Otis Earnings: Still-Weak Equipment Demand Irks Investors Despite Modernization and Service Strength
The resilience of wide-moat Otis’ installed base business model remained on display in the second quarter of 2024. Demand for new elevator installations remained weak, with orders for new equipment falling 11%, an unsurprising outcome given the immense pressure the Chinese property market remains under and construction activity in North America and Europe that remains cyclically weak. Nonetheless, elevator modernization demand remained strong in the second quarter, growing 14% year on year and delivering a much-needed offset to the ongoing weakness in new equipment markets. Accordingly, second-quarter organic sales eased by just 1% as the combination of the strong modernization revenue and solid growth in the maintenance portfolio—where portfolio service units grew some 4% year on year—drove solid 5% organic top-line growth for Otis’ service segment. The group EBIT margin strengthened 110 basis points in the second quarter to 17.0%, largely the result of improving unit economics for the service segment as its maintenance portfolio continues to grow, thereby aligning with our full-year expectations.