Otis Worldwide Corp Stock

Good afternoon, everyone. My name is Brandon Knutson. I'm on the multi-industrials team here at Morgan Stanley. And I'm here with Judy Marks, CEO of Otis Elevators and looking forward to our conversation.

But before we get started, I need to read some disclosures. So for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

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

Great. Well, Judy, I saw the announcement Monday. You announced your retirement. First off, congratulations on a great tenure at Otis. And when we look back at your career there, what are you most proud of from your time at Otis? And what are you most excited about for the next CEO to take over?

Thanks, Brandon. I mean this is an exciting time for Otis, and I couldn't be more proud, and I really need to thank our customers around the world and 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 couldn't be more proud of our team. I couldn't be more proud of the results, and I couldn't 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've had a great return for our shareholders when you look at the capital we've returned between dividends and share buybacks, it's 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.

So 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 it's -- 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 we'll 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.

Great. Well, the portfolio has historically been viewed as a predictable Service compounder. You have a very strong Service business. What needs to happen operationally over the next 12 to 18 months for Otis to get back to the combination of Service growth, but also Service margin expansion?

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 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. 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.

So the modernization business is really what was growing, what also -- 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 need to invest in them. So if you go back to '24, '25, 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.

So this break-fix repair business for us, where we used to -- would tell you with 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. So 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.

So 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 onetime, 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 will flow through. We're seeing pricing initiatives that will 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.

Yes. We'll definitely get to that. And as you mentioned, the Service organic grew 9% in Q2, a big acceleration, highest level since spin. So great growth there. But you talked about the growth -- the investments as well, which are partially meant to help the retention, which declined a little bit over the last 12 months is taking a little bit of time to recover. What are you seeing today in retention, particularly in the Americas? And what milestones should investors watch for to know that the Service quality investments are working?

Retention to us is when a customer renews. So 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 4 years later, we re-sign the customer, we retain them. Some of that's due to auto renewal, but a lot of that's due to continued Service quality. As we exited 2024, we saw that our world-class retention rates, which have been over 95% since spin in ex China had started coming down. And it did create an area for us to focus on. And so we stepped back and said, even though they're world-class, we're convinced they're 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%.

And so what we did is we looked across the globe because it's not a unique geography. It's 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. And so we looked and we started in North America, and we said, where are we below that median of 94.5%, which branches? And we did root cause to understand what was going on there. And what we found was we had this lower quartile performing branches where while they were performing, they weren't at the level that we -- of quality that we expected of our Otis branches.

So in late 2025, we invested. We invested in more mechanics. We continued that through 2026 so that we would have the ability to address the Service quality at the branches. When you talk about retention, most people naturally say someone is leaving you for price. That's not the case in this industry. And then they ask me, well, are they leaving you for an independent Service provider. That's not the case either. Sometimes they go to an OEM, sometimes they go to a Service provider. Very rarely is it price. It's all about things you control and Service quality and performance. So we've added these mechanics to make sure that our Service quality improves because there's a direct correlation between Service quality and retention rates, even though there's a lag.

So we have 4 elements we measure in North America on Service quality. We meet code. Let me start there. Let me make sure everyone understands the code, we meet everything on maintenance. In the U.S., there's no mandatory visits required. But in our Otis maintenance management system, we require that you do a scheduled visit twice a year. So the first thing we measure is, have you been there within the last 6 months to see the customer to do the scheduled maintenance. The second thing we measure is of the checklist we gave you to do during that visit, did you do every one of those tasks. The third thing we measure is even though there aren't scheduled mandatory visits for any of you who live in the U.S., you go in an elevator and you see there's an inspection certificate, did you pass the test to prepare for the inspection? And then the fourth thing we measure is, are there any units that are down.

And that mix creates a Service quality index that we measure at every one of our 1,400 branches. But specific to the U.S., it's that mix. What we shared at second quarter earnings was by making this investment, by adding mechanics, by doing more visits, by literally complying everywhere with our Otis management -- maintenance management system, we were able to raise our Service quality index 7 points. I can tell you, as of September, we're still at that positive 7 points in the places where we invested. Now we need to see the retention rate and that correlation. There's no direct time line for when that happens, but we do anticipate that happening.

But again, world-class retention. We're at -- ended last year at 94.5%. Any quarter you measure it, you're going to have some variability, but we do see line of sight to getting back to 95% probably in 2027.

Great. And 95% is a high level of retention definitely.

Best in the industry.

Right. And investors always want more upside. So is there any -- is that fair to think of that as a ceiling? Or what can you do to possibly take it up to a little bit above that?

I think there's always room for improvement. Anytime you focus anywhere on your lowest quartile and you have the ability to move that to median or above, you're always going to get some extra benefit from that, plus your top performers. So I want everyone to understand, we have -- I visited many of our operating territories have 98% retention rate. So this is an average across the globe ex China. There's room for more, but there is a ceiling. You will never get to 100%. I don't think you'll even get to 98%. But can 95% go up over time? I think it can. And I think as we benchmark with Software as a Service, subscription services, -- there aren't people that can get much higher because there's always natural churn.

Makes sense. One of the more interesting developments this year has been the decision to temper some AI-driven micro pricing a little bit in the maintenance portfolio to protect the retention that we're talking about. What have you learned about price elasticity in your installed base?

Pricing is an interesting element and an important element. As I share with any colleague who will listen to me, as costs go up, you have 2 levers, price and productivity. And costs will go up, whether it's annual wage increases, whether it's commodities, all of those things, and you need to offset it with price and productivity.

Let's talk Service pricing. So in repair pricing, when we have a unit that breaks, we generate a repair proposal. That's reactive repair. We generate a proposal presented to the customer, and that's the first time they see it. Micro pricing and repair allows us to understand how much elasticity we have, how much value the customer will get at this, what -- where it's happening to them, what its impact is to their enterprise.

And we've seen strong micro pricing in repair. It's already in our backlog and our AI algorithm looks at all of these metrics. What will the market bear? What has this repair been sold for in another city because the parts are the same cost, the labor is the same cost. What did your peer salesperson get for this? What does this mean for your commission if you can get the repair at this price? So repair micro pricing is doing outstanding. It's in our backlog. That's why you're going to see the 70 bps of repair margin improvement to the Service margin in the second half of the year is coming from repair volume and repair micro pricing.

In maintenance, we get annual price increases. Everyone -- when we use this word temper, there was this misunderstanding that our prices don't increase. We have contractual and commercial mechanisms to be able to get annual price increases. They're tied to different inflationary reasons depending where you are in the world. Some are backward-looking for '25 that then you can apply in '26. But others are real time and they're all different indices, as you can imagine. That happens anyway. But the micro pricing, we've trained all of our sales -- maintenance salespeople on it. They see what's possible.

What we've tempered is how much more they think they can get versus the theoretical, what we believe is possible, tempering that with if that's going to push your customer over the line to cancel us and not be part of retention, then we're going to allow the local team to have some judgment, at least this year. Because we want to balance retention and price. We're still getting price on maintenance, but we want to have that ability.

It's not happening everywhere. We're seeing great maintenance pricing with micro pricing in a lot of our operating territories. But in some, it's really more customer-specific, and we just don't want to push them too far. But we are getting price. We're getting price in terms of the annual price increase. We're getting price in terms of surcharges because of fuel and logistics challenges in the Middle East. And we're preparing and getting price now for what we see potentially as other input costs next year in terms of material productivity.

And what can you do to make the gap between the micro pricing you can get on the repair versus the maintenance side smaller and maybe even parity?

Well, I want to make -- I'm not worried about the gap. I want to make them both grow. So let's start there because the repair pricing, it is market pricing. And that's what we want to reinforce over and over again. And you'll see that, as I said, in the second half of the year. The maintenance pricing, again, we focus on a few things. We focus on what's achievable, what's possible. And then besides just the AI micro pricing tool, we use AI tools to help our sales reps do value selling. We actually have an interactive AI tool that will actually mock negotiate with them before they go see the customer. So they understand what value propositions they need to propose for Otis Service.

Great. Great. And I want to touch on the Otis Service operating model a little bit. You introduced this operating model and standardizing field and sales processes across the organization. What is structurally changing at the operating territory level versus how Otis has historically run the business?

So we're a 173-year-old business as of last week. And you can imagine we have very proven, reliable processes. We're in the life safety business. It's important that we operate safely, but it's also important that we -- that customers count on us. All of you in the room and everyone listening, you count on us for a safe, reliable ride every time. You don't think twice, and that's 2.5 billion people every day.

We've been on a journey in terms of transformation. We started at spin with needing to set up the company to be an independent public company. We focused on where we needed to enhance processes. We focused on the technologies we needed. We focused on go-to-market. We focused on innovation and product. And we worked through all of that the first few years after spin, and you saw those results, and we're very proud of those results.

And most importantly, we focused on Service portfolio growth because we believe the strength and the size of our Service portfolio is the foundation for Service contracts for maintenance and repair on top of that and then eventually modernization. And we took a company where between 2010 and 2019, the Service portfolio kind of oscillated between 1.9 million to 2 million units, and we focused on portfolio growth in the early days, the first few years, and we grew at 25%, and we now have 2.5 million units, largest Service portfolio anywhere in the world.

Then we said, that's great, but now how do we continue to drive growth, top line and margin expansion bottom line. And a few years ago, we said, well, as we look at these 1,400 operating territories, first and foremost, let's take out and centralize the local activities that are not customer-facing, that are more transactional. We called that UpLift. You recall, we did a major restructuring on that. So we've removed all of that, handed it, working with a partner. We've centralized all of that.

The next step in this transition, and it's not a restructuring, let me be clear, is the Service operating model. We have some of our operating territories that are operating incredibly well. They have best practices to share, but we haven't changed the basic core of how we work end-to-end process from the sale to the field installation to the field Service, especially. So this is all in Service. So from the time the warranty starts to we provide maintenance, repair and then eventually mod, we haven't changed how we do that in a very long time.

So we're going to change the processes, and we're also going to apply technology because this is happening at a very unique inflection point where agentic AI and generative AI and 1.1 million of our units being connected on Otis ONE and giving us data every day is giving us the ability to make our field more productive, to improve our quality and also to raise the level of how we work. So it's not a restructuring program, but it's a build after we did uplift so that we can be more customer-centric, and we can get leverage on Service margin.

This is all about now where do we get the next leverage on Service margin. We can continue to add units. That will help. We can drive volume on the top line. But now we need to get that leverage in terms of productivity, in terms of how we deliver and how we work. And you're going to be hearing more about the Service operating model. We're going to do it in a very focused way, Brandon. We are going to start in our high-value countries because not every unit contributes the same way. A unit in an emerging part of Asia is very different contribution than a unit in a mature part of Europe or the Americas.

So we're going to start this in the U.S. We're then going to move the Service operating model to a few key high-value countries. You can imagine Germany, France, Spain, in Europe, and then we're going to -- we'll proliferate it from there. But the yield, it's all about leverage for us on Service margin. And we think beyond volume growth, this is that second piece that pulls it all together.

And as you mentioned, you have some territories that are operating very well, combining strong growth, retention and productivity. What separates those best-performing territories from the rest of the network? And how much margin opportunity is there from simply closing that performance gap?

There's significant -- I won't put a quantitative number on it, but there's significant opportunity by raising the lower quartile and getting to where our -- and we have some world-class leaders in these operating territories, retention rates in the high 90s, customer satisfaction, incredible, far greater margin contribution and Service margin. What separates them is the ability to do workload planning to do resource allocation to be able to be responsive to customers and to do all of that simultaneously based on the processes they put in place, these best practices. And we have some that are outstanding. And the challenge is how do we institutionalize that.

And these people are -- they're doing great jobs. We have 1,400 P&Ls that all add up, and they're not all operating at the same level. But when we can get this deployed, especially in these high-value countries, you're going to see the difference on the bottom line.

That's great. I want to drill down a little further on Service margins. The biggest question coming out of Q2 was the margin story. You had strong organic growth, as you mentioned, but margins declined. 170 basis points as mod mix, labor costs and investments weighed on the results there. How should investors separate what was temporary executional costs from structural costs that are required to support a faster Service growth level?

So we had about $50 million of -- in 2026, we have about $50 million of that it's not investment cost, but was for the decision we made to be able to do much faster backlog conversion, and that drove a lot of the repair and modernization top line volume. We needed to -- you can't allow backlogs to grow too significantly, especially in repair because the customer had an elevator down. So we needed to apply higher skills at times in certain countries, we needed to bring subcontractors in for us to be able to convert the backlog. Our mod backlog as we ended the year was at 30%. It's now at 26% with this 24% revenue we had. We needed that ability and we thought for customer relationships for backlog conversion, that's temporal. We know that's temporal in terms of what we need to do.

Simultaneously, obviously, hiring these mechanics and the skill needed to do repair and modernization is a higher skill discipline than just to do maintenance. Traditionally, we had the luxury of bringing everyone in, they start with maintenance and then you continue to grow them and groom them. With our backlogs as high as they are in repair and mod, we needed to use higher skilled labor than we had anticipated. So that all -- that $50 million, that was all fairly temporal in the second half.

In terms of modernization, though and mix, it is a lower margin offering for us than maintenance and repair, but it is worth it. So if you look at right now, we have about a 75-25 split in revenue, maintenance repair being about 75%, modernization being about 25%. The modernization markets, our target medium term was to get to about 10%. We're on that trajectory, and then we'll improve from there. But you know our Service margins, we're going to end the year at -- the second half will be about a little over 24%. You can imagine that maintenance and repair is much higher margin.

The reason we're so excited about modernization is twofold. One is actually the expansive opportunity. But in terms of how it can contribute is we have the volume we're going to get from it. And with that volume, we're going to get the flow-through of profit dollars. So the EBIT is going to come. It will be margin dilutive, but the EBIT is going to come. But just as important is a tremendous number of the modernizations we do are units that are not in this 2.5 million unit Otis Service portfolio. So as we finish those modernizations, as we're in a live building with the customer, they're having us do their work, our conversion on those into our Service portfolio helps us grow the Service portfolio even more. And it overcomes even China conversions, which have slowed down because New Equipment slowed down.

So to us, modernization is an evergreen opportunity. Again, 9 million units over 20 years old. Last year, we anticipate -- it's not really well kept records in our industry like New Equipment. We anticipate a little over 300,000 units got modernized. More than that entered the modernization window last year. So the opportunity is growing. It's going to continue for years to come. And so the modernization business, again, as we grow scale, it will get even more profitable, but the profit dollars will come and the ability for them to add to our portfolio is like a double benefit.

Before we get to modernization, I just want to ask one more on margin. So the $50 million that you said is temporal for the second half of the year, what specifically do you need to see improve in order for that $50 million to truly be temporal and unwind in the next year?

So we've already hired the mechanics. They're on their journey in terms of their apprenticeships, in terms of their learning curve. So in terms of the need to bring in additional surge subcontract to support and the need for us to keep moving labor around, whether we're moving China mechanics to Japan or mechanics from Peru to Spain, we've been using our workforce dynamics and subcontractors to be able to help fulfill this while our mechanics have been getting trained. We're comfortable our mechanics are at the right place in the learning curve where we hired them in '24, '25 or now in '26 that, that will take care of that situation.

Great. So now shifting to modernization. As you mentioned, sales are really strong, grew 24% in Q2, backlog up 26% but you're going to moderate growth to the mid-teens, you're saying. What is -- how sustainable is this level of demand in the 20s? And what would it take for you in terms of investment or whatever else you would need to do to support the higher level of growth in the mid-teens you're guiding to for the back half?

We're ready for in terms of an investment perspective. We've got the modernization packages standardized around the globe. They're coming across our New Equipment lines in terms of manufacturing. So we're getting the scale in terms of supply chain, in terms of material productivity. And we're seeing the early days of the installation productivity, repetitiveness that will get us that efficiency in terms of how we quoted versus what our final result was. I don't think we stay at 24 every quarter, but I think it will modulate in the 26% up backlog. There's a combination of volume mod. So think about an apartment building, a school, something of that nature versus major projects mod. Think about the Empire State Building when we did that mod, Willis Tower, large office complexes where -- or airports where you can't stop the flow of people, but you can take down one elevator at a time to do a modernization.

I was at the -- last year at the Beijing Metro. And for that escalator mod, we were allowed to operate from about midnight till 4 every day. And then we had to leave. So major projects have a little different revenue recognition flow. It looks a lot more like New Equipment. But the volume mod, we see happening easily at this mid-teens and then major projects is kind of the piece on top that's a little harder to predict in terms of revenue recognition.

Got it. I want to shift to the New Equipment for a second. You saw down only 1% in Q2, one of the better results in the last couple of years with backlog growing as well. Is the New Equipment market turning a corner? And where are you seeing the most strength and weakness on a regional basis?

This quarter, we will -- that minus 1% from second quarter will be positive. First time we can say that since 2023. Any of you who know us know that, that's due to the significant decline in China New Equipment that's been happening now for about 5 years, a little over 45% decline in the market segment. And we've done everything, whether it's our China transformation or any pivoting more to China Service and modernization to handle that and to really reflect in our business a different level of business we have now in China that used to be predominantly urbanization New Equipment.

What we're seeing happening right now in the third quarter, what's overtaking that overhang from China, and we're just delighted to see it is how our team in North America has done. We've had 8 straight quarters of New Equipment growth in the U.S. and Canada, and it's been significant New Equipment growth. There's a good 18-month lead time. So if you go 8 quarters, we're now starting to see that not just flow through our factory in Florence, get installed, but we're seeing it flow through at much higher volumes to where it's overtaking China. Asia Pacific and Europe still looks strong. China New Equipment is now 18% of the group revenue. It was 33% in 2020.

So -- and our business has grown. So you think about we've overcome the China overhang. We're going to inflect positive in third quarter. That's going to continue through the rest of this year and next year. And once China just stabilizes and we don't have the compare, you all will see how well the other 3 regions have been performing year after year to keep our business growing. I mean our top line, we're going to be up to about $15.1 billion to $15.4 billion in revenue this year, and that's still with China down in its fifth consecutive year on New Equipment.

So I think the team has done a great job compensating. And once China stabilizes, we don't expect New Equipment to ever grow there again. That would be a nice surprise. Once it stabilizes, you'll see the strength of Asia Pacific, of EMEA and of the Americas and how well they've been doing on New Equipment. Still a lot of construction going on in this world.

As you mentioned, China has been weak, but recent comments have suggested that it's sequentially improving at the very least and performing as expected. What are you seeing on the ground today in China? And what gives you confidence that the market is approaching a more stable level?

I have the privilege of having just gotten back from China 2 weeks ago and met with government officials all the way up through Premier Li to understand economics, party secretaries, governors to understand where China is heading, where the priorities are in the 15th Five-Year Plan and what does that mean to our market and what does that mean to Otis. And just as importantly, time on the ground with the team. We understand our markets.

So our team has performed incredibly well under challenges. We knew we needed to take cost out of New Equipment, and we did that through our China transformation last year. But we ended the second quarter with 48% of China revenue being in Service. First quarter was 52. So all of a sudden, what used to be such a predominant New Equipment business, we've converted to be a Service business, and China looks a lot more mature. Where we're seeing growth in China on the Service side, we're still growing our Service portfolio. We spun with about 220,000 units in China in 2020. We're now over 0.5 million. Team has done a great job growing that, which then drives repair.

But the biggest CAGR growth is happening in modernization in China. China units tend to modernize at the 15-year mark versus the 20 because of so much usage they get. And in 2024, the Chinese government added a stimulus. Originally, it was for white goods, but we got elevators included for older residential elevators, the government pays to modernize their buildings. In '24, it was 80,000 units in '25 was 120,000 units. This year, it's 180,000 units. In the second quarter, our modernization orders in China alone doubled, smaller base, but doubled, and we're winning more than our fair share of this modernization stimulus.

What I heard while I was in China is it's going to continue into '27, and we believe beyond potentially beyond just residential to take care of the citizens of China. Other buildings will be included in the stimulus. This year, we got it added that it wasn't just 1 price point. It's 3 price points depending on the rise, how many floors there are because there's more material.

So the Chinese government is committed to this in the 15th Five-Year Plan, and our Otis team has been performing wonderfully. So China looks more like a mature market to us. It's obviously had a hit on our New Equipment margin becoming lower because China had the highest New Equipment margins followed by the Americas, but we've been able to make that up.

And as investors start to think about looking beyond '26, not asking you to provide guidance, but what should we think of as the major puts and takes that we should be thinking about as we bridge into 2027 in terms of Service volume, margin recovery, New Equipment in China?

We are excited. Listen, the business model is intact. This is a stable business that has been preparing for higher growth than we've seen in a long time. That's what the investments have been all about. Those investments need to pay off. Pricing needs to happen. We need to see the Service quality continue where it is and continue to improve and that translate directly into retention rate. And we need to execute with excellence. The Service operating model will help us do that. We are the leader. We've got a great portfolio. We've got the best people in the industry. And what you'll see on the margin side is some of these temporal issues and investments we made this year not repeating. There is some seasonality, so I'm not going to get into first half versus second half in '27. We'll share that with you when we guide.

But we're going to leave the year strong in terms of Service margins. You'll see incremental improvements third quarter and fourth quarter. That's all in our backlog now. So we just need to perform. And when you see that strength and we share with you where we're going in '27, I think you guys are going to see the returns of a high-quality business and a business I've been very proud to lead and we'll continue to lead into the year.

Great. Well, that's all the time we have. Thank you so much, Judy, and I appreciate the conversation.

Thanks, Brandon.

Good morning, and welcome to Otis' Second Quarter 2026 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com.

I'll now turn it over to Imelda Suit, Senior Vice President, Treasurer and Interim Head of Investor Relations. Please go ahead.

Thank you, Krista. Welcome to Otis' Second Quarter 2026 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Cristina Mendez, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the Webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties and Otis' SEC filings, including our Forms 10-K and 10-Q, provide details on important factors that could cause actual results to differ materially.

Now I'd like to turn the call over to Judy.

Thank you, Imelda. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope everyone listening is safe and well. Starting on Slide 3. We achieved significant top line growth as we delivered a solid quarter with a significant step-up in organic sales growth, driven by accelerating service growth and improving trends in new equipment, along with strong cash generation. Service remains the key growth engine of the business with 9% organic sales growth supported by 24% modernization growth, double-digit repair growth and accelerating maintenance trends. Modernization orders were up 9% to end the quarter with a backlog up 26% at constant currency. We strongly believe that the investments we are making in capacity, quality, pricing and commercial execution are enhancing our competitive position and yielding continued growth in our service business.

In New Equipment, we're encouraged by the sequential improvement in sales and the stabilization in margins. While orders were down 5% in the quarter, backlog increased 4% at constant currency and the business is showing greater stability supported by a sales turnaround in the Americas at a robust 10% growth. We delivered another quarter of strong cash generation with adjusted free cash flow of $290 million, up 19% year-over-year. The strength of our cash flow reflects the resilience of our business model. Importantly, this allows us to continue investing in growth and strategic investments, including the acquisition of a majority stake in we maintain while also returning a significant portion of free cash flow to shareholders through share repurchases and dividends.

