure, remains a challenge.

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Retention rates in maintenance require sustained improvement to reach historical levels.

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Margin headwinds persist in New Equipment due to lower volumes, pricing, and tariffs, partly offset by productivity and cost actions.

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Free cash flow conversion remains below historical levels due to working capital buildup from business mix changes.

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Analysts questioned the pace of recovery in retention and the ability to sustain current margin expansion.

FINAL TAKEAWAY

Otis Worldwide delivered strong Q3 results, returning to organic sales growth and accelerating performance in Service and modernization. With a narrowed and raised adjusted EPS outlook of $4.04 to $4.08 for 2025, management emphasized operational execution, cost discipline, and a robust backlog that supports continued growth. While challenges remain in China and in improving retention, the company’s service-driven business model and ongoing transformation initiatives position it for sustainable earnings and cash flow growth into the next year.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/otis/earnings/transcripts]

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