Third Quarter 2026 Earnings Conference Call - OTIS WORLDWIDE CORP

Explicit Guidance:

• FY2026 Revenue: Net sales expected between $15.1 billion and $15.3 billion.
• FY2026 Growth Rates: Global organic sales growth anticipated in the low-to-mid single digits; Service sales expected mid-to-high single digits; New equipment expected low single-digit decline to flat.
• FY2026 Operating Profit: Range of $0 to -$30 million on an actual currency basis; -$45 million to -$15 million at constant currency (unchanged from prior guidance).
• FY2026 Free Cash Flow: Expected around $1.5 billion.
• FY2026 Earnings Per Share (EPS): Range of $4.01 to $4.05.
• FY2026 Service Margins: No specific quantitative guidance provided for 2027; Q4 service margins expected to be broadly flat sequentially with Q3 (~24.2%), assuming productivity and churn remain stable.

Business-Segment Outlook:

• Service: Continued momentum expected with repair sales growth driven by proactive maintenance and AI-enabled pricing; Modernization remains a primary growth engine with 20% sales growth in Q3 and a backlog up 20% at constant currency.
• Modernization: Market expected to expand at a double-digit rate (dollar basis) driven by an aging installed base; China modernization orders grew >20% in Q3 with strong backlog growth; backlog growth rate has moderated from 30% (end of 2025) to 20% due to accelerated execution.
• New Equipment: Global market expected to stabilize with growth in all regions except China (where market is pressured but declines moderating); Americas new equipment sales expected to remain flat to positive through FY2027, supported by a 14% backlog in North America; China new equipment market expected to see structural stabilization over the medium/long term following regulatory changes (the "828 rulebook").
• Productivity & Margins: Service operating margins in Q4 expected to hold steady vs Q3; Modernization margins targeted to reach 10% in the medium term as volume leverage and supply chain efficiencies improve; New equipment profit expected to remain a headwind year-over-year.

Market and Competitive Outlook:

• Demand Trends: Healthy demand for modernization and repair globally; New equipment demand strong in Americas (9th consecutive quarter of growth), EMEA (Southern Europe), and India; China new equipment market facing headwinds from developer liquidity issues and escrow rules but expected to stabilize.
• Pricing & Mix: Micro-pricing strategy expected to continue delivering positive results and limited discounting; Mix shifts toward higher-value modernization projects expected to drive profit dollars despite potential margin dilution in the short term.
• Competition: Otis views current market conditions as favorable relative to distracted competitors; maintaining focus on service portfolio and avoiding distracted bolt-on M&A in Europe; No specific comments on TKE/Schindler sale impacts other than general opportunistic stance.

Macro / Industry Outlook:

• China Policy: Bond stimulus (15th Five-Year Plan) expected to continue into 2027; potential policy shift next year to include non-residential projects; New equipment market impacted by "high-quality development" rules (828 rulebook) requiring escrow for pre-sales, expected to stabilize market structurally over the medium term.
• Regional Economic Views: North America showing strength in hospitality, data centers, medical, and industrial sectors due to reshoring; China residential new equipment market remains weak but modernization is insulated by stimulus.
• Labor Market: Continued need for field workforce expansion in high-value regions (Europe, Japan, North America) to support backlog execution; Training and apprenticeship ramp-ups ongoing.

Strategic Initiatives:

• AI & Digital: Rollout of AI-enabled micro-pricing, internal data intelligence tools for repair/mod opportunities, and field service tools for route optimization and scheduling; Early evidence of these initiatives supporting service growth and pricing discipline.
• Service Quality: Continued investment in field teams and quality initiatives; Service Quality Index improved by 7 points; Expectation that retention and churn improvements will follow with a lag as contracts expire.
• Capacity & Hiring: Ramp-up of new mechanics and technicians, particularly in high-value markets, to handle modernization backlog; Managing subcontractor usage as internal capacity increases.
• Product Focus: Emphasis on high-value units (e.g., Gen 3, Skyrise) in industrial/medical sectors over lower-priced residential units; Standardization of modernization packages to improve execution.

Risks and Headwinds to Outlook:

• China Market Volatility: Continued pressure on new equipment sales in China due to developer regulations; reliance on stimulus program continuation.
• Pricing & Mix Headwinds: High mix of modernization (lower margin than service) and unfavorable pricing in new equipment expected to continue pressuring segment margins and operating profit.
• Labor & Churn: Churn and retention levels remain a variable; potential for churn to worsen if service quality retention lags behind contract renewals.
• Incentive Adjustments: One-time adjustments to incentives (aligned with performance) may impact quarterly results; FY2026 profit outlook includes assumptions on these adjustments.
• Supply Chain & Productivity: Execution efficiency on large modernization orders depends on labor ramp-up; potential for subcontractor costs if internal capacity is insufficient.

Management Tone on the Future:

• Confidence: Strong confidence in the "service flywheel" strategy, citing sequential margin improvement and strong backlog conversion.
• Strategic Pivot: Management expresses enthusiasm for the pivot to service and modernization, viewing it as a multi-year opportunity with a "good runway."
• Cautious Optimism: While bullish on global service and modernization, management maintains a prudent stance on new equipment, particularly regarding China, acknowledging structural changes and the time required for stabilization.
• Execution Focus: Emphasis on discipline in project management, pricing, and backlog quality; tone suggests a preference for "profit dollars" over margin percentages in the near term.

Miscellaneous:

• Backlog Quality: Focus on maintaining high-quality backlog; Americas backlog conversion cited as a key driver for new equipment inflection.
• ESG & Recognition: Company highlighted recognition as a "World's Best Company" and "Best Employer" as indicators of organizational health supporting future execution.
• 2027 Outlook: Management explicitly stated no quantitative guidance will be provided for FY2027 at this time, deferring to standard earnings practices, but highlighted expectations for sustained growth in repair and modernization.