In the first half of 2026, we bought back approximately $800 million of shares and raised our dividend 5%. And returning over $1.1 billion to our shareholders. These results reflect our progress in executing our strategy and investing and strengthening our service business. Service margins declined year-over-year as labor and material cost increases have added pressure on margins as we ramp up our operations to execute on our strong repair and modernization backlog. With continued service revenue growth, we expect a sustained recovery in margins in the next quarters.

With that, let me turn to our second quarter financial results on Slide 4. Otis delivered net sales of $3.9 billion, with organic sales up 6%. Adjusted operating profit, excluding a $7 million foreign exchange tailwind decreased by $32 million in the quarter, higher volume and price were offset by inflation, mix and productivity impacts. Adjusted operating profit margin declined 180 basis points to 15.2%. Adjusted EPS declined 4% or $0.04 in the quarter due to operational performance, partially offset by favorable foreign exchange rates.

I want to take a step back and look at the significant transformation journey we've been on, as shown on Slide 5. From 2020 to 2025, we drove growth through a focus on boosting the size of our portfolio introducing innovative products like Gen3 and Gen360, connecting 1.1 million units on OtisOne and industrializing our modernization business. With keen operational focus, we optimized and developed resiliency in our supply chain and executed on uplift in China transformation programs. These programs yielded sustained operational performance improvement over the past 5 years. Starting this year, we added 4 operational initiatives.

First, we drove value-driven AI micro pricing across maintenance and repair. Second, we shifted our portfolio mix focus toward high-value service segments and geographies. Third, we took a proactive approach in our repair offering to drive customer uptime and service growth. And fourth, we made a strategic decision to invest in service quality through our service excellence initiative to sustain portfolio growth in our key markets in the Americas and EMEA. We are seeing early signs of progress in this area and an opportunity to build a stronger operating foundation. The investment in service quality impacted margins in the short term, but we see it as necessary to fuel our growth. Service quality leads to customer satisfaction and retention, which feeds our flywheel for service volume growth across maintenance, repair and modernization.

Today, we're sharing our plan to work structurally on our service operating model, which will drive frontline excellence. It's a program to unlock the full value of our operating potential at the local level where our 45,000 field colleagues serve our customers every day. This will be a natural extension of the transformation we started with uplift, which freed the frontline from transactional activities to become more customer-centric. We will standardize our core field and sales processes and drive operational excellence across our front line. Our service operating model will leverage the learnings from the tactical investments we're undertaking in service excellence, which, as I said, are delivering promising results.

We have exceptional operating territories across our network that consistently deliver robust growth excellent customer service and strong operational performance. Our objective is to systematically use standardized systems and tools to consistently bring every operating territory to this level of excellence. Our focus on the front line is the logical next step in our journey since spin to build a more consistent, high-performance company. But we still have work to do to get there.

Slide 6 summarizes our progress in service margins, which improved sequentially in Q2, but we are still seeing pressure largely from productivity and cost headwinds and the timing of our micro pricing actions. In Q1, we communicated a plan to invest $50 million in service excellence and pricing, with the goal to drive retention improvement and pricing upsides in maintenance and repair. We have invested $15 million in the quarter, on track with the plan, and we're encouraged to see a step change improvement in our service quality metrics. Our service quality index has improved 7 points in the operating territories targeted in the investment plan. In a good portion of these operating territories, we have also seen retention improvement but the recovery timing varies. Although our overall retention rates ex China -- overall retention rate ex China was down this quarter, we believe this will improve as we continue to provide high-quality service to customers.

On cost and pricing, we were able to broadly offset the impact of the Middle East conflict with pricing actions and saw a strong ramp-up of our micro price initiatives in the repair business. Productivity and cost headwinds were higher than we anticipated this quarter. This has been driven by 3 main factors: First, our ongoing strategic investments in service excellence, impacted productivity and together with inflationary increases led to higher-than-expected labor and material costs. Second, as we ramped up resources to execute a strong repair and mod backlog, workforce onboarding took longer than expected for newly hired mechanics to reach full effectiveness especially for highly skilled activities in repair and modernization. Third, the acceleration of mod and repair execution required higher labor rates to make resources available where and when needed. We believe a large part of these headwinds are temporary while we adjust our operations through our service operating model to deliver on our growing backlog.

With that, I'll turn it over to Cristina to walk through our segment results in more detail.

Thank you, Judy. Starting with service on Slide 7. Service organic sales grew 9% with growth across all lines of business and regions. Maintenance and repair organic sales increased 6%, representing a meaningful sequential acceleration. Maintenance organic sales grew 3%, supported by 3% portfolio growth and 3% pricing partially offset by mix and churn. Reversals continued to gain momentum, growing 12% and delivering the strongest performance in the past 10 quarters. Modernization remains standard. With organic sales increasing 24%, marking the highest growth rate since the spin. Growth was supported by strong customer demand and execution against a robust backlog, which continues to be driven by ongoing orders growth.

Modernization orders increased 9% in the quarter, driven by a strong order growth in China, up significantly EMEA and APAC, both up low single digits, partially offset by Americas down mid-single digits due to a tough compare year-over-year. Modernization backlog remains very strong, up 26% year-over-year at constant currency. We remain confident in the long-term repair and modernization opportunity, supported by an [indiscernible] installed base that continues to drive customer demand and create attractive growth opportunities over the long term. The broad-based growth across our service business reflects the progress we are making in executing our strategy, and demonstrates that our focus on driving growth is delivering tangible results.

Service operating profit of $599 million increased $16 million at constant currency as higher volume and favorable pricing more than offset higher labor costs, including the impact of ongoing strategic investments and productivity -- cost headwinds and unfavorable mix. Service operating margin was 23.2%, down 170 basis points versus the prior year. Margin performance is impacted by mix with higher modernization growth cost and productivity headwinds and reflects deliberate investments to support service quality initiatives and capacity to execute on service growth.

Turning now to New Equipment on Slide 8. New Equipment organic sales declined 1% in the quarter. While market conditions remain challenging, this represents the lowest rate of decline in the past 9 quarters growing in Americas and Asia Pacific was more than offset by lower sales in China and EMEA. Americas sales increased 10%, supported by a strong backlog conversion and a healthy backlog built through orders growth in prior periods. Asia Pacific sales grew low single digits, driven by strength in Japan and India, partially offset by lower sales in Korea.

EMEA sales declined 4% and primarily due to weakness in the Middle East and Southern Europe. In China, new equipment sales declined high teens in the quarter, consistent with the backlog decline but reflecting a slight sequential improvement. New Equipment orders declined 5% year-over-year as a double-digit growth in the Americas and low single-digit growth in EMEA were more than offset by declines in APAC due to tough compares and in China. New Equipment backlog increased 4% year-over-year at constant currency, 9% excluding China, providing good visibility into future sales and supporting our confidence in New Equipment stability over the coming quarters. New Equipment operating profit of $40 million declined $30 million at constant currency and operating margin declined 220 basis points to 3.1%, in line with our expectations. The operating profit decline was driven by lower volume and favorable price and mix.

Looking ahead, we remain focused on executing our priorities, managing price, volume and cost as we navigate a dynamic new equipment market environment. With a growing backlog, the China market sequentially improving and a strong market demand in many of our geographies, we are positive about the New Equipment projects going forward.

Let me now turn it over to Judy to discuss the outlook for the remainder of the year.

Thank you, Cristina. Turning to Slide 9. Our sales outlook and market expectations remain unchanged. We continue to expect the global new equipment market to stabilize with growth in all regions except China. Our global outlook for modernization remains robust with double-digit growth across all regions. We're watching the Middle East conflict but do not expect a significant impact to our outlook. We expect net sales of $15.1 billion to $15.3 billion, with organic sales growth of low to mid-single digits. The quarter reinforced our confidence in the sales growth trajectory of the business. We continue to see strong top line momentum, particularly across our Service segment, while we take actions to strengthen service quality, backlog execution and customer retention to sustain growth.

While our revenue outlook remains unchanged. Our focus remains on executing the investments in service quality, balancing productivity and cost management and converting strong demand into sustainable earnings growth over time.

With that, let me turn to Slide 10 and discuss the key areas of focus and the progress we're seeing. As we have discussed earlier this year, our priorities have been clear. ramp up top line growth by converting the robust modernization backlog, coupled with our strong growth momentum in repair, capture the flow-through of our micro pricing initiatives, improve service quality to strengthen retention and execute cost reductions in nonfrontline related activities. We are seeing progress in the acceleration of modern repair sales and in micro pricing initiatives in the repair business. However, we have not yet seen a significant improvement in retention. It is taking longer than expected. And because of that, we're tempering our AI micro pricing implementation and maintenance to balance this.

We expect this headwind to have about $20 million impact versus our prior outlook for the full year. In addition, while we've executed on our cost reduction program and expect to realize savings for the balance of the year consistent with our prior outlook, we have experienced productivity and cost impacts as discussed previously. We estimate this headwind to have a $50 million incremental impact versus our prior full year outlook. Walk productivity remains below our original expectations we continue to believe that the majority of these pressures are temporary, and the actions we're taking today, together with our service operating model program will support stronger sustained performance over time.

In summary, there are 3 takeaways: renew growth remains strong, our service quality metrics are improving and our operational initiatives are progressing. While the timing of retention benefits has shifted, and we have observed headwinds in productivity and costs, we are as confident as ever in our strategy and our service flywheel.

With that, let me turn it over to Cristina to summarize our financial outlook.

Thank you, Judy. Turning to our financial outlook on Slide 11. We now expect adjusted operating profit to be in the range of down $30 million to flat on an actual currency basis, and in the range of down $45 million to $15 million at constant currency. The revision reflects the retention and tempered maintenance micro pricing impacts as well as the productivity and cost headwinds mentioned earlier. Our adjusted free cash flow is now expected to be between $1.5 billion to $1.55 billion, in line with the operating profit outlook change.

Moving to the 2026 EPS bridge on Slide 12. The reduced operating profit outlook will result in an adjusted EPS range of $4.01 to $4.05. The change versus the previous outlook reflects the adjustments from retention, pricing, productivity and cost as well as a negative impact of $0.04 due to foreign exchange. Providing some color on the third quarter. We expect service organic sales to remain strong at mid-single-digit growth. mainly driven by repair and modernization that will continue to grow on the back of the strong orders momentum.

New Equipment organic sales trend versus prior year is expected to continue to improve sequentially. Total adjusted operating profit is expected to be flattish in the third quarter. But with the impact of tax rate cannibalization, we anticipate that it will result in an adjusted EPS decline at a level similar to the first half of the year. For the balance of the year, we expect momentum to build in the second half as the operational actions Judy outlined continue to take hold.

Service profit would improve sequentially as productivity increases and the benefits of our initiatives begin to materialize. Together with recovery in new equipment volumes, this positions us for profit growth in the fourth quarter. Stepping back, we recognized in the last quarters, we have faced challenges in service, which we are actively working to address. The execution of UpLift, while setting the foundation of a stronger and more efficient operating model did cause some disruption in service execution in 2025. In addition, portfolio mix has been a headwind driven by geographic mix and a recent increase in cancellations. UpLift has been completed, and our new operating model is working and running stable. We have taken the decision to reinvest in the core of the business, and we recognize 2026 is a year of investment. This requires a cultural shift into service quality and customer centricity impacting certain results. However, we strongly believe that the investments we are making today in service excellence are creating a strong foundation for the future.

And as a next step, we plan to systemically drive excellence across our 1,400 operating territories through our service operating model. In addition to the maintenance strategy, we are excited about the sustained growth in repair and modernization that is expected to continue. This and the new equipment business being back to growth in the second half with a growing backlog gives us confidence that we are well positioned to sustain our industry-leading margins and capture growth for years to come.

With that, I will kindly ask Krista to open the line for questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from Nigel Coe with Wolfe Research.

Thanks for the details on the guide. Maybe just -- I mean I think you kind of made it clear that you've dialed back on the micro pricing and -- but I wonder if you can maybe just talk about some of the productivity headwinds that you're seeing that wasn't clear. And then maybe, Cristina, could you just maybe just lay out kind of how you see the service margin progression through the balance of the year?

Yes. Thanks, Nigel. So listen, we -- let me be clear what we're doing with the AI micro pricing. First of all, we've seen tremendous success with it in our repair business. We see it. We see it flow through and we see it flow through rather quickly because from the time we take an order, we typically execute that repair backlog in a period of short -- low single-digit months 1 or 2 months and then we see it flow through. So we're very pleased with the ability to get price there.

On the maintenance side, there's really 2 factors going on. One, which we've always known as most of our maintenance contracts come up every few years. So we don't have the opportunity to reprice them on an annual basis. So when they come up, we're trying to drive for that. But trying to balance retention rates with additional micro pricing is where we're trying to find that balance, Nigel, that says in the maintenance contract, let's see what's appropriate. We understand where our costs are and the micro pricing is giving us that detail by segmentation. But we also don't want to drive additional potential customers who are on the fence because of our former service quality challenges that we're now investing in, we don't want that to be the tipping point for them. So it's an account-by-account balance when we say we're kind of rebalancing that more so than a wholesale change or a pullback?

Nigel, I'm complementing to your 2 other questions about what happened with productivity and our expectation of service ramp-up -- service margin ramp up in the second half. So first, stepping back, we are very pleased with the service revenue take up in the second quarter. This is in line or even above expectations. And also the investments we portrayed in the last quarter, we said $50 million this year. They are progressing exactly on plan. While we have observed in the second quarter on productivity is twofold. On the one side, as we are investing, we see the cultural shift into quality and customer centricity that is creating some headwinds in productivity that we are actively addressing. The second component is temporary that is related to the ramp-up of resources because we are increasing the number of mechanics that we are allocating into highly skilled activities, repair a modernization and the onboarding time is longer because of the preparation required for those activities. And second is, we have significantly accelerated execution of most 24% in the quarter in order to deliver our customer commitments. And this creates some headwinds in rate in order to have the resources available when and where needed.

Now looking into the second half of the year. We are very positive about revenue growth. This is going to continue. We are expecting in service approximately 6% revenue growth in the second half of the year. The reason from 9% to 6% in the second half is because modernization would normalize to a low teens level. Then on the New Equipment side, we are also going to continue growing. In fact, we expect positive growth in Q3 and the margins [indiscernible]. Looking at the margins in service when you compare first half that are around 23.1% to the second half expected around mid-24%, this is a 150 basis point margin expansion in the second half based on 80 basis points from repair price. This is happening.

We see that coming in the backlog. 50 basis points coming from modernization and repair volume also happening. We have the orders in place and we have the resources to execute. 30 basis points is the SG&A allocation into service. You may remember that we communicated $10 million restructuring in nonfrontline related activities last quarter. This has been executed in the last 2 months, and we are now going to capture the benefit in the P&L. And we have a little bit of headwinds from FX because of the mix of the -- where the FX moves are coming from. This is assuming the productivity headwinds we have seen in Q2 will continue in the second half, which is an opportunity for us to address and to do better.

Okay. I realize I ask the multi question there. But maybe if I could just follow on. Before I do that, Cristina, I just want to say congratulations on the World Cup. Huge for Spain obviously...

Thank you, Nigel.

Very important, obviously, to mention that. And then just on the retention, Judy, I think you mentioned retention has taken longer to -- improvement taken longer to achieve. So just maybe just kind of put a bow on that point. Why is it taking longer? And are you still confident by year-end, you're going to make progress.

Yes, we're absolutely going to make progress and continue. Nigel, you've always heard me say orders can be lumpy retention varies by quarter, which is why we try not to report it quarter-over-quarter, but we certainly watch it more frequently than that. And what we're seeing is just some -- we had some retention challenges, primarily in our portfolio in the Americas was down, not significantly, but down a little, and that's why we are investing in service excellence, and we're continuing to do that throughout 2026 because where we see we've made the investments we're seeing as the service quality improve -- that hasn't instantaneously changed the retention rate.

You're talking about a portfolio of 2.5 million units with the average customer having 4 units. So we -- across the globe. So we have a lot of customers, and we really need to drive the service operating model and buying good service excellence and customer centricity. And all of that, we really are convinced will show improved retention at year-end. We understand how important that is. And we did see portfolio gains in EMEA -- we did see significant portfolio gains in China in high single digits, and we did see it in Asia Pacific as well. So we're comfortable that we have the trajectory to get there. We're also comfortable we've got the initiatives and the folks to get there. I can tell you if you stop any Otis colleague who I really need to thank our 72,000 colleagues are working diligently every day but so many of them are customer-facing.

And if I ask them, what do you think is most important? I think they're going to answer first, safety because it's one of our absolutes. And the second thing they're going to say is satisfying our customers. And that's the culture change that we want to ensure in doors and then we measure it through return.

Your next question comes from the line of Jeff Sprague with Vertical Research.

Judy, I just want to come back to retention for a follow-up. Maybe just kind of get to the root cause, sort of the nature of my question is, right, we kind of had the retention disruption with kind of the UpLift program. There was some customer connectivity that wasn't clear until the program was executed and it caused some disruption. I sort of thought that was behind us. So is it really you're seeing just more elasticity to price now as you're moving through this I guess I'm not surprised retention is not going up quickly, but I'm a bit surprised that it's gone in reverse in at least a couple of places.

Yes. Listen, Jeff, it's gone in reverse in a couple of places, but only by -- if you look at the first half of the year, I'm not going to give you a number, but it's a small number of basis points. But you know us to be transparent. We're always going to tell you whether it's up or down and share good news and bad news, but make sure we act on it. It's not pricing elasticity it's not ISP is gaining share. It really is, if you think about a 4-year contract in North America, we still have some residual flow-through regardless of the service excellence we're doing with some customers who were just -- who are choosing to change based on multiple years. .

We are focused on addressing that through service excellence. I think the service operating model will address that in total across the enterprise. And so these lighthouse operating territories where we've done the service excellence using the 7% gain and the majority of those -- the clear majority of those have much higher retention rates that track with those service quality metrics. But it's not what people naturally go to on price or on a different service offering from an ISP.

Understood. And then just a comment, I think it was Cristina. I think you said kind of the shift to quality has negatively impacted productivity. Is that indicative of just the higher level of training? Or what's really sort of the root of that?

Well, part of the root of it is as we -- it's really interesting in our industry. And again, with 2.5 million units some mainly Otis but other non-Otis equipment. The equipment is aging, and we see that, obviously, through the great upside we've seen in repair and modernization revenue, and that demand is going to continue but with that comes some more complex maintenance that has to happen on our comprehensive contracts, and so as we see that unfold, that's not so much -- there's some labor involved in that, and we discussed that but there's even more material involved for some of these older -- these contracts where we offer comprehensive service, and we have seen inflation in repair parts. We've seen inflation in raw materials, but especially in repair and spare parts for the [ non-Ernest ] equipment we've seen pretty significant inflation, and we have our maintenance contracts for 4 years. So that's what we need to offset. And we've seen that because of the quality focus. So that's what we need to offset with productivity and eventually with price when that comes up for renewal.

Your next question comes from the line of Alexander Virgo with Evercore ISI.

I wondered if you could just expand a little bit on this tempering of micro pricing point. I think Jeff was talking or alluding to the fact that maybe you've got a bit of price sensitivity, and it sounds like you've still got a bit of a hangover from the sort of legacy customer quality issues. I was wondering how much of this is sort of a function of you trying to push the price up and discovering that actually, these guys are going to walk away. So you're going to just temper that and that's what tempering means.

I wondered if you could talk a little bit about what you're expecting before versus what you expect -- it feels like it's quite a big swing. So if you could expand on that, that would be super helpful. And just as a follow-up, on the service margins, Cristina, thank you for all of the detail on that. That's super helpful. You talked -- I just wanted to clarify, ultimately, you talked about productivity headwinds remaining in the second half despite all of the other things you talked about as a tailwind. So as we roll into 2027, what would we -- what should we be thinking about in terms of these productivity headwinds, the $50 million as we look to '27?

Alex, thanks for the two questions. Let me address first the pricing question. So first, clarifying that we are executing our usual price increase in maintenance stable as we have done before. This year, our goal was on top of the usual price increase. We wanted to add micro pricing that we knew in maintenance was going to take longer because of the time of the negotiation of the price adjustment and the time to penetrate the base. [ Rebar ] is working exactly as we expected. And we -- you may remember, we said we're going to have $50 million increment price impact this year. $35 were from repair. This is in the outlook and it's unchanged. It's the $15 million, I mean, from maintenance that we are kind of balancing out with where we see the cancellation.

We think of micro pricing is we can be very targeted. We are not increasing the same price to everyone. So we are only tempering in those customers where we see the quality indicators are not there. We are not pushing those initiatives on top of the incremental price increase that we always have because of inflation. So it's just the upside from micro pricing that is coming later because we are prioritizing retention.

Now moving to the service margin question and what it means for 2027. I want to reinforce the point that we are still very, very confident that our investment thesis on the flywheel remains unchanged. We had a strong generator of profit and cash flow, and we are very encouraged by the revenue take up and that's going to continue over time because we see an ongoing orders intake in repair and modernization of around low to mid-teens in the case of most higher than repair. While we have those orders, we are also building up the operational machine. We are ramping up resources in order to execute sustainably this ongoing growth in sales will ramp up the resources, and we also invest in the core of the maintenance business, we are seeing some short-term headwinds in our results because of the cost to ramp up. But we are confident that we are -- we can address them because we have a great track record of addressing efficiency, productivity on the field. And that's what we are going to do going forward.

So now looking into '27, you can expect an ongoing revenue growth. New Equipment is going to grow because we have a growing backlog, and we will see the growth happening in the second half of the year. We see service ongoing growth. On the profit side, new equipment margins should gradually get better. And on the service side, you are going to see the ramp-up in the second half of the year. Service margins are going to expand. We will come back to you on your time on precise guidance for 2027.

Yes. Alex, let me add just some color here and some commentary. And as we were preparing for this and Cristina said, and you think about the 5 years since spin, we do know how to manage productivity, operational effectiveness. We've shown that in -- within multiple headwind scenarios, whether it was COVID or something else or supply chain challenges, we know how to do that. I hope you all realize we recognized that we were going to see an increased demand signal in our markets in the elevator and escalator markets that's a little unprecedented for at least the past, let's just say, decade. .

We saw that the service business was going to ramp up due to the aging of equipment, and we knew we needed to prepare for that. That's different type of muscle and culture and process to be able to simultaneously globally handle the ramp-up of a service business whether it's through our workforce, whether it's through tools and technologies. But we started investing by hiring mechanics well over a few years ago, we brought on about 1,000 each year. We're continuing to do that. We've put training programs in place. The investments we've made in service excellence are for preparing for the future, but also reacting to our retention that went down at the end of '24.

And I just want you to understand the ramp we're on and why we're investing this year and actually why we took the outlook down, I think it's important for everyone. As we look at 2025 in service on the top line, our maintenance for the year was up 2.5%, repair was up 5.3% and mod was up 9.3%. This quarter alone, maintenance was up 3%, repair was up 12% and stand out on mod on 24%. I don't believe it will stay at that level. I think it will come down -- normalize a little into the teens. But that was the ramp we knew it was coming. And it's not a short-term ramp. It's not a few quarter ramp. This is a multiyear into the 2030s ramp as we see all this equipment aging -- so this is our time to prepare. And this is what we're doing with the service operating model. This is how we're getting ready. Like many other industries are getting ready for technology change and everything else, this is our industry's time, and this is how Otis decided to invest and to lead.

We understand that bringing the outlook down is not ideal and while we're making these investments, we have seen increased costs in material, in labor, and we haven't been able to recover that fully in pricing. We understand that but these investments will prepare us not just for '26, but for '27 through 2030 and beyond because the demand signal is there. I couldn't be more pleased with the top line and what we've been able to show, we have not had results like this previously. That is going to continue, plus or minus 1 point or 2. That is going to continue as we go through the year and through the out years. And again, we'll share more outlook in '27.

Your next question comes from the line of Varun Govindaraj with Bernstein.

Quick question just touching on the EPS number again. When we look at that $0.20 that you sort of cut for the back half of the year, obviously, you've talked a bit about that being the mix. Are there any investments sort of baked into that as well? I'm just trying to get a sense of how much of this is structural versus how much of this is temporary? And I know we talked about it a little bit, but any clarity you can share on the numbers would be super helpful.

Yes. So Varun, on the investments we communicated in Q1 $50 million investments by fold. This is included in the outlook and is progressing as we said. Out of the $50 million, we have invested $15 million each quarter in Q1, Q2 saw $30 million in the first half of the year, and we expect another $20 million in the second half of the year. Now moving into the productivity headwinds, and we are now anticipating another $50 million [indiscernible] incremental to the previous outlook. $30 million out of that is temporary because it relates to the ramp-up of resources and the higher rate [indiscernible] execution. $20 million relates to what Judy mentioned before about inflation, material that we are investing in order to drive quality up in our service excellence program and we are going to address this productivity and incremental material costs with our service operating model program.

Got it. Super helpful. And then a quick follow-up in terms of hiring. How is that looking for the back half of the year? Do you sort of have the head count that you're looking for? Are you still trying to pull talent I know this is a tough environment for technical talent more -- just given the amount of demand. But how are you sort of thinking about that?

Yes. The way we're thinking about it, so I always try to remind people that we have a professional skill trade that is not something that is -- that moves to become electricians or welders or something. Our mechanics, they train, they are true professionals and they stay in this industry for the majority of their careers. So we're not competing with the buildup of data centers that's grabbing a lot of other skilled trades. As a matter of fact, our data center business, especially in the Americas, has been up significantly. So we're not competing with that. But we are competing with all of the other challenges that with an aging population versus less availability of people who want to go into trades, we are focused on that.

Our hiring is pretty geographically dispersed. It ranges from Asia Pacific markets, to EMEA markets to the Americas. Obviously, China is at a stable point. And many of our China field teams actually support us in the rest of the globe as we go through surges. They become field traveling teams. So we're not concerned. We said we would think this year would end about where we've ended the last 2 years around that plus 1,000. We're well on track for that. We're controlling voluntary attrition to the best of our ability with our mechanics because that's the best place is to retain mechanics. We obviously have mechanics who are retiring but we have just as many mechanics in 0 to 5 years with us as we do in 30 years plus. So we've got a nice distribution. We're not seeing a cliff with huge retirements, but we're balancing that in these 1,400 operating territories on a real-time basis.

And then obviously, as we bring new mechanics on, some are skilled they're coming from other competitors and other companies. Others are brand new into the industry. And that's the mix where we're trying to address the more complex repair and mod growth versus the skills required for maintenance.

Your next question comes from the line of Nicole DeBlase with Deutsche Bank.

Just on the kind of bridge to get to what you guys had talked about for 3Q and 4Q. Cristina, is it possible to give some color around the exit rate on service margins. My math is kind of telling me that you have to exit around mid-20s to get back to profit growth in the fourth quarter. But if you could confirm that? And then, I guess, if we could talk through some of the major bridging items that drive the improvement in service margins from Q2 to 4Q.

Sure, Nicole. So first, some color on Q3 and Q4. On Q3, we expect service revenues to grow around 6%, which would be maintenance and repair around 5% and low teens in modernization. We expect margin rates to gradually ramp up in Q3 will be around mid 24% and on the New Equipment side, we will move into growth, and it will be around low single growth in the quarter and gross will be in line with the second quarter. So overall, as I said before in the script, the operating profit flat although EPS will be down because of the calendarization of the tax initiatives in the year that are very backloaded into Q4.

Now your maths were correct in Q4. In Q4, we expect operating profit growth on the back of ongoing growth in the equipment with more or less stable minds, ongoing growth in service revenues also around 6%, but with another ramp-up in service rows. So the ramp-up is essentially coming from repair price that is in the backlog. So we see it's just a matter of executing this backlog is about the acceleration of modernization and repair volumes also in the backlog. SG&A will be reduced. So the growth we have seen in the first half will be lower in the second half because we will see the flow-through of the restructuring actions activated in the last 2 months, and we have some headwinds on FX compared to the first half. So that will end in the around 25% margin by Q4 and will be for the full year at that below 24% for service loss.

Okay. Understood. That makes sense, Cristina. And I guess just kind of back on the price cost point, steel costs have continued to go up alongside what's happening with your pricing and micro pricing initiatives? How are you guys thinking about the impact of cost in 2027, is that when we start to see the impact of the steel inflation come through based on the timing of your steel purchases? And how confident are you, you can pass that through via price? Or is it possible that price cost could be a challenge in '27.

Yes. Listen, we're not going to give you a guide to '27, but I think it's important to understand that from a commodities perspective, we have locked in the majority, almost 98% of our commodities globally for the rest of this year. And where that impacts is not just on new equipment, but on mod. So it's in both segments and/or a subsegment, if I may. Listen, we have the ability to price and to have that flexibility as needed and have discussions with customers. We had that when the Middle East flared and we needed to raise prices besides the normal price adjustments we get on service. .

So 27, we will continue to monitor. We'll lock in early for '27 if it makes sense. We continuously review this. And we do this local-for-local. Remember, we manufacture local for local. And while we may have global purchasing agreements, they do get implemented on a local basis at our 16 manufacturing facilities. So we're going to continue to watch that. Our raw material costs typically are $600 million to $700 million a year, so it's not a huge number for us because so much of our revenue and our profit, especially is in the service side. So we're -- we think -- we know we have this year covered and we're preparing already and evaluating '27 with actions now. It's all about supply chain resilience. It's all about productivity and obviously, getting material productivity from our suppliers. And we've shown we know how to do this in the past, and you're going to see that again in '27.

Your next question comes from the line of Lewis Merrick with BNP Paribas.

Could just go back into the operating profit, you said that in Q3, operating profit should be flat sequentially. I just want to confirm that.

Yes. I said, Lewis, I said flat versus the prior year.

Okay. All right. And then on the New Equipment, I mean, during the quarter, it looks like you made a lots of in market share based on the order [indiscernible] planting competition in a one-off issue or several months.

Yes. Lewis, I don't think we lost market share in the quarter. Our backlog is actually up 4% and if you look at New Equipment for us, standout performance in North America, yet again for the eighth straight quarter where their orders were up 15% again after a strong 24% in the first quarter, and I'm really thrilled to share that we are just honored -- most recently, we were announced our partnership in collaboration with Silverstein Properties and Turner Construction, where we secured 60 elevators and escalators to world trade. .

China new equipment is in line with us. As a matter of fact, everything China this quarter was as expected, whether it's the market or how Sally and the team performed, it was exactly as we expected in New Equipment and it's in line. And as you see with our New Equipment service, our lease down in 9 quarters, we really are starting to see that pick up.

In Asia Pacific, we had 2 major projects in India and in Singapore last year. So it's a compare issue there, which is why the New Equipment orders look down. So I'm confident in New Equipment don't believe it's -- we compete with ISPs. They're not taking our share anywhere we can see, and we're going to continue again, we always knew we would get to a place in New Equipment. It's taken us a while. It's taken the market a while to where we can have that ability to finally grow again and not have the headwind of New Equipment. That's what you're going to see in the second half of the year with a 10% up in the Americas in the second quarter and that continuing because we've had 8 straight quarters of New Equipment growth.

Just one other comment on -- and let me just correlate it to mod in case you had question there. Our backlog is up 26%, which is still a tremendous backlog. And we need to execute it. We need to convert it, and we showed we could do that with 24% this quarter. But no one's taking share from us in mod right now. For China mod orders were up over 100%. Some of that due to the bond stimulus but also due to a tremendous project called Tension 117, where we're going to supply 250 -- over 250 elevators and escalators to the tallest current construction or modernization site in China. So that's going to get converted as we go through the year. The compare is going to be tougher on the mod stimulus because it was more second half loaded last year, but you're going to see strong mod performance through the back of the year. And mod orders, we had a couple of tough compares second quarter last year, had a great large commercial win in the U.S. and another large commercial win in Australia. And so it would have been double digits without it, but we don't report that way. I just want you to understand the bridge.

And that concludes our question-and-answer session. I will now turn the conference back over to Judy Marks for closing comments.

Thank you, Krista. In 2026, we are investing in capabilities to accelerate our top line growth and profitability. Together with fundamental tailwinds of the aging installed base, Otis is well positioned to deliver attractive, sustainable long-term shareholder value through our service business. Thank you all for joining us today. Please stay safe and well. .

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Good morning, and welcome to Otis' First Quarter 2026 Earnings Conference Call. This call is being carried live over the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com.

I'll now turn it over to Rob Quartaro, Vice President of Investor Relations. Please go ahead.

Thank you, Krista. Welcome to Otis' First Quarter 2026 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Christina Mendez, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties.

Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q provide details on important factors that could cause actual results to differ materially.

Now I'd like to turn it over to Judy.

Thank you, Rob. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope everyone listening is safe and well. Starting on Slide 3. Otis delivered a solid start to the year in orders and sales with continued demand momentum that provides visibility for future growth, especially in our Service segment. Total organic sales increased 1% in the quarter driven by organic service growth of 5%, with broad-based strength across all service lines of business. Maintenance and repair sales increased 4% driven by an acceleration of organic repair sales, which increased approximately 10%.

In modernization, we continue to see strong demand with orders up 11% in the quarter and the backlog up 30% at constant currency. This backlog provides improved visibility into the future and supports our view of modernization as a durable multiyear opportunity as the global installed base continues to age.

In new equipment, market conditions remain mixed, but we see encouraging signs of stabilization. Orders increased 1% at constant currency and 5% excluding China. Backlog increased 3% year-over-year at constant currency and was up 11%, excluding China, giving us good momentum for the remainder of 2026 and beyond. While China continues to weigh on results, demand across the rest of the world remains positive, especially in the Americas, where orders grew more than 20% in the quarter for the seventh straight quarter of orders growth.

Otis delivered another quarter of strong cash flow performance with adjusted free cash flow of approximately $272 million, up 46% versus the prior year. This reflects a ramp-up in orders, improved working capital management and continued focus on cash conversion. Yesterday, we announced a 5% increase to our quarterly dividend. Since spin, our dividend has increased by approximately 120% consistent with our disciplined approach to capital allocation and our commitment to returning cash to shareholders.

During the quarter, we opportunistically completed approximately $400 million of share repurchases reflecting our ongoing approach to capital deployment while maintaining flexibility to invest in the business and support long-term value creation. We recently announced the majority investment and we maintain a digital and AI-enabled elevator service provider. We anticipate this transaction to contribute incremental growth as we maintain offers a compelling connected solution with a complement to Otis ONE for a multi-branded portfolio base. We're excited to welcome and support the -- we maintain team and integrated ecosystem and look forward to the long-term value creation opportunity. We're continuing to build our services capability to drive growth and margin. We will continue to invest in field and sales resources to support the service business.

Lastly, we recently announced 2 new innovation offerings. The first is Otis robust, a range of heavy-duty elevators designed for data centers and other mission-critical environments. I'll share more in a moment. Secondly, we also introduced Otis Veeva solutions which supports safer and more accessible mobility for aging populations. Otis Veeva solutions focused on improving everyday usability and accessibility and elevators across both existing buildings via modernization and new installations.

Turning to our orders performance on Slide 4. Combined new equipment and modernization orders increased 4% in the quarter, reflecting continued strength in the modernization business and new equipment orders returning to growth. The combined new equipment and modernization backlog increased 9% year-over-year, and our total backlog remains at historically high levels, approaching $20 billion, setting a solid foundation for future earnings visibility.

New equipment orders increased 1% at constant currency in the quarter. We saw a strong performance in North America with orders up more than 20% and low single-digit growth in EMEA driven by the U.K., Central Europe and Western Europe. These gains were largely offset by a greater than 20% decline in Asia Pacific due to a tough prior year comparison as well as continued softness in China where orders were down low teens. Modernization continued to perform well with orders up 11% at constant currency, driven by North America and China each up greater than 20%. This was partially offset by EMEA down high single digits and Asia Pacific down mid-teens as both regions faced difficult comparisons for major projects in the prior year.

Before moving to financial results, I'd like to mention several highlights from the first quarter. In France, Otis has been selected by Marseille Metropolitan Transport Authority to fully replace and maintain 51 escalators across 10 metro stations. The scope includes the installation of 35 escalators designed for standard heavy-duty metro use and 16 additional escalators engineered for the most demanding environments, featuring greater vertical rise and very high passenger volumes across one of France's busiest metro networks.

In the Americas, Otis has been selected to supply 46 units to the Austin Convention Center redevelopment in Texas, including SkyRise and Gen 3 elevators as well as public escalators. We view the expansion of the Austin Convention Center as part of a broader modernization opportunity across the U.S. Convention Center segment, where many facilities built 20 to 30 years ago are now being upgraded to meet today's capacity accessibility and performance requirements. In China, Otis will upgrade 46 elevators at the Run win community in Harbin City as part of a bond-funded residential renewal project replacing all units with Gen 3 comfort elevators. This represents the first nationwide implementation of the Gen 3 Comfort model since we launched it at the eighth China International Import Expo, aligning with the country's good housing standards. Built for residential modernization and elderly friendly living Gen 3 comfort elevators feature full-height mirrors to enhance spatial awareness, bright LED lighting to improve visibility and comfort, increased cab height for a more spacious and comfortable ride and smart recognition cameras to detect and prevent safety hazards.

The elevators are also equipped with a regen energy regeneration system and Otis ONE IoT platform, delivering a safer, more comfortable, energy-efficient and connected travel experience for residents. And lastly, as I previously mentioned, we recently launched our Otis robust range of elevators to serve data centers and other mission-critical environments, including hospitals and industrial buildings.

Otis Robust is built for high-capacity, high-traffic applications that require durable, reliable around-the-clock operation, reflecting growing demand across infrastructure-driven markets. Engineered for heavy-duty performance and accelerated project time lines, our robust solution demonstrates our commitment to product innovations that serve our customers' unique needs, including movement of high-value freight and passengers.

Turning to our first quarter results on Slide 5. Otis delivered net sales of $3.6 billion with organic sales up 1%. Adjusted operating profit, excluding a $28 million foreign exchange tailwind decreased by $38 million in the quarter. Adjusted operating profit margin declined 130 basis points to 15.4%. Adjusted EPS declined 3% or $0.03 in the quarter driven by operational performance partially offset by favorable foreign exchange rates.

With that, I'll turn it over to Kristina to walk through our results in more detail.

Thank you, Judy. Starting with service on Slide 6. Service organic sales grew 5% in the quarter, with growth across all lines of business. Maintenance and repair organic sales increased 4% with organic maintenance sales of 2% and driven by 3% portfolio growth and approximately 3% positive pricing, partially offset by mix and churn. Repair organic sales were in line with our expectations, up 10% and reflecting solid orders momentum and healthy customer demand across all regions.

Modernization organic sales grew 6%, supported by a strong backlog conversion in the Americas China and Asia Pacific, partially offset by a decline in EMEA. We experienced modernization project delays in EMEA due to the conflict in the Middle East during the quarter. However, we remain convinced of the underlying demand for modernization as evidenced through the progress we continue to make on orders. As Judy mentioned earlier, our modernization backlog is up approximately 30% at constant currency, which give us confidence in our outlook for the remainder of the year.

Service operating profit was $556 million in the quarter, down $10 million at constant currency. Higher volume and favorable pricing provided a benefit that these were more than offset by continued investments to support long-term growth, higher labor and material costs and unfavorable mix, particularly in our maintenance business. As a result, Service operating margin contracted 160 basis points to 23%, reflecting investments in service capacity and quality as well as ongoing cost inflation. As the growth in lower-value maintenance units has driven negative mix in our portfolio growth in recent quarters. As we are focusing on shifting these dynamics to capture higher value units, we are investing significant resources in service excellence. We are also continuing to hire to support our long-term growth ambitions.

In a moment, Judy will provide some additional insights on these dynamics and the actions we are continuing to take to address these headwinds.

Turning to new equipment on Slide 7. New Equipment organic sales declined 5% in the quarter. Growth in EMEA was more than offset by declines in Asia, particularly China and slightly lower volumes in the Americas. EMEA sales increased approximately 1% driven by growth in Southern Europe, partially offset by weaker performance in Western and Central Europe. Asia declined 13%, reflecting China's lower backlog with sales down more than 20%, alongside lower sales in Asia Pacific with a strong growth in India, more than offset by softness in other parts of the region.

New equipment sales in the Americas declined approximately 1%, a sequential improvement from last quarter as we begin to execute on the strong order growth that began in the second half of 2024. Looking ahead, we expect the Americas to return to positive new equipment sales growth for the full year in 2026. New Equipment operating profit of $38 million declined $27 million at constant currency, with operating margin declining 240 basis points to 3.3%, in line with our expectations. The decline in profitability was primarily driven by lower volumes and favorable price and mix, partially offset by productivity.

Looking ahead, we remain focused on disciplined execution, productivity and cost management as we navigate the current new equipment market environment.

I will now hand it over to Judy to discuss our [indiscernible] margins and the actions we have taken to return them to past levels. Judy, back to you.

Thank you, Christina. Turning to Slide 8. We realize we have seen some volatility in our service results in recent quarters, which is unusual given the nature of our stable and predictable service flywheel. 2025 was a year of uplift implementation in our frontline operations, which caused some disruption in repair and modernization execution in the first half.

At the same time, we redefined our service strategy with the goal to maximize lifetime value by investing in service excellence and driving growth in our highest value markets. We're pleased with the progress we've made in strong repair and modernization orders in the first quarter and we're also encouraged to see our retention rates excluding China stabilizing.

However, we experienced short-term profit pressure in the first quarter in our service business, driven by 3 factors we're working to address. The first factor is our investments for growth. Since the second quarter of last year, we've been adding field colleagues to drive our service excellence initiatives as well as adding sales resources to support our growth. Overall, in Q1, we have $5 million of additional field costs in the baseline devoted to service quality.

In addition, in Q1, we invested approximately $10 million in sales capabilities in high-value markets, including tools and our AI pricing algorithm, sales representatives and training of the sales force. For the full year, we expect $50 million of incremental investments in 2026, inclusive of what we've executed in the first quarter. The second item is portfolio mix. While we've grown our maintenance portfolio 4% for 4 consecutive years through 2025, in the first quarter, our portfolio grew 3%.

Importantly, more of the recent growth has come from lower value markets. This negative mix has been a drag, causing maintenance organic revenue growth to decelerate to approximately 2%. While we recognize this headwind last year, we anticipated a faster recovery in higher-value markets. Third, we have seen revenue delays and timing of cost recovery driven by inflationary effects in our base, partly related to the Middle East conflict. As we look ahead, we're taking decisive actions to address the headwinds to service margin and drive sequential improvement in the coming quarters.

As I mentioned, the portfolio mix headwinds have been higher than anticipated and we've decided to scale up investments encouraged by the positive results from the pilots in place. We're confident that the improvement in retention rate will pay off, and we will return to margin expansion by the end of the year. Additionally, we're investing in micro pricing capabilities. And as we roll out the pricing initiatives that started last year across multiple high-value markets, we anticipate accelerating maintenance organic sales growth back to 3% in 2026.

In addition, we remain extremely bullish on the outlook for both modernization and repair demand due to the aging of the global installed base. Going forward, we expect repair organic sales to grow approximately 10%, while modernization orders are expected to grow in the low teens or above on a sustained basis. Within repair, we're replicating the industrialized and proactive approach that has delivered such strong results in modernization. By leveraging insights from Otis ONE connectivity together with our unique capabilities from factory to the front line, we are proactively driving repair volumes and reducing customer downtime.

First quarter repair results were very solid. We expect this trend to continue throughout the year. Regarding cost management to address cost headwinds experienced in the first quarter, we are implementing fuel and logistics surcharges, though there is a time lag versus cost incurred as we implement these pricing actions, we expect to fully offset these higher costs as we pass them on via pricing throughout the year.

Finally, we're executing a targeted cost reduction program in nonfrontline related activities. After finalizing uplift in 2025, we're refining our global functions to be business-centric and removing discretionary spending that's not business-critical. We expect this to result in up to $20 million of run rate savings and indirect expenses. Please note of the $20 million targeted run rate, we expect to achieve approximately $10 million in 2026.

Overall, while recognizing a setback in our service profit in the first quarter, we are addressing the root causes while sustaining our investments to return to our post-spin margin levels. With the actions in place we expect service margins to sequentially improve in the coming quarters and return to year-over-year margin expansion towards the end of the year as we capture the benefits from retention, pricing, execution of our growing orders in repair and modernization and optimization of our costs.

Moving to Slide 9 with the market outlook. Our 2026 market expectations have not changed. We continue to expect the global new equipment market to move towards stabilization in 2026 with industry units down 2% for the year. This expectation includes growth across all regions except China. In Americas, first quarter demand in North America was robust, and we continue to anticipate solid growth for the full year, driven by strength in residential, health care and data centers. Latin America market volume is expected to stabilize, supported by public investment in Brazil. Growth in EMEA is expected to accelerate this year, driven by broad-based strength in Europe, and continued expansion as the Middle East continues to build its future economically despite the current conflict.

At this time, we have not adjusted our beginning of year forecast for the Middle East. However, should the conflict continue for a prolonged period, there is a risk that new equipment demand could be negatively impacted. In Asia Pacific, we're anticipating last year's expansion trend to continue driven by robust demand in India and Southeast Asia, while Korea is expected to stabilize this year after a challenging past several years.

Lastly, in China, we believe the worst of the market decline is behind us. While units are expected to decline in 2026, demand is continuing to trend towards stabilization. Taken together, we expect Asia to decline in 2026, the global outlook for modernization remains robust with the market continue to grow double digits on a dollar basis, with growth across all regions. This is due to past construction cycles and the demographics of the aging installed base. We continue to believe we're in the early innings of a multiyear growth cycle for modernization that we're just beginning to capture in both phased and full modernizations.

Turning to our financial outlook. We now expect net sales of $15.1 billion to $15.3 billion, with organic sales growth up low to mid-single digits. While we've experienced limited project execution delays due to the conflict in the Middle East, we believe these delays are recoverable through the remainder of the year. We now expect adjusted operating profit to be approximately $2.5 billion up $20 million to $60 million at constant currency and up $60 million to $100 million of actual currency. Given the new profit outlook, adjusted EPS is now expected to be $4.20 to $4.24, still in the original range of our guide, representing a mid-single-digit increase compared to 2025. Adjusted free cash flow is anticipated to be between $1.6 million to $1.65 billion. We opportunistically completed $400 million of share repurchases in the first quarter, and we continue to target $800 million for the full year front loaded in the first half of the year.

I'll now pass it back to Christina to review the 2026 outlook in more detail.

Thank you, Judy. Turning to our organic sales outlook on Slide 10. We continue to expect low to mid-single-digit organic sales growth driven by accelerating growth in service and moderating declines in new equipment. Our outlook for service organic sales remains unchanged. We are anticipating mid- to high single-digit organic sales growth within service representing 1 to 2 points of acceleration compared to 2025.

Repair should benefit from robust orders demand as well as flow-through from our pricing initiatives. And within modernization, our strong backlog should enable us to deliver another year with solid organic sales growth. Our expectations for new equipment organic sales growth is also unchanged. We continue to expect to be down low single digits to flat with growth across all regions except China. In the Americas, we should continue to see improvement through the year as strong orders growth that began in the second half of 2024 flows through revenue. We expect total net sales of $15.1 billion to $15.3 billion for the full year.

Turning to our financial outlook on Slide 11. We now expect adjusted operating profit to grow $20 million to $60 million on a constant currency basis. This represents similar operating profit growth compared to 2025 despite $50 million of incremental investments as well as the cost and mix headwinds we are currently experiencing. Regarding the conflict in the Middle East, we expect neutral impact for the full year profit. As we anticipate, we will be able to pass on higher cost for fuel commodities, electronic components and logistics.

Our guidance also assumes a modest year-over-year benefit from tariffs based on the current tariff regulation in place without assuming any tariff reforms in year. Lastly, adjusted free cash flow is expected to be between $1.6 billion to $1.65 billion.

Moving to the 2026 EPS brief on Slide 12. We are reducing the high end and narrowing the range of our previous adjusted EPS guidance to $4.20 to $4.24, primarily reflecting our softer-than-anticipated first half due to operational headwinds and investments in surveys described earlier. Note that our current guidance assumes the Middle East conflict ends in the second quarter, However, studies continue, we expect it to have a negative impact to profit of $5 million to $10 million per quarter due to project delays, logistic interruptions and increased cost.

Providing now some color on the second quarter. Our expectations are aligned with what we said on our webcast on March 18. Total organic sales are expected to accelerate mainly driven by repair and modernization that will grow sequentially on the back of the strong orders momentum. The decline in new equipment organic sales is expected to moderate sequentially. Total adjusted operating profit dollars on a constant currency basis are expected to decline in the second quarter at a similar level as the first quarter resulting in adjusted EPS decline of minus 3% to minus 5% compared to the prior year.

Looking at full year, we believe that the results will accelerate in the second half as we execute the operational actions Judy described. We expect service profit to sequentially expand driven by the impact from pricing, repeated modernization execution retention improvement and cost takeout. Together with recovery in new equipment volumes, we expect to drive profit growth in the second half. The investments we are making today are creating a strong foundation for the second half of the year and beyond. We are well positioned to capture the significant service opportunities ahead with our industry-leading margins that we believe and resume expanding in the future.

With that, I will kindly ask Krista to open the line for questions.

[Operator Instructions] Your first question comes from Joe O'day with Wells Fargo.

Can we just focus on the cadence of service margin expansion? I'm not sure if kind of thinking about this correctly, but is it something that goes from like 23% in the first quarter to maybe 24.5% in the second quarter and then the back half of the year, you're looking at year-over-year margin expansion -- and if that's reasonable, just any color on kind of those building blocks from 1Q to 2Q because it would be a decent margin step-up.

Joe, this is Christine, and thank you for your questions. So let me guide you through the sequential evolution of the service margins throughout 2026. So we started Q1 with 160 basis points decline, 23% [indiscernible], and we are expecting this to sequentially improve along the coming quarters. You rightly said, Q2 will be probably negative EPB margin will be around 24% to stabilize in Q3 and to come back to margin expansion in Q4. That means that full year, we should be in the high 4 which is a patch below 2025. The reason for this calendarization is because of all of the actions we are implementing in the first half of the year.

In terms of pricing, we also are facing these temporary headwinds for the Middle East that will be full year neutral because we are pricing the inflation in our contracts, but it takes time to recover the price versus inflation that comes upfront. We are also very positive about the strong momentum in every sales expansion. We have a very strong backlog in modernization and repair and we expect execution to ramp up as early as in Q2. So with all of this in mind, together with the payback of the investments we are already placing -- also on the portfolio mix, we expect maintenance sales growing 3% at the end of the year. As Unit has said, we are very confident that service margins are going to be back to normal by the end of the year.

That's helpful. And then on the maintenance growth trajectory, so something like 2% in Q1, just to be clear, is it 3% for the full year? Or you would be exiting the year at that pace? And then what you see in terms of that path from kind of Q1 to better growth as you go through the year? The degree to which that's price related or kind of strategy around what you're doing on retention at capture?

Thanks, Joe. It's Judy. So yes, it's 3% full year and the exit rate -- so let me just take care of that one head on. Listen, we have been very focused. While we were disappointed in the first quarter that we didn't see the acceleration from this strategy shift we made last year to higher value parts of our portfolio, that is where the focus is. That's why we're making the investments in our people, making sure we have service excellence.

So we're adding maintainers where in the past few quarters, and now we haven't billed them, again, to drive that service excellence. So the key metric I look at for that is retention. And I am pleased to share without sharing numbers, which we only do once a year our retention rate at the end of the first quarter was at the same place it was for full year '25.

So it has stabilized. But if you look first quarter '26 to first quarter '25, we're up about 50 basis points in retention, which is why we have this confidence is the investments paying off. Again, at that we ended last year with a 94.5% ex China retention rate. So as we continue to add units in the higher value, countries. It obviously drives a higher value of margin contribution and profit dollar contribution, and that's what we'll be seeing as we go.

Secondly, we are very focused on what we've been doing with micro pricing -- we're encouraged by what we saw with the pilots in the fourth quarter of last year. We're rolling that out in our higher-value countries as we speak and that is in both maintenance and repair. So our maintenance contracts as we renew them, separate from the pricing action we're taking to handle the inflationary impacts of the Middle East with fuel and everything else, they're sticking. And so that will going through, and you'll see that coming through the revenue.

Your next question comes from the line of Rob Wertheimer with Melius Research.

And Jay, just a follow-up on what you just touched on retention getting better, but you were sort of disappointed in the high-value markets in 1Q. So maybe square that circle, just what didn't come through as you expected in 1Q on that service portfolio?

I'd say the biggest challenge we had geographically was in our Europe base full transparency. That's where we didn't see significant gain there in terms of portfolio gain, and that is half our portfolio. So the good news is under TiVo's leadership, that team is laser-focused on ensuring portfolio gain in countries where our revenue per unit is significant as well as our contribution per unit.

He has his team together, I spoke to them earlier this week as well directly. Those top leaders. This is their top metric, and they understand that. And over 55% of our portfolio is in EMEA. So that's why this is just so important to us.

And do you think the war and disruption had any impact on that particular metric? Or is decision-making or anything else? Or is that more just [indiscernible]

I would not put this one on the war in terms of portfolio retention. This is about us executing the commitments we've made with service excellence.

Again, we're starting to see the improvements, Rob. I really -- I can tell you that based on the deep dives and retention that we're seeing at every one of our operating territories. And I believe you'll see that come through as the year goes on.

Your next question comes from the line of Jeff Sprague with Vertical Research.

Judy, maybe a pivot to we maintain that sort of winds a little bit with kind of the nagging concern many of us have about ISPs being technically capable of competing effectively against the big OEMs. Maybe just sort of address that and what you see them bringing to the table specifically for Otis.

Yes. No, thanks, Jeff. Great question. So we're really excited to have Ben and Jade and we maintain team join us here at Otis. And we will be operating them independently. What sets we maintain off from a lot of the ISPs across the globe is they're not just a service provider. This is a digitally native ecosystem that was started in late 2017 that operates in at least 4 other countries right now that integrates a digitally native mechanic with an ecosystem that uses machine learning and AI to really drive more customer centricity and to learn with every repair they make, every maintenance visit they make.

What I like about it is it -- it complements what we do on Otis ONE, which has significant depth for Otis units and in a 23 million unit installed base gives us even more access to non-Otis units, of which a little under 20 million units out there are non-Otis units. So we're excited. We're excited to be the majority investor Again, we're going to operate as separate entities because we think that gives us more access to the market. But there's a really strong alignment with the technology platform that we maintain, and we believe in the growth potential that's going to, we believe, drive long-term value for customers and the culture.

Is there something that they have done or are doing, though that would suggest it's not I guess easy or likely that someone else replicates us using AI tools.

Well, they've been doing it for almost 9 years now, 8 or 9 years, which is different than just putting a piece of a genic AI out for repair technicians and maintenance technicians. It's truly integrated in terms of the knowledge learning and the immediate sharing across their entire mechanic base.

So this was born this way. if you join, we maintain as a mechanic, is -- these are the tools you use and you use them 24/7 and when we look at incredible retention rates that they have and their ability to continue to grow, we think this is very unique.

Great. And just a quick follow-up on margins. You had that 60 bps gain in the Q4 service margin. You're -- on an as-reported basis, you're comfortable with Q4 2026 exceeding Q4 2025 even with that gain?

Yes, we are -- and let me remind you that Q4 '25 was also driven by sale of assets. We have $50 million benefit from that. from a few transactions. But yes, we are confident based on what I have described before because we see the backlog is there we have the resources to execute. We are very positive about the first impact we see from the pricing initiatives we started last year, and this is going to compound over the year. We will put on top the additional price through -- that will cover the inflation we have seen in Q1 and we will see in Q2 coming from the Middle East. And in addition to that, maintenance sales will recover in the second half of the year. So with all of these components, we are positive about the service margin expansion in Q4.

Your next question comes from the line of Nigel Coe with Wolfe Research.

I just wanted to follow up on that, Cristine. Maybe if you just give us a little bit more help on that bridge and 23% in 1Q. I think you're pointing to a 26% plus in 4Q.

So just wondering if you could maybe decompose that between pricing surcharging some of the cost reductions, that would be helpful.

So thank you, Nigel, starting with Q1. In Q1, originally, we were assuming 30 basis points margin contraction initially in our guide that was essentially the result of the investments we initiated last year sometime in Q2, Q3. The reason for those investments is that we wanted to accelerate growth in high-value markets and was primarily via retention. And as you know, stickiness in our business is very high. If we do the right things, if customers are satisfied, there are digital reason for them to leave.

So those investments in the first pilot are rendering good results. Having said that, as we started the year, we realized that the headwinds we see in the portfolio mix were higher than expected. And that's why we decided we are going to invest more because we are happy about the results, you mentioned the retention rate has stabilized, so we are going to scale up those investments.

So the reason for the incremental margin deterioration in Q1, we have seen 160 basis points versus 30 basis points originally expected is essentially 50 basis points coming from these mix headwinds -- another 50 basis points coming from the incremental investments we placed in Q1 and approximately 30 basis points coming from a variety of topics, primarily the Middle East headwinds. We had shipment delays in modernization and additionally, the cost inflation that we start seeing in our base.

Now when you go through the year, you will see that service sales will accelerate. We are expecting approximately 7% organic services in the second half of the year, this is thanks to repair and modernization ramping up, repair will be around 10% growth per quarter. And look, we see the orders, repair orders in Q1 were above 10%. So this is coming, in addition, modernization will be above 10%. Our organization backlog is growing 30% and then in addition, we see the pricing effects. Pricing, we said at the beginning of the year, we expect $50 million FIFO incremental to what we have done before.

Last in addition to that, we are going to price the inflation we see from fuel and logistics. This comes on top. And last but not least, that this is not related to service, but you did also mention because this will contribute to operating profit improvement in the second half cost take out. We are conducting a very selective approach in order to remove all kinds of costs that are not related to the front line. Let me also highlight that. We are going to protect frontline sales and field execution. This is going to come from non-frontline activities.

Okay. Christina, that's really helpful. And then just on the pricing, it sounds like you're quite bullish on some of the pricing you put through. I'm just curious, is there a risk with higher price and some surcharges that could derail the attrition improvement strategy to some degree.

Nigel, listen, we -- the reason we are doing micro pricing is to not have just across the board and across-the-board push, which obviously, with certain customers who might be right on that precipice -- we don't want them to attrit. We want to keep them. So we're looking at where we drive value.

So when you're looking at a repair, as it's urgent and imminent, how much elasticity is there in that price. And we're looking at it real time in the markets it's part of, whether it's hospitality, hospitals. So we're really micro-segmenting the segments and micro segmenting what the value and the elasticity is.

So I'm not worried about that. The the fuel, I think you're going to see that across the board you already have with so many logistics companies already doing that I think you're going to see that everywhere. We've got 22,000 vehicles. As you can imagine, we're moving parts across the globe to be able to respond to our customers real time. And so we will -- we've done this before. when fuel went up, we were successful with it, and we anticipate a similar success, and I'm not worried about any compounding there that would cause attrition.

Your next question comes from the line of Lewis Merrick with BNP Paribas.

Just one from my side. Just coming back to the service margin, you pointed out the negative mix impacts you've been having from growth in Asia and China. It's understood that those are lower-margin regions or the negative mix impact you get from growing there. but have that underlying margins ex the investments you've made in the EMEA and the Americas also coming under pressure? Or is that not the case?

Yes, they are not coming under pressure. We have not seen that at all. Again, we've been balancing retention price and that ability to make sure that those margins drop through. We do that through cost controls, Louis and including not just the ones we talked about where we're going to handle discretionary costs and other other resources that are noncustomer facing nonfield nonsales. But even in our field organization, our cost of sales and where and how we buy parts, all of that is being carefully managed and controlled now. So that's, again, what gives us the confidence, especially in the Americas and EMEA.

Your next question comes from the line of Alexander Virgo with Evercore ISI.

Judy and Christina. Sorry, sitting in London. I wonder if you could talk a little bit about the repair business. If you could just sort of size it for us in the broader context. And then maybe give us a sense on the the visibility and the sort of the lead times that are entailed in it because I'm guessing that the dynamics are going to be somewhat different from the broader service business. So just wondering how you can underpin that 10% for the rest of the year and then how we might think about that in the longer term?

Sure. Let me start, and then I'll hand it over to Christine, let me just set the stage. The repair business is not discretionary. As the modernization business tends to be. And with 9 million or 10 million units now over 20 years old, we are seeing the frequency of repair increasing that we call reactive repair. That's something Otis has always done. It is, as I've shared many times on this call, our highest margin product offering -- it's higher margin than maintenance, it's higher margin than modernization and new equipment.

As units age, they break down more. So this reactive repair demand we're seeing is healthy and growing by itself. Now we're layering on what we call proactive repair, which deals with obsolescence of parts, which deals with our ability because we have 1.1 million -- over 1 million units connected via Otis ONE. The ability to predictively understand when an elevator is going to shut down or have an issue, and we have the ability to get to a customer before that and repair it so that they don't have a shutdown. They don't have time lost.

So when you add the reactive and the proactive, we believe that's somewhere in the teens, that growth rate. Again, it compounds and grows as people defer modernization decisions, which is absolutely every customer is right, whether it's a phased or full modernization.

Christine, I'll let you take us through some numbers.

Yes. And Alex, I can complement with the financial size of this segment as you were asking of this activity. Within the Service segment, this is probably the second biggest activity after maintenance in terms of revenue size. But let me also note that we don't separate maintenance from repair because depending on where you are in the world, the nature of the contract can be all included in which case, repair is included in the maintenance revenue or can be basic and then all activities in repair or charge on top. That's why we put them together because it depends on the typology of contracts.

From a margin standpoint, you said it, it's the highest margin activity. So you can imagine that repair growing at an ongoing run rate of 10% is very accretive from a profit standpoint.

Your next question comes from the line of Julian Mitchell with Barclays.

Just wanted to circle back, apologies on service margins again. So just trying to understand kind of what's -- anything changing in the market versus sort of self-inflicted things.

Judy, I wondered if there was any shift I mean our understanding is that maybe China service pricing very difficult U.S. service pricing, maybe a little bit more pressure in the industry. I just wondered if you sort of disagreed with that.

And then secondly, the price sort of cost headwinds or price net of labor, materials, fuel and so on in service, is that a big lever sort of turning around as we move through the year or not really? I think, Christina, you didn't mention that as a big headwind in first quarter, but it sort of come up through the call.

So I just wondered if that's something price net of material and other costs in service, does that also help the margins year-on-year through the rest of the year?

Well, let me take the first question, Julian, and really thanks for asking. You're the first person who's asked me about China so far this morning. So I almost had a clock on that. But listen, we -- our service business in China, just like everywhere else, consists of maintenance, repair and modernization.

And this is the first quarter in China where since spin, and I would argue, you can go back a lot more years where our service revenue has outpaced our new equipment revenue. So it's now 52% of our revenue for the quarter, while China is down to 9% of the total revenue for Otis.

So our service business has continued there in terms of being able to add more units to our portfolio, albeit at a lower revenue value and a lower margin than in the more higher value markets. the mod market in China, though, is what's really added some nice contribution in the first quarter. We've been talking to you now, this is now year 3, we've entered with the bond stimulus. It started earlier this year, and there's approximately 180,000 units this year for bond in mod in China versus 120,000 last year and our mid first quarter orders were up well over 50% in China. The revenue was up close to that and their mod backlog is up over -- well in the double digits. In the Americas, we're not seeing a different maintenance structure.

Yes, there are a lot of ISPs who have been amalgamated and brought together by other private equity -- but they're the same ISPs we competed with before. They're just some different brands, some different names. So we're not seeing that pressure drive really anything on the price side in the Americas. There's always unique customers, some key accounts across the globe where we make special considerations as you can imagine, because of the long-term relationship we have with them.

And Julian, I can complement what Judy has said on pricing. So first, we don't see additional challenges in the marketplace from a competitive standpoint. But secondly, price for us is a tremendous tailwind this year. And there are 2 different initiatives. One is the micro pricing that we started last year and this is essentially thanks to our AI algorithm, thanks to a much more value-add approach to pricing, we are able to adapt our price to customer perception to customer SMAs. So we don't follow the same approach for all and this is the $50 million improvement sequentially that I mentioned before, 1 year versus the other because this comes on top of the regular inflationary clauses we have in our contracts.

The second set of initiatives related to the particular situation of the geopolitical Middle East conflict. And you mentioned Q1 is true that the Q1 effect from inflation was not big. It was part of the 30 basis point margin deterioration. I mentioned before, together with the volume today. But then in Q2, it will get a little bit bigger. This is part of what we guided of EPS being 3% to 5% down in the second quarter. It includes the inflationary effects -- but for the full year, we are going to be able to recover because we are currently already pricing that is just the time lag from when we start the initiatives until we see the flow through.

So in the second half of the year, in a nutshell, pricing is going to be a tremendous tailwind both from macro pricing and from the Middle East inflation pass-through.

That's very helpful. And just 1 follow-up question, not so much on this year, but a broader 1 maybe for Judy, around the service business, and you had that strategy sort of pivot over the last 12 months. So for service, generally, as we're thinking about the medium term, is the expectation now it's maybe kind of 2% or 3% maintenance portfolio growth, and then you're trying to kind of squeeze out more -- just a sort of higher ARPU from adding technicians and all the rest of it. How long do you think it takes for us to see that higher ARPU kind of flowing through on that lower maintenance volume growth?

Well, it's lower maintenance unit volumes growth, and that's why we're talking about value versus volume. And you will start seeing that next year beyond what we've already now guided and outlooked for the rest of '26. That's where it comes through at the revenue per unit. We don't report on revenue per unit, but you will see it in our maintenance revenues. And we were up 5% organically this year -- this quarter. As Christina said, you're going to see that continue to ramp. And that's due to the backlog we have. I mean we have line of sight on repair and modernization to be able to convert that this year and that's what's part of our EPS guide for the second half.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

If we could start with the service business. I also have a bit of a medium-term question. With the goals of improving attrition over time, which we understand will nice that attrition is bottoming, but it will take time for it to move in the other direction. How should we think about the need for service investments beyond 2026? And I guess your confidence in being able to return to year-on-year margin expansion within service in 2027.

Yes. Thanks, Nicole. That's an absolutely fair question to ask. I would say that certainly retention has stabilized ex China again, different structural thing system in China for every year, competition every year renewals, no auto renewals -- so we are -- the investment we've made, we see as very, very important.

The most important part to that is it does drive the retention. And simultaneously, it gives us more skilled mechanics. So when I look at medium term, when I look beyond this year, it's not just about the retention rate in the maintenance portfolio because once we get that, we also get the additional repair that comes with that work and eventually the relationship for modernization downstream. So it really does have a knock-on effect again, of driving all parts of our business because some of the maintenance portfolio, we get through recapturing units.

So they're not all just coming off warranty from new equipment. They're also entering our portfolio from recapture. So they enter at all different service life. And so we understand where they are in those service lives, what it takes to maintain them and what it takes to retain them in our portfolio. So I think the investment, certainly, we're not going to guide for medium term on that. But I think the investment slows down or more importantly, those people convert to billable.

So there's actually could be a double benefit where they're now trained. They're now working. They have customer relationships. They can work on maintenance, they can work on repair. They can work on mode. We have a better skilled workforce and now we can do better resource allocation and make them billable.

So we're actually kind of turning and reversing an investment into a revenue and profit-generating opportunity.

That's very helpful. And then I just wanted to circle back on what you're seeing in the Middle East. It sounds like you're not assuming that the condensate continues. But what's happening on the ground right now with the ceasefire, are there still project delays? Have you seen kind of a return to business as usual, which means if the current status prevails, there shouldn't be a real impact in the second quarter?

Yes. So we have colleagues -- and first of all, I'm just -- I'm thrilled and we watch it every day. They're all safe. We have colleagues everywhere in the Middle East. As you can imagine, UAE, Qatar, Kuwait, Bahrain, Saudi Arabia, and they are performing.

Our Middle East revenue is low single digit of Otis' revenue. So this -- that's not as much the impact in the region. Obviously, we're back on construction sites where our customers want us on the new equipment side. And the Middle East is more of a new equipment business, as you can imagine, than a service business. Just because of all the building that's going on and the investments that all of the governments are making and the commercial entities are making.

So we see it as a delay in projects. It's recoverable -- our folks are at construction sites, they're modernizing buildings, and we never stopped our essential services just like during COVID. So we feel comfortable that we won't have a lot of impact. As Christina said, though, if if some of those new equipment projects or potentially demand disruption happens that's what we said. Think about that third quarter and fourth quarter, each of maybe $5 million to $10 million of EBIT impact. We don't expect that to happen, but we wanted to be clear as to what we saw.

Your next question comes from the line of Patrick Baumann with JPMorgan.

A lot of questions on service. I'm going to go back to new equipment. Just wanted to get some more clarity on the margin you expect there in the second quarter and then for the year, what was the tariff benefit to the guidance versus prior expectations and then below the line, the corporate expenses for second quarter and the year, if you could give some more color on that.

Patrick, thanks for the question. So on the new equipment side, we are at 3% margins in Q1, and we expect the situation to continue at this level for the balance of the year. We will -- the reason for that is, as we see the recovery from volumes, which is going to be a tailwind, we have the mix and the price in the backlog, primarily from the price reduction we saw in China in 2025 Commodities are a small headwind. In a broader scheme of things, very small. We are talking about $10 million negative. But last year, they were $10 million positive. On the other side, you got it right. Tariffs are a tailwind for us. The new situation regarding IPA, Section 122 and the new tariffs are favorable by $10 million versus our original guide expectation that was to be flat versus prior year. So it's going to be better versus prior year. And in addition, we are getting some productivity on the field. So with all of this, we expect newcomer margins to stabilize. And as we start in positive new equipment sales, margins should go up in the future. On your second question regarding corporate, corporate is going to be around $50 million per quarter going forward. and it's going to be full year approximately $50 million down or worse BPY.

Thank you, that's all the time we had for questions. Judy Marks. I'd like to turn it back to you for closing comments.

Thank you, Cristina. In 2026, we are investing in capabilities to accelerate our top line growth and our profitability, together with fundamental tailwinds of the aging installed base, Otis is well positioned to deliver attractive, sustainable long-term shareholder value through our service business. Thank you for joining us today, everyone. Stay safe and well.

Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining, and you may now disconnect.

Okay. Great. We're moving right along here with Otis and Cristina Mendez, CFO. Thank you so much for making it here. And I think you're going to give a little bit of intro, and then we'll jump right into the Q&A.

Absolutely. Thank you, Steve, and thank you for having me. I appreciate the opportunity of talking with you today. Let me read the statement first. Please note that excerpt or otherwise noted, I will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. Reconciliation can be found in our fourth quarter earnings presentation on our investor website. We also remind listeners that today's discussion contains forward-looking statements. Otis' SEC filings provide details on important factors that could cause actual results to differ materially. So thank you, Steve.

Let me start by saying that Service is the foundation of our business, as we all know. And we are very pleased to see the Service business growing. It has grown mid-single digits since the spin with expanding margins of 50 basis points per annum. And we see this growth continuing, thanks to the growing opportunity we see in the market. And thanks to this resiliency, despite of the challenges we have faced in new equipment in the last years, New equipment has declined, especially in China. From the top line perspective, it has been a drag of approximately $400 million a year in '24 and in '25. Despite of that, we have delivered ongoing and steady EPS growth. And that's thanks to the resiliency of our Service business.

And looking ahead, we are very excited about the opportunity we see. We see an opportunity in the addressable market, what we call the TAM. And that is thanks to the aging population of units. So we have all of these units that were installed in the major Western construction cycles back 30 years ago and in the construction cycle that started in the 2000s. We are talking about 9 million units out of the 23 million units global installed base. These are in the prime age of modernization. That means 15, 20 years or older. And this population is growing high single digits. And besides, the portion of the market that is actually being served is significantly smaller, and that's why modernization revenues are growing double digit.

And we see this as an evergreen opportunity because by the moment we complete the cycle of modernization of all of these units, we will have new units that require modernization again. In addition to that, repair is also growing because of all of the units that are not being modernized and repair is our highest margin activity in the P&L. So we see this happening simultaneously, repair and modernization growing in the 4 regions in the globe.

We are also executing a strategy that is based on value. We are addressing value growth instead of volume growth. And we are very excited about an opportunity in pricing. We have been very disciplined in passing inflation to customers, but the opportunity is to do micro pricing to be much more targeted and to segmentate and align the price with the willingness to pay and to the value the customers receive. So because of all of this, we are excited about the growth opportunity in Service. We see the acceleration happening as early as in '26 and as early as in Q1. Q1 is growing maintenance and repair sequentially from Q4 as we expected. And we are convinced that with our scale, with our industry-leading margins and with our strong brand, we are very well positioned to capture this opportunity.

So I guess the Service business, obviously, very strong, in line with guidance. Maybe you could just talk about the -- just broadly the other parts of the business, what you're seeing out there? And are you reaffirming the total company guidance?

Yes. No, absolutely. And look, as you said, Service is super strong. We see an acceleration of repair. Repair in the quarter in Q1 is trending to [ wash ] approximately 10% growth, exactly as expected. And we are also seeing an ongoing demand. Our repair orders continue growing high single digits. So we have good line of sight for the high single-digit repair growth we have guided for 2026. In order to do that, we are hiring mechanics. We hired last year 1,000 mechanics. In the 2 first months of the year, we have onboarded 200 together with the 250 we onboarded in Q4. So we are in good space, and we are accelerating as much as we can because we need those mechanics to execute our growth plan. In addition to that, I've talked about pricing.

I'm super excited about the pricing opportunity because here, what we are doing is piloting pricing in maintenance and repair in high-value markets. We are very focused on the markets that move the needle, and we are essentially adapting the price to the value we deliver to the customer. It's super segmentated, very analytical, thanks to an AI algorithm that we are rolling out in these particular markets. We see the results in the orders, and this is flowing through in the P&L as we convert those orders. With price, we expect this year to be 4% versus 3% in the past, so 1% point incremental that together with portfolio growth that is expected to be around 3%, we will continue growing our maintenance business.

And last but not least, you asked outside Service. New equipment is also performing very well. And in new equipment, in particular, we are positive about the Americas. As you know, Americas has had a strong quarters of orders in the last 6 quarters. Their backlog is growing. As Q1, their backlog will be growing low teens. And you have seen probably today the ABI numbers. They are also very promising. ABI is going up sequentially, 49% plus. So still below 50%, but getting there, highest ABI number we have seen in the last 12 months. So we remain very bullish about the new equipment market in Americas growing mid-single digit.

Now on the new equipment and mod side, we are impacted by the geopolitical situation in the Middle East. We are present in the Middle East, but it's a small portion of our business. It's only a low single-digit percentage of our revenues. We are present in UAE, Saudi, Egypt, Qatar, Bahrain, Kuwait. And we also have distributors or indirect presence in Lebanon, Jordan, Israel, Cyprus and Oman. But it's a small part of the business, but the [indiscernible] sites are closed. So we see some delays in the recognition of revenues. And we also see some disruption in shipments from Asia to Europe and vice versa because of the shipments of units, components and parts.

This is just temporary. We are rerouting the shipments all along Africa instead of following the Suez. And we also see increase of logistics costs and some FX headwinds. We guided FX for euro at $1.18, and we see today we are trading at $1.15. Having said that, all of these impacts are temporary. The orders are in place. The units have been produced. It's just a matter of the situation stabilizing in the area and being back to normal. We quantify this impact for the quarter in approximately $20 million for new equipment and modernization each, which is a small portion of our quarterly revenues. For new equipment, it represents 2% of our revenues. for modernization is 1% of our revenues.

At profit level, there is a flow-through because of the delay of shipments. And we also have a calendarization of investments. I said before, we are investing in mechanics. We are not taking the foot off the gas. We are accelerating investments because it's the right thing to do for the business. It's a key enabler for us to grow because of these mechanics that have onboarded at the beginning around productive and because of the investment in pricing in the AI algorithm and training the sales force, we see some calendarization of profit into the second half of the year. So currently, we are seeing EPS in Q1 around minus 3% to minus 5% down, but it's just calendarization in the year.

So 3% to 5% down EPS, that's a year-over-year figure?

Correct.

For the first quarter?

For the first quarter.

And then anything kind of calendar-wise in the second quarter? Should we expect a nice steady ramp from there? How do you see that seasonality playing out?

So the second quarter, of course, will depend on how the situation evolves in the Middle East. But assuming we come back to normal, it's just a matter of time for the job sites to be reopened there. And look, we are prioritizing the safety of our employees. We leave -- the employees are not in the job site. So it will take some time for job site readiness. The rest of Europe, the shipments are in place. It's a matter of facing the logistics, the FX and also some commodities are a headwind because of the conflict, particularly aluminum, but we are talking about the small number. It's only mid-single-digit dollar impact. So I would say first half of the year would be minus 3% to minus 5%, so Q2 in line with Q1 EPS growth. We already had a backloaded profile in the year.

And the reason for that is because new equipment is gradually turning around into positive. We expect Americas to be positive in new equipment sales Q2, the latest Q3. We also have a tariff comparison that is easier in the second half of the year. And we also see the acceleration of service that is in the second half, particularly because of the pricing benefits coming later in the year. So that was as planned with the conflict, there is some revenue and profit shifted to the right, but kind of essentially in line with the calendarization we had initially.

The good thing, Steve, is we are very encouraged by the strong performance of the core of the business that is maintenance and repair, the acceleration in Q1. And also, we have a new organization in place. This was announced in January. We have now a Chief Operating Officer and a Chief Growth Officer, new roles that are focused on the one side on operational performance and on the other side, on growth initiatives, and we believe this is the right organization for us to execute our plan in the year.

So just thinking about the repair growth, you mentioned it was going to be up 10% in the first quarter. How are you thinking about it for the year, for the total year?

So for the total year, we said around high single-digit growth. So first quarter, probably a little bit stronger. It has also an easier compared with first quarter last year. It will slow down, but still in the high single-digit level for the full year. And as I said before, our orders for the quarter are trending in that direction.

Got it. And as far as the pricing on Service, I think just -- can you just take a bit of a step back? And you said there's going to be a point of price this year, and that's incremental to what you guided to? Or is that in line with guidance? Just feel better about it.

That was already baked into the guide. We feel very good about it because we see the results of the first pilots in the first 2 months of the year. It's coming in orders. It's just making its way through the P&L as we convert those orders. And we are also going to scale up to other branches and always focus on maintenance and repair and always focus on high-value customers to get started.

Okay. And then as far as mods are concerned, how are you feeling about orders there in the first quarter and the expectation there for the year as well on sales?

Yes. So as I said before, mod for us is evergreen. We see mod growing low teens, and we expect the first quarter to be kind of around that ballpark. And conversion is coming as we ramp up resources. We ended up last year with a backlog growing 30%. So we are very positive about mod. The good thing of mod is we are industrializing our packages. That makes everything easier in the factory. We benefit from supply chain scale, material productivity, and this is especially easier on the field because it's the same installation method as for new equipment. We can shift mechanics from new equipment to mod very easily, and we also capture field efficiency. We said in the past 2 years ago that mod was going to overpass new equipment margins. At that point, new equipment was at 6% with a midterm target to get to 10%. We are very close to that 10% margin in mod. And we will not stop there. We will continue capturing efficiencies. We think we can do more than that.

And on that front, there was obviously a pretty big subsidy program in China. How are you guys thinking about that in '26? And then what's the outlook for the sustainability of a program like that? Those programs are notorious for turning on and then shutting off. How do you guys think about that outlook?

Yes. No, you're totally right. So the program in China has -- first, China is growing modernization in all the verticals, not only residential. This program is focused on residential, but we are also growing in commercial, in infra and in offices. But on the residential side, the program started in 2024. At that point, the government subsidized 80,000 units. Last year, it was 120,000 units. And this year, in December '25, the government announced the plan to subsidize 180,000 units. In February, the Ministry of Housing and Urban and Rural Development announced the first release of a batch of 61,500 as part of the 180,000 for the year.

So we see this very positive as an ongoing support of the government to continue promoting modernization in China. And the difference this year, that we welcome, is that there is no fixed price. The subsidy will depend on the number of stops. The higher the number of stops, the higher the subsidy. And they have announced that for more than 19 stops, it's going to be RMB 200,000. This will help the mix and therefore, the margin. And we are quantifying that with the more volume and this tiered approach, the program this year is going to be 15% to 40% bigger than last year. And we are going to take that opportunity, and we are going to take our larger share of segment in this growing segment. And remember that China has a faster conversion rate. So if we get more orders, we can convert faster in the year. We are still evaluating, Steve, what it means for us in the year, but this is a good opportunity.

And you said the -- you expect it to be up 40% for you guys?

15% to 40% bigger than what it was last year.

Got it. Okay. Got it. And is there any visibility on -- I mean it seems like it's huge for you guys. Is there any visibility on '27 and how they approach '27 because it's a lot of units putting in the base.

So look...

Sorry. And how big is your China mod business today-ish, roughly?

It's small. We don't disclose China mod, but it's small relative to new equipment. But growing -- well, last year, China grew 80% mod sales, 100% in Q4. So it's really booming. But back to your question, we expect the program to continue and maybe winding down over time in the sense of probably not having a full subsidy, but a partial subsidy. But the good thing of this program is it's creating the demand and it's creating the interest in the marketplace. It's now monopolizing all the residential modernization. As we -- as it winds down, we are very prepared to continue generating this demand and growing over time. So you don't see a hit when the program comes to an end.

Right. Okay. And the -- let's talk about attrition rates. Maybe just talk about the -- what's happened. This is kind of the maintenance side, the maintenance portfolio side. How is the attrition rate trending? And what are the actions you're taking to kind of stabilize that?

Yes. Our attrition rate is one of the key focus areas at the moment. And we are pleased to see outside of China, attrition rate has stabilized in 2025. At a very good level, by the way, we had a retention rate of 94.5% and it's a good rate. That is because we are putting much more focus on quality. We have realized that customers do not leave because of price or because of competitive pressure. They leave because they are not satisfied with the quality of the service. So putting the right focus on quality and ensuring that all the branches are looking at the quality KPIs and assigning enough mechanics to follow those contractual commitments, it is fundamental to improve retention.

We have started investing on that last year, and that's linked to hiring mechanics. And I mentioned that we have hired 450 in the last 5 months. And we see good results. And going forward, we expect this to improve. Now China is different. China is a very price-sensitive market. The contracts are only annual. Therefore, every year, you renegotiate. And in China, we are pivoting into a value-driven strategy. We are not chasing units for the sake of units. Not all the units count the same.

So we are focusing on the right customer segments, on the right verticals on the right tiers, not a surprise, Tier 1, Tier 2 cities are much more profitable because they are more dense than Tier 5 and 6. So with this strategy, we may slow down the growth of volumes in China, but with an acceleration of dollars because we get more value from the customer base.

And I guess, do you have -- do you need to tweak the headcount there as well because of that because you have kind of an infrastructure to serve a certain level of growth? Or you just kind of stop building that infrastructure and leverage it to the extent?

So we are talking about service. The good thing is that we will be able to be more efficient. As you rightly say, we have less growth, but more dense. Therefore, it's more productive. But that means we can free up resources to do more activities on repair and modernization. So it's kind of freeing up resources for more growth.

I see. Got it. And as far as that -- the cost of those mechanics, how does that kind of filter into the P&L? Like what's the annual rough cost of one of those mechanics? And how does it -- when do you see that like kind of breaking even?

It depends on where you are in the world. It's not the same mechanic in China than a mechanic in the U.S., of course. And for example, U.S. is under a union agreement, that is a multiemployer agreement. So all the players in the industry follow the same rules. But I would say as an average pattern, at the beginning, hiring a mechanic is cost because you need to train and they are not productive, they are not billing revenues. After, I would say, 3 to 6 months, depending on where you are in the world, they become productive and they are fully absorbed with revenue generation.

Got it. So when we think about the portfolio growth rate here, I guess the 94.5% that you have outside of China, where was that before? And can that go back to where it was before? Are you pretty satisfied with the 94.5%?

Well, we think it's a good number. We have been a little bit higher in the past, and we think a good target would be 96%. Going beyond that is complicated because you have natural attrition coming from [ aging ] or buildings that are changing, right? But 96% would be a good target.

And you're still thinking -- so in this kind of construct, you're thinking portfolio growth in units. Is that 4% or 3%? I think you said 3% plus a point of price or something.

That's exactly what we are thinking. That is probably going to be around 3% with a different mix. That means China is slowing down and accelerating in other regions and with much more price, and that will help long term to reduce the headwinds and to also accelerate total maintenance sales growth.

Right. I think that makes a lot of sense. The -- so the Services business, if you kind of break that down, the -- you said 50 bps of margin expansion is because of all these costs that are kind of loading in here this year, is that 50 bps a little bit lower this year? Or are you pretty much on track for the year.

That's a good question. We are not focusing so much on margin expansion anymore. We are focusing on dollar growth, top line and bottom line. On the Service side, we still expect margin expansion because as we grow the portfolio, we increase density, we increase productivity and also pricing has a higher flow-through. All the pricing upsides are 100% flowing through the P&L.

Having said that, in Service, we also have 2 headwinds from a margin rate perspective. One is modernization that is growing faster and has a lower margin rate, and the other one are all of these investments. They are headwinds from the rate. They are not headwinds from the dollar side. So to your question, we expect margins to expand, not to the extent of the 50 basis points we saw in the past, maybe 10, 20 basis points, but there is still room to continue expanding.

And that would be the annual framework.

That will be the annual. Then you have calendarization and seasonal effects when you compare the different quarters.

Right. And then -- and you would expect, though, after these -- you hire these 1,000 service people, they kind of get up to speed, you can start to leverage them a little bit more in the rate. So maybe next year can be -- all else equal, that would be a little bit of a lift with everything else being pretty stable?

Absolutely. Having said that, as we continue growing, we continue onboarding. So this is going to be a natural process.

Okay. Got it. So it doesn't sound like the 50 bps from a longer-term perspective in Services is really -- we should kind of build back up to that over time as opposed to going from up 10 to 20 to up 50 in an inflection.

Exactly. And look, at the end of the day, the question is service will continue -- will accelerate growth from mid-single digit to mid-single-digit plus. Margin will not expand 50 basis points, will be 10 to 20, but total profit will continue growing in Service.

Right.

On the new equipment side, new equipment has been a drag. I said it at the beginning, both revenue and profit. This is coming to an end. We think the worst is behind us. We see China stabilizing. So in the moment, new equipment stops being a drag, together with acceleration of service growth, you can see the growth in EPS.

Okay. How are you exposed -- I guess, just stepping back for a second to the services side. How are you exposed to fuel prices on that front? You got a lot of guys driving around in trucks.

Yes, it's not a big amount. So we have approximately $60 million to $70 million fuel cost per annum. If you assume a 10% increase, this is mid- to high single-digit impact. And by the way, we have the ability to pass part of this to our customers, not a big impact.

Not a big issue. Okay. Got it. So the -- anything on the tariffs front that stands out for you guys this year?

Well, tariffs, I mean, the situation remains fluid. But based on what we know today, it should be a positive impact to our guide. The Supreme Court decision regarding IEEPA together with the newly implemented Section 122, this would represent $5 million to $10 million upside to our guide. This is excluding any refunds from the previously paid IEEPA Tariff. But as I said before, it's very fluid. So we continue to evaluate, and we wait until we see the final scenario.

And just remind us again on kind of the nonfundamental stuff, the ForEx, what are you expecting and what would that be now?

So that is at the moment, a headwind because we guided according to euro being $1.18 and we is $1.15, $1.16. So that can be a headwind to the guide this year.

Okay. Got it. Any magnitude there?

We see how it goes. And it also depends on how the conflict evolves in the next weeks.

Okay. I'm not going to ask you about that, timing on that. The -- so on the new equipment side, you're saying that China is stabilizing. Just talk a little bit more about the orders there and what you're seeing so far this year in China, what gives you confidence?

So China market last year declined 13%, and we are expecting this year to decline approximately 8%, a little bit more at the beginning of the year, around 5% decline in the second half of the year. And of course, the situation is very volatile and it may get better. And if it gets better because of the lower conversion rates, we can move it into the P&L faster. Our expectation is that China is going to continue declining. At the same time, we are very much focused on service to growth modernization and service and to focus on new equipment projects that gives us the conversion into service.

Got it. So -- and then the other -- and how is pricing there? Are you seeing pricing stabilize at all on the [indiscernible] front?

I would say it stabilized is too much to say, but it's price cost neutral.

Got it. Okay. And then in the rest of the world, you were pretty optimistic. You talked a little bit about the U.S. What are you guys seeing in Europe?

Yes. Europe is growing low single digits all across the board, leaving aside the situation in Middle East that, of course, may impact demand if it stays for long term. And APAC is growing. APAC is growing in India is high single digits. Southeast Asia is growing. Japan is slightly growing. And even Korea that has been declining, we see some signals of stabilization in Korea.

And as far as the margins here, just remind us of what you guys guided to and how you see that playing out, for this year?

So we guided slightly below 4%. That would be the same level of margin rate we saw in Q4 is going to continue this year.

Okay. So no change to that.

No.

Okay. Just one last one to kind of wrap up the guide. I know some of this stuff is temporary in the first half. How much of this impact in the first half can you make up in the second half? So on an annual basis, are you kind of reaffirming the year? Or is the slow start kind of you gain some of that back, but you don't gain it all back in the?

I would say it's too early to say because, again, I cannot predict how long the situation is going to last. Having said that, all of the impact we are seeing is temporary. There is no impact on the demand. We see the orders continue. We see the -- by the way, the orders we are now executing are in place. We have the backlog and we have the shipments. So it's a matter of -- for the rest of Europe, navigating the macro. And for the Middle East is for the job sites to be reopened. In the moment this happens, we can recover everything. It's only a matter of the calendarization that we expect now a more backloaded profile in the second half of the year.

Okay. You guys had a really strong performance in free cash flow in the fourth quarter. Maybe talk about the moving parts on cash flow as you move into this year and then into -- for the annual on.

We are very pleased with the cash flow conversion. Last year, we ended up at 100% back to our normal levels. And that, at the end is a result of new equipment that is moderating the decline, plus modernization is growing. And modernization has the same working capital pattern as new equipment, which is essentially we collect advances when we book the orders, and we also collect before shipping the material to the field. As modernization grows, this is a tailwind in working capital. And we see the 100% conversion rate from '25 continuing in '26. New equipment is also going to moderate. We expect in the guide new equipment sales to be flat to low single digit down versus minus 7% last year and mod continues growing at low teens. So from that perspective, good line of sight to continue cash flow conversion at 100%.

And what are you -- how are you thinking about capital allocation priorities? There are some assets out there that are being talked about. Is there any M&A on the agenda?

So we have a very consistent capital allocation strategy. We generate an incredible amount of cash, and we have said to our shareholders that we will continue with a 40% payout of dividends, subject to Board approval, plus also share buyback to give the excess of cash to shareholders. From the M&A perspective, the breadth of matter of our M&A and the most accretive deals are small ISPs that we can easily integrate into our branch. We synergize SG&A, we synergize the field routes. And we will continue doing that. We see more ISPs knocking on the doors because the industry gets more sophisticated technology-wise and there are generational refresh, right? And they are calling us, and we are taking opportunity when it comes up.

From a big M&A perspective, there are rumors in the market. I'm not going to comment on any rumor transaction. I can only say that whatever scenario happens, we will welcome the transparency on that asset. And this will happen either in an IPO or in a consolidation scenario. If it is consolidation, it's going to be a very complex deal, which will trigger destruction, and we are going to take advantage of that from our side.

I don't want to comment on potential very serious questions about whether this is in the best interest of customers or employees. And last but not least, we have competed in a very consolidated industry for more than 100 years. We know these players very well, and we know how to win. So we are essentially going to remain focused to execute our winning strategy that is being customer-centric and continue leading the market with the best-in-class margins.

What are you seeing from the ISPs as far as how competitive they're being on price?

So they are -- they have a different value proposition. They are more local. They have proximity. And they are also less sophisticated. They cannot run the big modernization. They cannot run complex repairs. So they are kind of more bread and butter. We are not so concerned about the competitive environment. As I said at the beginning, retention is typically very high if you do the right things for the customer. So that's not an issue. What we do see, and I said it before, is more ISPs trying to leave the market because of technology sophistication and because of the generational refresh.

Right. So really, the competitive dynamics that you're seeing out there or at least the attrition rates you're seeing out there, I mean, in China, it's a bit of a pivot in strategy that you're undertaking. And then here in the U.S., it's really not a competitive issue. It's more of a -- you guys needed more boots on the ground and better service effectively.

Absolutely. You got it right.

Okay. That makes sense. Any questions out there? Everybody shy. I haven't got one question the entire day. That's right. I can keep going. On the other raw materials, metals or steel or anything like that, anything to note?

Last year, commodities was a tailwind for us of approximately $10 million. This year, we anticipated it was going to be a headwind in the similar amount. Essentially, copper is trending up, but very small in the broader scheme of things. So we are talking about $10 million. Nothing to do with the commodity crisis we saw 3 years ago.

Right. Far from what we saw in COVID and the inflation there.

Absolutely. Nothing to do with that.

Anything else that you wanted to talk about that we didn't -- that we really didn't touch on?

No. Look, again, we are very encouraged by the trends we see in the first quarter in the core of the business that is maintenance and repair, leaving aside all the noise for the geopolitical conflict that in the broader scheme of things is small, as I said before, $20 million-ish in new equipment and in modernization. And it's just calendarization within the year. We continue investing. We see the good results of investment in price and in mechanics. And with the new organization in place, we are very confident on delivering what we said.

Right. And I guess this first quarter shallow start is really centered within the Middle East region and things going -- having trouble going back and forth and some delays as opposed to anything to do with like underlying demand in China or anything like that.

Exactly. So it's essentially the Middle East region, shipments to Europe impacted by the Middle East conflict plus the calendarization of investments.

Yes, the investments, right, because you're starting off the year on a pretty strong foot.

Yes.

Yes. Okay. Anything else? Anybody? Any questions? Okay. I think that's all we have.

Thank you very much.

Thank you so much.

Thank you, Steve.

Good morning, and welcome to Otis' Fourth Quarter 2025 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com.

I'll now turn it over to Rob Quartaro, Vice President of Investor Relations. Please go ahead.

Thank you, Krista. Welcome to Otis' Fourth Quarter 2025 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Cristina Mendez, Executive Vice President and CFO.

Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast.

We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

Now I'll turn it over to Judy.

Thank you, Rob. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope that everyone listening is safe and well. 2025 marked our fifth full year as an independent public company, a milestone that reflects our resilience and leadership in shaping the future of urban mobility. At the heart of this success are our 72,000 colleagues worldwide whose dedication to our purpose has made this possible.

Every day, we move 2.5 billion people safely and reliably and maintain approximately 2.5 million units across the globe, earning the trust of customers and passengers alike. That trust remains our highest priority. This year, we achieved multiple important milestones, ending the year with strong momentum heading into 2026. We secured record modernization orders, building an unprecedented backlog and our new equipment backlog grew. We achieved record adjusted free cash flow of $817 million in the fourth quarter, reflecting our continued focus on working capital efficiencies and collections.

We continue to grow the largest maintenance portfolio in the industry. We successfully executed the uplift program and completed our China transformation initiatives, including buying out the minority shareholder of one of our joint ventures in China, Otis Electric, while driving operational excellence across our business. For the year, we generated $1.6 billion of adjusted free cash flow and returned approximately $1.5 billion to shareholders through dividends and share repurchases, while investing approximately $100 million in targeted bolt-on acquisitions to strengthen our service portfolio and expand our presence in key markets. With these results, our strong backlog and the largest maintenance portfolio in the industry, we are confident that our strategy will continue to deliver attractive results in 2026 and beyond.

Moving to Slide 3. Otis closed the year with solid performance in the fourth quarter driven by our service-driven business model. Organic sales grew 1% in the quarter with service up 5%, including broad-based growth across all lines of business. Maintenance and repair grew 4%, while modernization increased 9%.

Adjusted operating profit margin expanded 70 basis points, driven by a 100 basis point improvement in service margin. We delivered double-digit adjusted EPS growth in the quarter, up 11% and which was the highest level this year and our strongest performance in the last 6 quarters. At approximately 2.5 million units, the largest in the industry, our maintenance portfolio grew 4% for the 14th consecutive quarter allowing us to grow and invest in our global service network and demonstrating the heart of our flywheel strategy.

Modernization was a standout in the quarter as orders increased 43% and we ended the quarter with a backlog up 30% at constant currency, the highest since spin and positioning us well for 2026. We are driving meaningful modernization growth through our industrialized manufacturing and installation capabilities and our commercial strategy, including phased packages that limit disruption and provide budgeting options for our customers. The tremendous modernization opportunity ahead remains evergreen as by the time all of the aged units are modernized, they will be ready to be refurbished again.

Quarterly adjusted free cash flow reached $817 million, another record since spin, reflecting our continued focus on collections and working capital efficiency. And we continue to be an innovation leader. For example, in November, at the 8th China International Import Expo, Otis unveiled Gen 3 comfort for residential modernization, SkyRise mod and Linkmod for scalable high-rise elevator and escalator modernizations and upgraded SmartCap and new AI tools, including the Otis AI inspection robot and the Otis AI agent to enhance safety, diagnostics and real-time collaboration. These solutions bring AI-driven safety, connected service capabilities and enhanced accessibility to customers and passengers supporting urban renewal and aging communities.

We also recently launched our Gen3 product family in EMEA. Gen3 builds on our Gen2 platform and comes standard with Otis ONE, our Internet of Things connectivity solution, enabling predictive maintenance, real-time health monitoring and remote intervention, which improves uptime and service quality. These products complement Otis Gen 360 and comply with the latest and most stringent safety standards while providing customers with smooth, comfortable and digitally connected rides and stylish cabins that can be customized to meet their unique needs.

Our Otis ONE connected units continued to grow globally as we approached 1.1 million connected units, providing predictive maintenance, data-driven proactive repairs and valuable application of AI for productivity and customer value. The growing connectivity is also driving subscription revenue, which increased 35% in 2025. We -- turning to the full year. Otis delivered solid organic service sales growth up 5% and expanded adjusted operating profit margin by 40 basis points. Since spin, we have improved margin by 30 basis points or more each year, underscoring our steady operational progress and the disciplined focus that enables consistent delivery.

Adjusted EPS grew 6% and we generated approximately $1.6 billion of adjusted free cash flow for the year. This strong cash flow enabled us to return $1.5 billion to shareholders through dividends and share repurchases. With a positive new equipment backlog at year-end and with modernization backlog at an all-time high, this level of free cash flow conversion should be sustainable.

Turning to our orders performance on Slide 4. Orders for combined new equipment and modernization increased 10% during the quarter, driven by solid performance in EMEA in the Americas. Our total backlog at constant currency grew 8% and when excluding China, the increase was 14%. New equipment orders at constant currency declined 2% in the quarter. We saw strength in EMEA up mid-single digits driven by growth in Western and Southern Europe and in the Americas, which also increased mid-single digits. This was offset by a high teens decline in Asia Pacific due to a tough comparison.

We continue to see improvement in China which declined mid-single digits in the quarter and in the second half, in line with our expectations. At constant currency, our new equipment backlog increased 2% year-over-year, and excluding China, it grew 9%. The Modernization closed the year exceptionally well, delivering the highest quarterly order since spin and surpassing the record we set in Q3 of this year. Orders grew 43% at constant currency, with over 100% growth in EMEA, over 20% growth in the Americas and high teens growth in Asia Pacific.

We ended the quarter with a modernization backlog of 30% reinforcing our view that we remain in the early stages of a multiyear modernization cycle supported by the aging global installed base. Our service portfolio grew 4% in 2025 bringing it approximately to 2.5 million units and strengthening our leading position globally with low teens growth in China, high single-digit growth in Asia Pacific, low single-digit growth in the Americas and approximately flat performance in EMEA.

Recaptures and cancellations remained roughly net neutral for the year, making [indiscernible] enabled by our ongoing focus on investment in service excellence. This represents an improving trend in our retention rate, excluding China as anticipated. As you know, the Chinese market exhibits structurally higher churn due to competitive dynamics and shorter contract duration. Our global teams executed well this quarter, securing strategic customer wins that reflect the strength of our solutions and the trust our customers place in Otis. As we install service and modernize their elevators and escalators, we deepen relationships and build loyalty that supports long-term recurring revenue growth.

In the Americas, Otis secured a major new equipment project in Dallas, to provide 39 elevators for a new pediatric hospital developed by Children's Health and the University of Texas Southwestern. The scope includes 26 SkyRise units and 2 Gen3 elevators with our Otis ONE Pro connected service platform. This project reinforces Otis' role in delivering advanced vertical transportation for the critical health care infrastructure.

In China, Otis was selected to supply more than 490 heavy-duty public escalators for Shanghai Metro Line 19. These escalators are equipped with sensors that enable real-time remote performance monitoring. The new line will span 29 miles and include 34 stations and we are proud to continue our long-standing relationship with the Shanghai Metro where Otis already supports approximately 2,700 elevators and escalators across 13 lines. In London, Otis won a comprehensive service and modernization contract program for 172 escalators across the London underground bringing the total number of units we service for transport for London to more than 300. Our teams will maintain, refurbish or replace units, ensuring safety and reliability for equipment that operates up to 20 hours a day and supports 1.2 billion annual passenger journeys.

Building on a legacy that began with the first Otis passenger escalator at Earls Court 1911, Otis continues to deliver trusted expertise and innovation for urban mobility in the capital of the United Kingdom. In Kuala Lumpur, Otis has secured a landmark new equipment project at our [ Mon Halcon ] KLCC delivering 26 SkyRise elevator systems featuring our Compass 360 destination management technology, Otis ONE IoT solution and EV smart screens to enhance passenger experience. Working with Armani Group and project developer Vesselin, this collaboration brings advanced vertical mobility and innovative design to one of Malaysia's most prestigious developments.

Turning to our fourth quarter results on Slide 5. We Otis delivered net sales of $3.8 billion with organic sales up 1%. Adjusted operating profit, excluding an $18 million foreign exchange tailwind increased by $29 million. Profit margin expanded by 70 basis points to 16.6%, driven by strength in service margin, which increased 100 basis points in the quarter. Adjusted EPS grew approximately 11% or $0.10 in the quarter, driven by strong operational performance, favorable foreign exchange rates and a lower share count.

With that, I'll turn it over to Cristina to walk through our results in more detail.

Thank you, Judy. Starting with service on Slide 6. Service organic sales grew 5% in the quarter with growth across all lines of business. as our service flywheel continues to deliver solid top line results. Maintenance and repair organic sales grew 4% with maintenance driven by 4% portfolio growth and 3% positive price partially offset by mix and churn.

Repair growth was solid, up mid-single digits, but slightly softer than our expectations heading into the quarter as we prioritizized investments in service excellence which should drive improved retention over time. These investments, together with our growing portfolio and continued high in our field mechanics should accelerate maintenance and repair top line growth in 2026 and beyond.

Modernization organic sales grew 9% with notable strength in modernization growth in 2026. Note that our strong modernization orders in the quarter include the large trust construction cycles continue to age. They should create a durable multiyear tailwind for modernizations. Service operating profit of $638 million increased $49 million at constant currency with higher volume, favorable pricing, productivity and gains on asset sales more than offsetting higher labor cost and mix and churn.

Operating profit margins expanded 100 basis points to 25.5% in the quarter, the strongest margin expansion of the year. matching our record service margins from last quarter. This performance reflects the continued strength and the discipline of our service execution.

Turning to new equipment on Slide 7. New equipment organic sales declined 6% in the quarter as growth in EMEA and Asia Pacific more than offset by a decline in China and the Americas. EMEA sales grew 6%, driven by a strength in the Middle East and Southern Europe. Asia Pacific grew low single digits, supported by solid growth in India and Japan, partially offset by weakness in Korea. The Americas declined 5% and slightly below our expectations due to timing of project execution. However, with a strong order performance for 6 consecutive quarters the region's growing backlog provides a clear line of sight for a return to positive new equipment sales growth in 2026.

Overall, our total new equipment backlog increased 2% and after 7 consecutive quarters of decline. And excluding China, new comer backlog grew 9%. And while China remains down on a year-over-year basis, we are encouraged by the improving order trend that Judy mentioned earlier. New equipment operating profit of $47 million declined $15 million at constant currency and operating profit margins declined 110 basis points to 3.6%.

As mentioned in previous quarters, the new equipment margin rate is more sensitive to a small variations in operating profit. even the smaller size of the business segment. The operating profit decline was driven by lower volumes and favorable price tariff headwinds and mix. These were partially offset by productivity, including the benefits of restructuring actions.

Moving to the full year 2025 adjusted EPS bridge on Slide 8. 2025 adjusted EPS increased $0.22 to $4.05, up 6% year-over-year, reflecting solid operational execution and the continued contribution from our service business. Below the line, lower share count and noncontrolling interest supported EPS growth more than offsetting higher interest expense. Note that the operational bar on this chart now includes the impact of tariffs, which was previously combined with the impact of foreign exchange rates as SkyRise become part of the baseline for 2026. Additionally, we finished the year with our best fourth quarter cash flow since '16, supported by excellent collections and sustained working capital execution.

Overall, we closed the year with solid operating performance, confirming the resilience of our strategic service model with our record modernization backlog, continued strength in maintenance and repair and a growing new equipment backlog, we are well positioned to deliver attractive growth again in 2026.

I will now turn it back to Judy to discuss our 2026 outlook.

Thanks, Cristina. Starting on Slide 9 with the market outlook. We expect the global new equipment market outlook to continue moving towards stabilization in 2026. Within the Americas, in 2025, the region grew low single digits, with mid-single-digit growth in U.S. and Canada, driven by demand in residential, health care and data centers. We expect this positive trend to continue this year.

In EMEA, the market grew low single digits in 2025 with notable strength in Spain, Germany and the Middle East, partially offset by declines in Italy and France. We expect EMEA to continue to grow this year driven by broad-based growth in both Europe and the Middle East. Asia Pacific is anticipated to accelerate in 2026 after growing low single digits in 2025. We anticipate this acceleration to be driven by steady growth in India and Southeast Asia a slight improvement in Japan and stabilization in Korea. Within China, the pace of decline moderated in the second half of 2025, in line with our expectations, and we expect the trend to continue improving. In total, we expect Asia to decline in 2026.

Turning to modernization. As of the end of 2025, there were almost 9 million units in the 23 million unit global installed base in the prime age for modernization. This population includes units over 15 years old in China, and over 20 years old in the rest of the world. These aging units drove a 13% increase in the modernization market in 2025 in dollar terms, with synchronous growth globally. We expect this trend to continue for the foreseeable future due to past construction cycles and continued aging of the installed base.

Turning to our sales outlook on Slide 10. Total organic sales are expected to increase low to mid-single digits driven by accelerating growth in our Service segment as well as moderating declines in new equipment sales, which are expected to be down low single digits to flat. Within service, we expect mid- to high single-digit growth with acceleration in both maintenance and repair and modernization, building on the strong ramp-up in the second half of 2025.

Maintenance and repair should benefit from this year's mid-single-digit portfolio growth, solid pricing and strong field performance. All of our regions are now running under the uplift operating model with clear focus on service excellence and customer centricity. In addition, in 2025, we continued to ramp up our resources adding approximately 1,000 field professionals in anticipation of continued portfolio growth and strong demand for repair work. The strong repair demand is being driven by the same aging of the installed base that's supporting modernization growth.

Within modernization, revenue growth should be driven by execution of our robust year-end backlog and continued aging of the installed base. Together, we expect a 1- to 2-point improvement in our service organic growth rate over the 5% service organic growth rate achieved in 2025. New equipment organic sales are expected to be down low single digits to flat. We finished 2025 with a strong backlog that excluding China, was up 9%. And in 2026, we should see growth in all regions, excluding China, with notable strength in Asia Pacific and with Americas returning to growth. The backlog in China remained down significantly as of year-end, which will weigh on sales, particularly in the early part of the year.

As a reminder, backlog conversion in China is typically around 9 months. Therefore, a faster market recovery may positively impact our sales prospects due to the book and ship volumes. In addition, while new equipment sales in China are expected to decline this year, we have seen a significant improvement in China new equipment orders in the second half of 2025, an encouraging trend. On an actual currency basis, we expect total net sales of $15 billion to $15.3 billion. With this accelerated organic sales growth, we expect adjusted EPS to grow mid- to high single digits for the full year.

I'll now pass it back to Cristina to review the 2026 outlook in more detail.

Thank you, Judy. Turning to our financial outlook on Slide 11. We are expecting another year of solid profit growth, driven by the strength of our service-driven strategy. At constant currency, adjusted operating profit is expected to grow $60 million to $100 million, accelerating profit growth on the back of a stronger top line.

As our new equipment segment is stabilizing and modernization continues a steady growth trajectory, we should be able to sustain this level. And given this dynamic, we expect adjusted free cash flow of $1.6 billion to $1.7 billion this year. We will continue with our shareholder oriented capital allocation strategy targeting a dividend payout ratio of 40% and executing approximately $800 million share repurchases. Note, however, that we will remain flexible with other potential investments, including bolt-on acquisitions, which may impact our capital allocation in the year.

Turning to Slide 12. We have delivered strong profit growth every year since it's been driven by sustained service top line growth and consistent margin expansion, which increased 350 basis points over the period. As we look to 2026, we are confident our service-driven strategy will continue to support this trend. We remain committed to accelerating service top line through volume and value growth in maintenance and repair while also capturing the tremendous modernization opportunities ahead. We will continue to drive productivity through increasing density and digital capabilities while also capturing the year-over-year cost benefits from the transformation programs finalized in 2025. These positive contributors will partially be offset by wage inflation, mix and churn.

And in new equipment, we expect the small headwinds from commodities, although relative to our annual spend in this category, this impact is expected to be modest. As we execute the new equipment backlog, we expect lower margin to flow through the P&L. In service, we continue to invest in service excellence as we have seen very good results in customer satisfaction, demonstrated by the stabilization of our retention rate in our most valuable markets. We are confident that these investments will support continued strength in the top line.

Looking at the first quarter, we expect service top line to ramp up sequentially with first quarter service organic sales growth of approximately 6% on the back of a strong execution in repair and modernization. New equipment top line is expected to be down in a similar range as the fourth quarter. So we anticipate it will improve as the year progresses on the back of the positive backlog at year-end. EPS in the quarter is expected to be around flat.

Turning to Slide 13. 2025 has been a year of transformation of our operating model. We have navigated external macro and geopolitical challenges while building a foundation of service excellence and customer centricity. In 2026, we are poised and ready to accelerate our top line and deliver a strong operational performance. Organic sales growth is expected to improve from flat in 2025 to up 3% in 2026 at the midpoint of the guide. The improvement is driven by acceleration of both maintenance and repair and modernization, coupled with a stabilizing new equipment sales.

Constant currency adjusted operating profit growth at the midpoint of the guide is expected to increase over 70% compared to last year. This is an indicator of our improving operational performance due to an accelerating top line, stabilizing retention rate, smart pricing and disciplined execution. Taken together, we expect mid- to high single-digit growth in adjusted EPS. While at the midpoint of the guide, this year's adjusted EPS growth is similar to last year's, our operational performance is accelerating. As we capture the benefits of past investments and our cost savings initiatives, while leveraging the industry's largest maintenance portfolio, our digital capabilities and our best-in-class productivity.

We are excited about the opportunities in front of us, and we have the resources, talent and strategy in place to capitalize on them in 2026. Longer term, we remain confident that our service-driven strategy will continue to deliver sustainable shareholder value.

With that, I will ask kindly Krista to please open the line for questions.

[Operator Instructions] Your first question comes from the line of Amit Mehrotra with UBS.

Judy, maybe you can talk about growth expectations for maintenance and repair within the Services segment for '26 and then how you expect service profit to trend relative to the mid- to high single-digit revenue growth outlook in that segment? And then maybe related to that, anything you could talk about on the progress you're making on retention and churn as well.

Sure. Thanks, Amit. Let me talk to the growth expectations. I'll ask Christina to talk to the profit expectations and then we'll circle back on retention and what we're seeing. Listen, we ended the year, obviously, at a 5% service top line growth, and we were targeting a little bit higher on repair, although we did see our repair trajectory stabilize and actually be much better in the second half than the first half.

As we go into this year, we are expecting our repair rates to ramp up to be 10% plus. So that will bring maintenance and repair up higher, and we're actually expecting at least 1 point gain in maintenance as well. That take that with modernization backlog conversion. And that's why we felt that we'd be 1 to 2 points higher. And we have line of sight to that with our backlog. Cristina?

Yes. And Amit, on the profit and margin rate side, so this acceleration of top line should also flow through profit, and we expect an acceleration of service contribution in the year. In '25, we contributed BPY versus previous year, $150 million at constant currency in 2022 -- 2026 is going to be $200 million. So very consistent with the acceleration of dollar profit strategy that we have been selling over time.

And look, when you look back, we have delivered a very strong performance in our service business consistently in the last 5 years. We have grown service margins by 40, 50 and 60 basis points every year, we are expecting margin expansion again in 2026. This is on the back of growth in volumes. We're also improving our price capabilities being much more adapted to customer demands, much more smart pricing. We also have the benefits of productivity and the uplift run rate.

On the headwind perspective, we have the investments we are placing in the stabilization of the cancellation rate that Judy will talk to in a minute. But we are very positive about the results of these investments in 2025. So we will continue selectively investing in customer excellence. All in all, very strong service performance expected for 2026.

Yes. Listen, I couldn't be more pleased with our service teams. And I think we are. I'm convinced we're making the right investments in service quality and service excellence. It matters to our customers, and it will as we've said all throughout 2025, make a difference in retention rate in '26, '27 and '28. Our goal in '25 was to stabilize that retention rate after seeing a decline from '24 to '25. And ex China, we're pleased to say that we've done that. And now we expect small growth to start yielding in '26.

But what I would tell you is we're very focused on several key markets. We want to ensure that we are retaining the right units in our portfolio. Having the largest portfolio is wonderful at 2.5 million units. But we want to make sure that every unit is not just accretive, but we continue to retain the key units that have the largest profit contribution.

In the past, we've grown in more of the emerging markets. So while the portfolio may not grow at the same rate in 2026 at that 4% that we're very proud of, it will grow in terms of the value it contributes where you'll be able to measure that, Amit, and everyone listening is in our maintenance revenue. You'll be able to measure it in our repair revenue, which is where it will show up, and then we'll share retention trends as we go through the year.

And just as a quick follow-up on the new equipment margins. Maybe just a question on how much do you think this trajectory it's structural versus cyclical. Obviously, the China market, which is your highest margin new equipment market is tough. So maybe it's just cyclical. But obviously, there's a need to capture more service revenues. So I'm just trying to understand the price competition there and whether you can bounce that trajectory back up if you get some macro tailwinds?

Yes. No, look, Amit, on the new equipment side, the new equipment segment is a very small piece of our business. And it will become smaller as we continue executing our service-based strategy. The margins are going to be a headwind in 2026 because of the ongoing decline of volumes, mainly coming from China. And as you know, China is our highest margin geography, we have the benefits from the China transformation restructuring an uplift, but most of the benefits are in the baseline. The run rate from China transformation is $20 million smaller in the year-on-year basis than in 2025.

Commodities are also a small headwind. Very small in the broader scheme of things on annual spend in this category, but it is a matter of navigating through the backlog and stabilizing the new equipment segment. In margin rate terms, we expect 2026 to land at the same rate of Q4 2025.

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Can you add a little bit more color around the service margin in the fourth quarter? And when you get 100 bps year-over-year growth, think about mod as being kind of the lowest margin within that portfolio, repair being the highest, repair was a little lighter than you expected. And so when you think about maybe some of the mix components within that, that wouldn't be helpful. And so what you're doing to drive the margin expansion in each one of those individual pieces and specifically what you were able to achieve in margins?

Yes. Let me let Christina go through some of the specifics, Joe, but let me start by saying when you think about it, we've -- as we've seen this impending opportunity in modernization, we've known that, that has the potential, obviously, to be dilutive to the Service segment. The good news is with the repair volumes growing and they ended the year at 5%. They're still growing at a larger even though the rates 5%, it's a larger bucket of core revenue to grow on than mod.

I will tell you, though, we strategically have focused on modernization seeing this large market that was going to continue to grow as we call it, almost evergreen. And so we industrialized our modernization approach. We've integrated it into many of our new equipment factories. We have a common supply chain, so we're getting scale benefits. We have dedicated and specialized installers, specialized sales reps, and now that the modernization scale is starting to emerge, we're seeing the margins grow as well.

So we're pleased to say, again, the modernization margins are getting much closer to the 10% medium-term target we set. Originally, we had talked about first surpassing new equipment margins. We've done that. Now we're at the point where it should be more than double new equipment margins even if the new equipment margins are typically around 5%. So we came very close to that as we ended the year. And I think with more scale you'll see more of that.

Just one specific call out though on modernization revenue growth. We did see it pretty much everywhere. But our China team, because of the ModBond stimulus program had significant orders in the third quarter and their orders were up over 35% for the year, pretty flat in the fourth quarter because they happened earlier this year. But our mod revenue in China, Sally and the team really turned the revenue very quickly. And that revenue grew 100% in the fourth quarter year-over-year and was up 75% full year. So mod margins look strong in China, just like the new equipment margins do, but let me let Cristina add some more comments.

Yes. Joe, so I can give you more color on the components below the basis points margin expansion in service. And let me start by saying we are very pleased with this strong performance and encouraged by the ability to continue growing service margins in the future. So as Judy pointed out, repair accelerated and repair has the highest margin within the Service segment. Modernization margins are ramping up. We increased 50 basis point modernization margin quarter-over-quarter, Q4 versus Q3. And there is a third component that is a onetime effect of the sale of assets of a few transaction of service centers. This is related to our service transformation strategy. We are changing our operating model.

So we have sold a few service centers because we are outsourcing to a third party that can handle the process more efficiently, and this was $14 million in the quarter. If we exclude this effect, service margins would have expanded 40 basis points, which is still a very solid expansion.

Got it. And then there's -- is there a go-forward benefit from the transactional service centers effects such that contribution in the quarter is a run rate contribution? Or was it more onetime in nature?

That was more onetime in nature, but the benefit will be retention rates because, again, it wasn't core for us to be managing some of our own spare parts. We have a third party now that, that is their business. better central location for that for quicker and more efficient spare parts delivery so we can get the right part to our mechanic to repair the unit in a shorter cycle time.

Got it. Okay. And then could you just talk a little bit about the China stimulus program with a little bit of color on how that's grown. And so if we go back to kind of when it started and the size of it, what the size of it was in '25 and how you're thinking about it in '26.

Sure. And it's still -- it's young and yet it's continuing to evolve. The whole focus was actually twofold from the Chinese government when this was started in about mid-2024. It was to make living more attractive for Chinese citizens, especially those that were getting older in some older residential buildings and also to drive consumption as part of the government's focus on driving consumption in a deflationary environment.

In 2024, the size of the program was about 80,000 units that could be modernized, again, fully funded by the government, but needing to be supported by local governments where they would put forward the number of units they wanted to do. That ramped up to 120,000 in 2025. And I think our team, from a share perspective, without giving any numbers, did an excellent job capturing the market due to our customer connections, our agents and distributors and our relationships, and we did deliver all of our units in year, which is a key element of the program. And that's really what drove it.

Again, full stimulus fully funded by the government. The government itself has said that program will continue in 2026 at least the level comparable to 2025. We've not seen if it's going to increase yet. We're obviously watching signals because right now, it was a one value program where we would fit solutions to fit that RMB 150,000. We believe that there's been rational assessment of, well, if you have taller buildings that need more content and more equipment, maybe we should have different levels versus just one value. So we think it's going to continue to evolve, but we view it as positive in 2026. It should look at least like 2025 and our Otis team is prepared to capitalize on that.

Your next question comes from the line of Nick Housden with RBC Capital Markets.

My first one is on modernization. So the mod backlog was up 30%, which is a very strong number. and you've discussed how you've been industrializing your modernization business. So it would be good just to kind of understand how you think about the annual growth potential in that business in the next couple of years? Because I don't think any of us are expecting sort of 30% numbers, but just thinking about how you kind of pencil in the acceleration in that business.

Yes, Nick, thank you for asking. We've seen this market starting to grow, and now it's growing at some pretty healthy rates. I shared in my opening comments, we think the market segment grew 13% in 2025. And you could tell from the arrow, that's going to continue to go up. It's not as well instrumented in terms of segment measures as the new equipment market, where most of the providers share information to a neutral third party.

So some of this -- most of this is actually based on our own estimates. But we are seeing demand increase. We originally started in this market primarily with full replacements. But in lots of discussions, remember, half of the installed base is residential, multifamily across the globe so many discussions with our customers, they were looking for alternative ways to phase this in over time. So earlier in the year, we introduced our Arise package set in EMEA, which has the largest population of aged units because just due to the aging in Europe and the building construction cycles.

And between the full replacements, the mod bond stimulus in China and again, these partial replacements that let people with our tools budget for this and do it over multiple years and have less disruption in office buildings and other places, we are seeing this market pick up significantly. If you look even this year on our orders, First quarter, we were up 12%, second quarter, 22%; third quarter, 27% and 43% in the fourth quarter. I mentioned transport for London. That is a major several decade-long project between maintenance and modernization that we'll be doing for the London underground.

So we have a combination of volume business and major projects business. So I don't believe you'll see us convert that 30%, I know, for sure, in 2026 because there are multiyear major projects in there, too. But we see a steady growth rate in the market. and it is growing in every region and every country where we do business, which gets us excited.

Lastly, just in terms of the how, we did specialize our sales force for this. We created packages, so it's easier to show the value proposition for our customers. we provide capital planning tools so they can get ready financially. Then we have the operations side, ready, as I mentioned earlier, and then the installation side. What we want to do is become very productive, have a lot of -- and I think we are getting through the learning curve with our installation crews. And then we believe this will then have the ultimate benefit of the conversion and the retention on service.

So for us, modernization, it's another lubricant on the flywheel but it will drive its own significant revenue stream and margin and more importantly, profit contribution in the near term. And I think planning it in the teens, if not more, is an appropriate place to plan.

That's great. And then my second question is I was just wondering if we could maybe unpack the EPS outlook a little bit more. It looks like it's slightly below what the market was expecting in mid- to high single digits. I'm just wondering what it will take to get back to the kind of 10% plus ambitions that you've previously discussed at Investor Day.

Mod growth this year should be good. You mentioned repair. I think you said growing 10% this year. There's an FX tailwind as well. So kind of seeing potentially only mid-single-digit EPS growth in that guidance has maybe looked a little conservative to me. So just curious to hear your thoughts there.

Yes, I will have Christina -- listen, we chose to be conservative I just want to be very transparent about that because we just want to make sure that what we commit, we deliver and anything we continue to do, which we'll be happy to talk about above and beyond that, we will deliver that to our shareholders as well. But we did choose to start conservative for the year.

And from the components perspective, we -- the midpoint of the guide, Nick, is 6% EPS growth, that is around $0.23. And the operational component of that growth is much stronger in '26 than in 2025. We are increasing from $0.09 year-over-year growth in 2025 to $0.15 in 2026. And this is on the back of the acceleration of operating profit in service. As I said before, service operating profit is going to grow to $100 million at constant currency in the year.

On the other side, we have FX that is a little bit favorable. We are talking about $0.08 in 2026. And it can be even more favorable because we are assuming euro at 1.18. And yesterday, the spot was EUR 1.20. So the stronger effects the more EPS we will deliver. Below the line, we expect this to be roughly flattish because we have the headwinds of the interest rate that is essentially the refinancing of the debt that comes mature and interest rates are now higher than 5 years ago. but we have the ongoing benefits from sure buyback, $800 million guided for the year and a little bit positive on the tax rate. We are expecting to finish the year at 24.5%.

Your next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to ask about maybe the margin opportunity if we look beyond '26. The company has delivered a really impressive margin expansion over the last 2, 3 years. without much help from the market. But a lot of that was driven by the restructuring programs, both the uplift savings and the China transformation savings. I think over the last -- '24 to '26, you guys have in the slides that it was, I think, $240 million. So I guess my question is, what is the ability here to expand margins as we look beyond these restructuring programs and just kind of more on a core operational basis for the business.

Yes, Chris. So first, let me comment on the restructuring program because definitely, they have been a tailwind in margin but we have also navigated a significant deterioration of the new equipment market worldwide, particularly in China. So when you look at our top line, new equipment has been a drag in growth of $400 million-ish in '24 -- in '25, and we are expecting to trend towards stabilization still around $100 million this year although it can be better depending on China because China has sort of their book and ship. So it's true that we have those tailwinds, but they have also helped us to navigate the situation regarding the equipment.

On the other side, I want to emphasize the strength of our service business. On service, we continue delivering mining expansion beyond uplift. And that's thanks to the increased productivity. We are proud to be best-in-class in the industry in our productivity. We are also connecting units with IoT, more than 1.1 million or 1.1 million units connected in 2025. And as we continue growing the portfolio, we will have more density and more productivity.

In addition to that, pricing should also help to expand margin rates because pricing has a higher flow-through in profit, and we have a few pricing actions, again, very targeted to adapt our price to customer demand that will benefit in '26 and beyond.

Yes, Chris, I would just sum it up to say, without top line growth, we've achieved this margin expansion and this profit contribution. With just think what we can do, not just think our plan is to drive growth in our company. You're going to see -- we did not have top line growth. We were flat this year. A lot of reasons, but it doesn't matter. We were flat. We are obviously showing we're going to have top line growth in terms of sales. And with that, that profit flow-through will be visible.

I really appreciate that. If I could maybe follow up on the conversion of modernization orders. So mod revenue has obviously been very good but orders and backlog have been even better for a while now. So I guess kind of my question is, can you just kind of maybe talk about that mod conversion cycle? I would imagine it's faster than the new equipment market, but any color there because it does feel like backlog and orders have been running ahead of revenue for some time now.

You're accurate, Chris. And we're just -- we continue to build up that backlog in our guide this year, the mod revenue will be in the teens certainly 10% plus as the volumes accelerate. That works really what your assessment on, you think it's quicker than new equipment, it is when we're doing a volume mod a small mod, certainly a partial mod, but even a volume full mod, we can do that relatively quickly.

But I would tell you that when we go to not just major projects but even office buildings, commercial locations, hotels where there's a bank of elevators or multiple elevators or infrastructure where there's multiple, we only can really take 1 or 2 out of service at a time. So even though we were not held up by a construction cycle or a general contract because we're the general contractor, it's about interruption in the building. So some of these major projects actually take longer than a new equipment job as do some of the ones where we have kind of a common bank if you're in a hotel, you're only going to modernize one at a time so that you don't disrupt traffic flow or have a lot of general work going on. So it's a little different mix than new equipment.

On the cash side, it looks good because it's -- we get the advanced payments and we bill as we go. On the revenue side, it's -- we'll do POC accounting in terms of how we do the sales. But there is this blend. And in the -- we are pushing hard, all of our regional leaders know, all of our field leaders know. We're pushing hard to convert the volume as quick as possible so that we can get ready for more. And it should be in the teens in terms of '26 and beyond.

Your next question comes from the line of Jeff Sprague with Vertical Research Partners.

Judy, I was wondering if you could just dial us in a little bit more precisely on China just to sort of level set the base and what is the actual expectation for 2026. You just kind of spoke to it directionally, but maybe just how the market ended in units, what you're actually expecting for the 2026 decline? And is it sort of a decline in the first half and then a stabilization in the back? Any color there would be helpful.

Yes, happy to, Jeff. So it's interesting. This time last year, we sat here and we said -- and I said that the market would start its stabilization as we got to the second half, and that is indeed what we saw. The market in '25 was down 15% for the first half, 10% for the second half. We believe the market ended at about 370,000, if I round up just a little units for 2025. You know we've changed our strategy there, but let me finish on kind of where we see the market this year.

Our view is that as opposed to if you take between the 15% and 10%, let's say, 2025 was 13% down, we think this year will be about 8% down. We think in the first quarter, maybe second quarter, we'll see that similar minus 10, and we think we'll end the year closer in the market being down to minus 5. So you can do the math in terms of it being down about 8% in terms of the segment.

In terms of our strategy and what we've done, listen, I think the team has done a phenomenal job in the fourth straight year of decline. Our service in the fourth quarter, we continue to grow our service business, both maintenance repair. You heard me talk about mad earlier. ServiceNow as we exited in the fourth quarter was 40% of our China sales. which was 42% in the third quarter. And you'll recall it spin, it was in the mid-teens. So we have been going through this transformation of our China business to not be as dependent on that.

China, in terms of global revenue, China represents 11% for the year of our total Otis revenue. It was at 12% in the fourth quarter, and it's now 19% of of our new equipment revenue in the fourth quarter versus 21% in the third quarter. So the rest of the business is growing healthy. Our China team has done an amazing job at being able to stabilize our business, and they've added connected units, they've continued on productivity.

And we're really interested in hearing what's going to happen in the March meetings that are happening after the 15th 5-year plan was announced at the fall Plenum. We believe that in Volution focus will help with competitive pricing, hopefully starting to stabilize that. the mod bond will help us, and we believe there will be a continued focus on how do you get consumption started in the property markets. But that's kind of the China picture for you, Jeff.

Yes. No, that's great color. And then could you also just address kind of where OE versus service margins are way back when, right, we used to think of new equipment margins actually higher than service? I think there's some debate on whether or not that was actually the case. But you did note that China is still your highest margin region overall. So I just wonder if you could give us a little more perspective on that also.

Yes, Jeff, they've remained the highest margin, the highest region in margin because we have restructured the organization to adapt the cost to the new volume environment. On the other side, service margins are expanding over time because I think that they are growing very strongly in modernization. Our modernization margins are kind of at the same level as new equipment. So as modernization goes up. In the case of China, that is going to be a tailwind in the margin rate. So -- but yes, directionally in line with what we have said before, new equipment, high service lower but getting better.

Your next question comes from the line of Nigel Coe with Wolfe Research.

Cristina, maybe you can clarify with you. The 1Q guidance, is that flat with 1Q last year? Or is that 4Q?

It's flat versus Q1 last year. And Nigel, let me give you some color about the different segments. So on the one side, Sales is going to continue accelerating all the year along starting in Q1. We are expecting in service 6% sales. You may remember that last year, we had a weaker service top line growth, particularly in repair. It was 1% in Q1 last year. It's expected to be around 10%. We also have an easier compare, but we continue accelerating, while modernization will be in a steady growth on the back of the 30% backlog.

From a profit standpoint, we expect profit at actual FX to be around flat with $20 million FX tailwinds. The reason for that is on the new equipment side, we didn't have tariffs last year in Q1. They came into place into Q2. You have also seen weaker execution in U.S. new equipment in Q4. This has been delayed to Q1. So we have kind of a compound effect of the compare last is moving into Q1. On the service side, although we continue growing the top line and the acceleration of repair is a tailwind in margin, we also have a tougher compare contribution because of investments. You may recall that last year when you compare to Q1, we don't have that in the baseline. But overall, margin is going to be around 16% in Q1.

Okay. That's helpful. That's what I was going to clarify that with you there. And then for the full year, you're indicating new equipment margins down probably 100 basis points or so for the full year. I think your plan is pretty flat margins overall. So should we think about it as, I don't know, a better relation on corporate, service margins up 20 basis points. Is that how you think about it?

Well, you got it right in the sense that margins are going to be around flat. But looking into the segments, as I said before, service is going to expand margins very strongly again in 2026. Total operating profit growth for service is going to be $200 million.

On the new equipment side, this is indeed a headwind for us. And the reason for that is that the China transformation benefits were mainly captured in 2025. So the run rate is $40 million in total, only $10 million incremental run rate in 2026. At the same time, we continue executing the backlog with a more competitive price and volumes are regularly stabilizing, but they are planned to be revenue in new equipment, low single digit down to flat.

From a corporate standpoint, we expect to be at the same level as Q4. So Q4 is a good run rate for you to take. And you need to consider the impact of inflation, and we have some small impact of transactional effect that is related to the hedging of our intercompany activity. It's a technical thing we can cover offline, but it's essentially leaving the run rate at Q4.

Okay. So just to clarify, Christina, it sounds like new equipment margins close to 3% for the full year.

Yes. I would say slightly below 4%.

Your next question comes from the line of Julian Mitchell with Barclays.

I just wanted to circle back to the service business for a second there. And just trying to understand kind of if we take the total company in service. I think you had 92% retention end of 2024. Where is that sort of ending 2025? And I think, Judy, you mentioned the 4% portfolio unit growth may be tough to sustain I just wanted to understand why that's the case as you are investing a lot more in service head count and so forth.

Yes, Julian, the 4% is not tough to sustain if we choose to sustain it with more emerging markets and lower contributing units. What we're trying to do is focus on growth and growth in value as well. So the retention rate actually ex China, which we didn't share last year. But actually, is we say stable, I would say, I was pleased with what we were able to do through the year.

We stopped it from eroding when you think about the Americas, Asia Pacific and EMEA, and now we're at the point with these investments and with our customer focus, where we think that will now actually become stronger, but not by a point in '26, but it should pick up a little bit. Obviously, China is a little different structural.

But please understand, I mean, we could continue to add units to the portfolio. This is a conscious decision we're making and it's not that 4% is going back to the 1% we had perennially, but it might be -- it might start with a 3%, but it's going to be a 3-plus percent, but it's going to be units that actually drive more top line in terms of maintenance value in terms of the repair we'll get from it and the eventual mod.

That's helpful. And then I just wanted to put a finer point on the how we should think about the EPS sort of phasing for the year. So I think it's up $0.23 for the year as a whole. That's all coming between the second and fourth quarters because Q1 is flat EPS year-on-year. Any help you could give us how to think about the phasing of that $0.23 increase in the remaining 9 months, please?

Yes. And I'll just remind you, this year, it was $0.03 for the first half and then $0.09 for Q3 and $0.10 for Q4. So our intent is not to have to depend on the full second half again. there will be an increase regardless of the compares, but you should start seeing it much more in the second quarter than you did last year.

Your next question comes from the line of Rob Wertheimer with Melius Research.

Judy, you've touched on service and service excellence investments a couple of times. I wonder if you could just in a general sense, talk about where you feel you are now versus where you want to be? Have you gotten there and you're starting to see results. Is there more investment to come? And maybe there's a margin kind of a theme attached to that question. And then I wonder if there's any new technology or new tools they're developing throughout the year that might add to your ability to lead that segment?

Yes. No, Rob, we anticipate continued productivity from our incredible down 45,000 field professionals. They represent us every day in front of customers, and they are, as I always say, the heart and soul of our company. We will be continuing to provide more tools and technology for them because the answer for us to continue growing, we cannot just instantly create new mechanics. They go through an apprenticeship. These are professionals. This is what they commit to.

So whether it's our robot that's doing inspections that we showed in China, other AI tools that let us handle parts identification more efficiently our -- obviously, the application of Otis One, I'm so excited about where that's going in '26 to give us better predictive maintenance and to make our mechanics first-time fix rate even more efficient. So all of that should help us in terms of how we go about the year.

The first part of your question, I'm sorry because I answered...

That was largely -- but have you reached kind of max investment and now over the next 2 or 3 years, you start to lever it? Or how do you think about that?

Yes, I think -- well, I can tell you the investment is still underway especially -- and it's planned for '26, which is a little bit part of the EPS bridge that Cristina took you through because having been in this business for 172 years, we understand the value of long-term customers, and we knew we needed to improve our service delivery. So that investment is still underway. It's happening at -- and basically, what we're doing is we're applying more mechanics and more field professionals in locations where the performance has not been satisfactory even though we may not be billing them, but we're trying to improve that service, retain that customer. It's an investment we think is extremely worthwhile and it's going to continue to play out this year, and we believe the returns will be seen for many years to come.

Your next question comes from the line of Kyle Summers with Roth Child & Company.

I just want to start on the repair side. Could you just go into a bit more detail as to how the investment into service excellence led to the lower-than-expected repairs. And then why shouldn't we see this reoccur in 2026?

Yes. Well, all I can tell you is the repair backlog is growing, which, from a financial perspective and how you look at it, you look at it positive from a customer service perspective, you don't want to wait too long for repair. So we need to increase the conversion rates on our repair and you're going to see us be more proactive repair in terms of sending out solutions for our customers before they ever experience the problem.

But I'll let Cristina talk to the rates.

Yes, Kyle. And I will add that, as Judy said, the repair backlog is growing and the demand is there is a matter of how we distribute our field colleagues in order to execute all the activities in the quarter that are in the case of service, maintenance, repair and modernization.

So as we enter the quarter, we knew how many field colleagues we had because the onboarding process is longer than 3 months. But we also monitor regularly the quality indicators. And as we see the need to put more field colleagues on maintenance in order to better support customer and satisfaction, we calibrate during the quarter resources from the different activities. So it's not a backlog or demand issue. It's a matter of calibrated resources according to the best use of them.

And I think we are getting better at that every day and every week at all of our operating territories.

And then just on the retention rate. So obviously, good to see it stabilizing outside of China, but obviously, the total rate has still declined. Can you just provide a bit more color as to what exactly is going on in China and how you aim to stabilize the decline there? And then just adding on to that, you mentioned slight improvement into 2026. Is that for the total group? Or is that still ex China?

So listen, we expect everyone to participate in continuous improvement in everything we do. So I wouldn't I wouldn't just call out group for improvement. There's room for everyone to improve. China is pretty simple. Every year, every contract is up for renewal, and there's no ability to have any sort of auto renewal in the structure of how China does business for everyone, not unique to Otis. So it is every year continuous, you have to prove yourself. You get repriced. It's just -- it's a very different structural system.

Your next question comes from the line of Steve Tusa with JPMorgan.

I'm not sure if we have the numbers right on the conversion rate in China. It seemed like it was substantially lower than what you guys have been reporting in the past, just a math on that, if you could confirm that?

And then I guess, just combining that with the attrition and delving a little bit deeper into Jeff's line of questioning, is there just something now, like structurally different with this China aftermarket that the price pressure is kind of intensified from the OE into the services now. And so that's just something you're -- like you said, you're kind of walking from a value perspective. Is that just higher level, like is that the Mosaic there?

Yes. Let me answer both. So the China, there's 2 things going on here, Steve. One is we are -- and we're kind of in flight. So we've got orders in the backlog that we won competitively, that we want through our agents and distributors. And some of these are not in the Tier 1 and Tier 2 cities where we choose to focus because of the contribution. We get better density there. The contribution makes sense.

So we've obviously delivered them. New equipment margins are good. But we're -- we understand if that customer chooses to go with another service provider, and we allow that to happen. Separately on recaptures, we use that same filter. So it's not -- we don't want to recapture everything across the whole country. We want to recapture the units. So new equipment. We want the units that will give us the lifetime service or certainly a better service stickiness in service, recaptures, we're very targeted now.

So I think you're seeing not structural but strategic Otis decisions that will -- it might impact the rate, but it will give us a healthier portfolio on China.

Okay. And are we right about the conversion rate being like...

It is lower. It is lower.

Okay. Okay. And that should remain kind of in that level going forward?

Yes, I would expect a little improvement, but it will remain lower, yes.

Okay. And then sorry, one last one, just on price cost. What is the kind of thought on that this year? I know steel obviously has been a bit volatile. What are you guys looking for on a kind of on a spread basis this year?

We would expect the same trend as we have seen in 2025, Steve. So rest of the world, excluding China, will have positive low single-digit price China will remain challenged around 1, 2 points down sequentially quarter-over-quarter.

Yes. I'm not as worried about commodities, Steve, with how we manage it. locally and then how we lock it in. Obviously, we're watching steel, copper, but it's not a significant number for us in terms of a headwind this year.

That concludes our question-and-answer session. I will now turn it back over to Judy for closing comments.

Thank you, Krista. 2025 marked another year demonstrating the strength and resiliency of our service-driven strategy. This foundation and service, together with a robust backlog for modernization and new equipment gives us confidence in driving meaningful growth in 2026 and beyond. Thank you again for joining us today. Please stay safe and well.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Good morning, and welcome to Otis' Third Quarter 2025 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com.

I'll now turn it over to Rob Quartaro, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Welcome to Otis' Third Quarter 2025 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Cristina Mendez, Executive Vice President and CFO.

Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

Now I'll turn it over to Judy.

Thank you, Rob. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope that everyone listening is safe and well. Starting with Q3 highlights on Slide 3.

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. This strong performance, together with a lower share count, drove a 9% increase in adjusted earnings per share in the quarter. Our maintenance portfolio continued to grow 4%, and we are on track to approach 2.5 million units in our service portfolio by year-end.

Modernization order growth accelerated to 27% and backlog increased 22%. New equipment orders grew 4%, returning to growth for the first time since the fourth quarter of 2023, supported by moderating declines in China and good momentum across the other regions. Adjusted free cash flow increased sequentially as anticipated to $337 million, giving us good line of sight to deliver our adjusted free cash flow outlook of approximately $1.45 billion for the full year. 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.

We continue to innovate both in our product and go-to-market approaches. For example, we recently launched Otis [ Arise ] mod packages in our EMEA region, which represents our largest modernization opportunity currently. Otis [ Arise ] mod is a new suite of flexible phased modernization packages designed to help building owners upgrade their elevators in a way that creates less disruption for passengers, and provides customers with options for a phased project and predictable budget. Otis Arise mod reflects our commitment to customer-centric innovation and positions us to capture long-term modernization demand across the region.

Also during the quarter, Otis was named a TIME magazine's list of the world's best companies for 2025, and again recognized by Forbes as one of the world's best employers. These recognitions reflect our commitment to our absolutes, our strong culture, global impact and commitment to excellence.

Turning to our orders performance on Slide 4. Combined new equipment and modernization orders grew 9% in the quarter, with notable strength in Americas, EMEA and China. Our combined backlog increased 3% and excluding China, increased 11%. Our total backlog, including maintenance and repair, remains near historically high levels, which should support growth in the coming quarters.

New equipment orders increased 4% in the quarter. And excluding China, we saw a robust 7% growth, with EMEA up high teens, driven by Southern Europe and the Middle East, while Americas grew mid-single digits. The strength was partially offset by a low single-digit decline in Asia. We have seen improvement in China year-over-year comparisons and we expect China new equipment orders to be down mid-single digits for the second half of the year. At constant currency, our new equipment backlog declined 1% year-over-year, but excluding China, it grew 8%.

We had our highest modernization order since spin, up 27%, driven by strong 20-plus percent orders growth in Americas and China, and high teens growth in EMEA. Our quarter end backlog grew 22%, positioning us well for the coming quarters. We continue to believe we're in the early innings of a multiyear growth cycle in modernization driven by the aging of the 22 million unit installed base. All regions contributed to our service portfolio growth of 4% in the quarter. We saw low teens growth in China, mid-single-digit growth in Asia Pacific, and low single-digit growth in Americas and EMEA.

Our global teams continue to execute well. And this quarter, we secured a number of strategic customer wins that underscore our ability to deliver differentiated solutions, deepen relationships and expand our footprint across key markets. In the Americas, we secured a project at [ 100 McAllister ] in San Francisco, a landmark 1930 [ Gothic revival ] in our [indiscernible] building that serves the University of California law school. Otis will install five Gen 3 elevators with Compass destination dispatching, delivering advanced vertical transportation while preserving the building's historic character. The project is being managed by [ Plant Construction ], a long-standing Otis partner, and highlights our commitment to quality, innovation and heritage preservation.

In China, Otis was awarded the largest bond-funded elevator renewal project in Shanghai with 106 units at the Sunshine Waterfront Residential Community. We're upgrading legacy Otis [ roped ] elevators to our Otis Arise mod packages, preserving key components to optimize the bond budget, and adding AI-enabled safety cameras to prevent [ e-bike ] entry. Our customer has requested handover by year-end with a fast-paced schedule requiring 10 units replaced every 10 days. This project showcases our ability to deliver safe, and efficient solutions under tight time lines.

In Dubai, we've secured a new project with [indiscernible] Realty to equip [indiscernible], a premium residential development in Dubai Marina. Otis will supply 29 units, including 25 SkyRise elevators, and four Gen 2 machine roomless high-speed systems, as well as our EMS 2.0 Elevator Management System. This project further reinforces our presence in the high-end residential segment and marks an important step in building a strong relationship with [indiscernible] Realty.

In South Korea, Otis was selected for the [ Landmark K ] project, the first urban architectural design innovation project designated by the sole metropolitan government. We'll provide a total of 54 units, including 25 SkyRise elevators, and Compass 360 destination management system to optimize passenger journeys. This project highlights our role in shaping next-generation urban mobility, and we're proud to support this innovative development in Seoul.

Finally, last week, I had the privilege of joining our customers at the celebratory ribbon cutting of the new JPMorgan Chase Global headquarters in New York at 270 Park Avenue. Otis installed 89 units, including 72 high-performance SkyRise elevators and 12 escalators, and introduced our Compass Infinity AI dispatching system, which continuously learns and optimizes passenger flow. We're proud to support JPMorgan Chase at this landmark site and beyond.

Turning to our third quarter results on Slide 5. Otis delivered net sales of $3.7 billion with organic sales up 2%. Adjusted operating profit margin, excluding a $17 million foreign exchange tailwind, increased by $16 million driven by strength in the Service segment. Adjusted operating margin expanded by 20 basis points to 17.1%. Adjusted EPS grew approximately 9%, or $0.09 in the quarter, driven by strong operational performance, favorable foreign exchange rates, a lower tax rate, and a lower share count. Adjusted free cash flow was $337 million in the quarter, and $766 million year-to-date.

With that, I'll turn it over to Cristina to walk through our results in more detail.

Thank you, Judy. Starting with service on Slide 6. 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.

Our repair business continued to accelerate to 7% growth year-over-year. After the first half of the year are marked by the transformation changes in our branches, as expected, repair activity is improving in the second half. And we expect repurchases to continue ramping up to 10% growth or above in the fourth quarter.

Modernization sales also saw significant acceleration in the quarter, with organic sales growth of 14% on the back of our robust growing backlog at the end of the second quarter. Furthermore, the outlook for modernization remains strong. And the 18 installed base should continue to support sustainable modernization growth in the coming years. Service operating profit of $621 million increased $49 million at constant currency with higher volume, favorable pricing and productivity more than offsetting higher labor costs and mix and churn. 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 making since spin.

Turning now to new equipment on Slide 7. New Equipment organic sales declined 5% in the quarter as the strength in Asia Pacific and EMEA were more than offset by declines in China and the Americas. EMEA sales grew 3%, driven by robust growth in the Middle East, while Europe was relatively flat. Asia Pacific grew high single digits, driven by strong growth in India, Japan and Southeast Asia, partially offset by weakness in Korea. Americas declined 7% as we continue to work through last year's backlog. However, thanks to solid orders performance for 5 consecutive quarters, Americas growing backlog provides line of sight for the region to deliver positive new equipment sales growth in the near future.

Excluding China, our [indiscernible] backlog grew 8%. And while China is still relatively weak, the sales decline versus the prior year is expected to moderate in the second half. China new equipment sales declined approximately 20% in the third quarter. New equipment operating profit of $59 million declined $24 million at constant currency, and operating profit margins declined 170 basis points to 4.7%. The operating profit decline was driven by lower volumes and favorable price tariff headwinds and mix. These were partially offset by productivity, including the benefits of restructuring actions.

The margin decline was more moderate than anticipated. Thanks to better-than-expected sales, especially in Americas, and ongoing efforts to reduce cost as part of our China transformation. Due to our progress, we now anticipate 2025 in-year savings of approximately $30 million from the China transformation as we have captured more than $20 million year-to-date. On an annual run rate basis, we continue to target approximately $40 million per year.

Our average savings targets have not changed. We continue to expect 2025 in-year savings of $70 million, and to reach annual run rate savings of $200 million by the end of the year. Note, we have reduced our expected full year '25 restructuring and transformation costs to approximately $220 million.

I will now turn it back to Judy to discuss our 2025 outlook.

Thanks, Cristina. Starting on Slide 8 with the market outlook. Before discussing our updated 2025 outlook, I'd like to briefly discuss our global market expectations. We've continued to see improvements in the Americas. Therefore, we are upgrading our outlook to up low single digits. This upgrade is supported by continued growth in the U.S. and Canada, particularly within the infrastructure and residential verticals. Notably, we've also seen encouraging developments in the data center segment this quarter, a vertical, we believe, holds strong potential for sustained growth given increasing demand for digital infrastructure.

Our outlook for EMEA in Asia remains unchanged with EMEA growing low single digits, and Asia declining high single digits. In EMEA, we continue to see greater than 20% growth in the Middle East supported by strong project activity and urban development. Central and Southern Europe are on pace for mid-single-digit growth, partially offset by softer trends in Western Europe and the U.K. and Nordics. Within Asia, our outlook for China is unchanged, down low teens. Overall, we continue to expect a mid-single-digit decline globally.

But while new equipment industry orders are expected to decline this year, we anticipate the industry installed base will continue to grow mid-single digits, with low single-digit growth in Americas and EMEA, and mid-single-digit growth in Asia. This growth reflects the 830,000 units that were installed 2 years ago that are now rolling off their warranty period.

Turning to our financial outlook. We continue to expect our Service segment to drive full year revenue and profit growth. We anticipate total net sales of $14.5 billion to $14.6 billion, with organic sales growth of approximately 1%. The third quarter marked our return to organic sales growth, driven by accelerating repair and modernization, as well as moderating declines in new equipment organic sales. We expect these improving trends to continue in the fourth quarter. These trends should also flow through to the bottom line.

Our adjusted operating profit outlook is $2.4 billion to $2.5 billion, up $75 million to $95 million at actual currency including the impact of incremental tariffs imposed in 2025. We've narrowed the range and increased the midpoint of our adjusted EPS outlook to $4.04 to $4.08, representing an increase of 5% to 7% compared to 2024. We anticipate adjusted free cash flow of approximately $1.45 billion for the year, in line with the midpoint of the previous guide. As I previously mentioned, in the third quarter, we completed our full year target of approximately $800 million in share repurchases.

I'll now pass it back to Cristina to review the 2025 outlook in more detail.

Thank you, Judy. Moving to our organic sales outlook on Slide 9. We continue to expect organic sales growth of approximately 1% for the full year, driven by strength in our service business, partially offset by a decline in new equipment as we work through last year's backlog. Within new equipment, we have improved our Americas organic sales outlook to down mid-single digits, due to improving shipments in the second half of the year. We have seen 5 consecutive quarters of orders growth in the region, and we have a solid backlog entering the fourth quarter.

Asia is still expected to decline low teens with high single-digit growth in Asia Pacific, more than offset by a greater than 20% decline in China. As mentioned before, the China new equipment sales year-over-year decline is moderating sequentially in the back half of the year, thanks to an easy comparison. And taken together, we expect new equipment organic sales to decline approximately 7% for the full year.

Within service, we have maintained our growth outlook across all segments. Maintenance and repair is expected to grow mid-single digits within range of our previous outlook. The change to mid-single-digit growth is mainly rounding given maintenance and repair has grown 4% year-to-date, and we expect approximately 5% growth in the fourth quarter. We anticipate repair to continue ramping up with growth accelerating to 10% or above in the fourth quarter. We are pleased to see the repair backlog normalizing with shorter execution time, driving customer satisfaction. And we are well resourced to execute as we have continued to ramp up field mechanics similar to last year. In modernization, after a solid third quarter, we have good line of sight to deliver approximately 10% growth in 2025 on the back of our strong backlog.

Turning to our financial outlook on Slide 10. We now expect adjusted operating profit to grow $75 million to $95 million on an actual currency basis, including the impact of tariffs. On a constant currency basis and excluding the impact of tariffs, we expect adjusted operating profit to grow $65 million to $85 million. We continue to anticipate a tariff impact of approximately $30 million for the full year, assuming current receipt profile and Section 232 tariff rates. As a reminder, the tariff impact is primarily in our key 2025 backlog as we have adjusted contract terms and pricing.

Adjusted operating margin is expected to expand by approximately 30 basis points, in line with our previous expectations. Cash flow has sequentially improved in the third quarter, and we have good line of sight to deliver the guide of approximately $145 billion for the year, as we anticipate fourth quarter cash flow to be in line with last year.

Looking at the big picture, 2025 is on the pace to be another challenging year in new equipment with sales declining over $350 million at constant currency, similar to '24. Despite of ongoing challenge in new equipment price and volumes, we are effectively managing costs to mitigate our decremental margins. At the same time, we expect to deliver another year of solid adjusted operating profit growth, thanks to the strength of our service flywheel, with 5% top line growth driven by volume and price, and ongoing margin expansion driven by density, productivity and our uplift program.

Moving to 2025 EPS bridge on Slide 11. We are narrowing the range and raising the midpoint of our outlook. With only 2 months to go, we now have good visibility for full year results. We expect full year adjusted EPS of $4.04 to $4.08. This is driven by a strong operational performance in our Service segment, partially offset by a decline in new equipment. Favorable foreign exchange rates and a lower share count are expected to offset headwinds from tariffs and higher interest income -- interest expense. Taken together, this represents adjusted EPS growth of 5% to 7% for the year.

While it is too early to provide formal 2026 guidance, we remain confident we can continue to deliver solid earnings growth in the coming years through the strength of our service-driven business model. The global installed base continues to expand supporting mid-single-digit growth in our service portfolio, which should continue to drive our maintenance and repair business. We are also in the early things of a multiyear growth cycle in modernization, due to the aging of the installed base. Combined with our productivity and cost savings initiatives, we have a strong foundation to continue delivering sustainable revenue and earnings growth.

With that, I will kindly ask Sarah to please open the line for questions. Thank you.

[Operator Instructions] Your first question comes from Joe O'Dea with Wells Fargo.

Can you talk a little bit about the efforts that are underway on the maintenance side in terms of what you're doing on retention and recapture. And when we think about that growth that might be pacing kind of in the 3% range, on revenue, kind of what your visibility is with respect to the time line to see that stepping up as you achieve some of your targets around retention and recapture?

Yes. Thanks, Joe. As we've shared all year, we were not pleased with where we ended 2024, and we made a conscious decision to invest. Invest in our service excellence, invest to make sure that we could retain our customers more. We'll share those outcomes at fourth quarter statistically.

But I will tell you, it's going to be a long journey. We should see some sequential improvement, but returning to the 94% retention rate will take sustained time to rebuild customers' trust, as well as to gain them back. Having said that, we continue to add about 100,000 units this year. And as I shared in my opening remarks, we're going to approach 2.5 million units in our portfolio. That gives us the density, not just for maintenance and for productivity and maintenance, but it gives us additional repair opportunities, and we'll talk more about that, I'm sure, this morning.

So we had good line of sight. We understand our conversion rates. We'll share those as well. We're pleased with where those are heading directionally. And again, our focus is on customer satisfaction and driving retention rates up. Recapture rates. We're pleased with as well, both Otis and non-Otis equipment, and we'll continue to drive towards portfolio growth. We'll share more at our Investor Day next spring, but we do believe that we should be growing at higher than a 4% portfolio. We're pleased we've done that now for over 2 years after being a traditional 1% growth, but there's more to happen in the maintenance portfolio. So stay tuned.

I appreciate those details. And then on Americas and new equipment, and what you're seeing and a little bit better outlook there. Just in terms of any more color on kind of how the last few months have kind of unfolded when you talk about infrastructure and resi as some of the verticals where you're seeing a little bit better activity.

Were these things that were in the pipeline, you just didn't think they were going to happen in the back half of the year? And any other color on what you attribute some of the demand kind of coming through here, too?

We're much more positive on Americas growth based on two factors. One, the demand we're seeing, and that's even that's only with one interest rate change, but the demand we're seeing. Residential, as I said, infrastructure are driving most of these improvements, but all geographies in the Americas showed growth this quarter. So we were very pleased with that.

The second thing we're seeing, Joe, is on the new equipment execution side that gets us equally excited about the future. We had shared with you last quarter that we had started seeing some challenges at job sites where there had been slowed down by other trades. As we came through this third quarter, we saw that basically being eliminated and back to a normal cycle of construction at new equipment sites. So with the backlog growing in new equipment in the Americas, and this was our fifth straight quarter of growth in especially in Americas, about 4%, that 4% is on top of 23% same quarter last year.

So [ Joe and our team ] are just really driving [ Joe Armes ] driving this growth on growth. And we have our great Gen 3 core product that's out there. We're addressing so many different segments now. And so we're really seeing that growth and then it's going to come through. It's 5 quarters now. We say there's about an 18-month lag especially in North America from the time we take an order until we see that revenue come through, which is why we're feeling good about Americas revenue in the next few quarters.

The next question comes from Nigel Coe with Wolfe Research.

So really nice momentum in repair activity. I think you said, Judy, 10% growth in repair in the fourth quarter. Just maybe just talk about sort of the visibility on that. And really what's driving this sort of this crunch towards growth in the back half of the year?

And then just maybe the implied maintenance growth would be probably sub 4% when we back [ up ] repair. I know that mix is a negative headwind to the kind of the core maintenance growth rate. So maybe just talk about where are you seeing the pressure points on mix and how that resolves, or kind of improves as we go into 2026?

Sure, Nigel. I will -- let me take the repair and I'll hand over the maintenance to Cristina. If you look at our sequential repair improvement started out fairly anemic at 1% growth in the first quarter, went to 6% in the second quarter, we were 7% this quarter, and we have line of sight to at least 10% in the fourth quarter, which gives us the confidence for the outlook for maintenance and repair to be mid-single digit. Especially now through October, we're seeing orders pick up as well. So that gives us even more confidence in repair.

But I was pleased to see us really with that revenue growth, 2 straight quarters, 6% and 7% and now 10%. We are going to turn that backlog much quicker. And Cristina mentioned that helps with customer satisfaction. No one wants to wait in the queue to get an elevator or an escalator repaired. So we have made sure we have our mechanics available, the parts available, and we put a concentrated effort to backlog conversion. And that rolls through the modernization backlog conversion as well. You'll recall that was 5% second quarter. Now, again, for organic, it's 14% this quarter and our backlog is still growing.

So we've got pretty good line of sight to the Service revenues and what's going to happen in the fourth quarter. And especially in repair, as you know, elevators are aging. We've got 8 million plus over 20 years old. And when they don't become modernized, they do tend to break more frequently because of usage and age. And so we think the repair business is going to stay strong. I think it could moderate over time back to kind of more traditional mid- to high single digit versus 10%, but we think it's going to remain strong.

Cristina, I'll turn maintenance to you.

Yes, Nigel, on maintenance, we have always said that we like seeing maintenance and repair together because depending on where you are in the world, the contractual setup is different. You have places where everything is included. Therefore, everything is in maintenance. Others where the maintenance fee is smaller, but then we have a lot of repair activity. So it's better to see them together.

But talking about maintenance specifically. Our performance this year has been very stable. Year-to-date, we have grown maintenance 3%, and we expect this to continue going forward. The formula is as follows. We are growing portfolio of 4%. We have a 3% price, and that means that there is a headwind in mix and churn. And this is exactly the area we are focusing on at the moment. Judy mentioned before, all the actions around customer retention improvement, investment in service excellence. This is going to be a mid-term journey, but we are positive about the initial results we are getting from those investments.

And the other headwind will be the geographic mix of the growth, and we are also focusing on growing in high-value markets. And also focusing on a more sophisticated price algorithm. So with all of these components, we expect maintenance growth to improve going forward. But again, the best way to look into this is to bundle maintenance and repair.

Okay. I think we'll follow up offline [indiscernible]. Maybe just a quick one on 4Q new equipment margins. 3Q came in a bit better, obviously, not great margins, but it came in a bit better than we expected. I'm just wondering if the [indiscernible] maybe wasn't quite as impactful as expected. And then the question we're getting is normally 4Q margins would be much lower in new equipment than 3Q. That doesn't seem to be what you're signaling. So just maybe talk about that as well.

Let me talk to 3Q. So we had two things really help us on margins in 3Q. One, our team in China really accelerated. We entered this year -- as I step back, we entered this year knowing we needed to transform our China business. And our team took that on. We did our China transformation and we're now going to achieve $30 million in savings. We've already achieved $20 million now. We're going to achieve $30 million. That all gets reflected in that cost takeout line and new equipment. So by accelerating that, that helped.

The other thing that helped was just more shipments than we had originally predicted out of our North America factory in Florence. So those are the two reasons that drove the margin expansion.

Yes. And on Q4, Nigel, so we expect margins to be around 4%. Q4 margins are seasonally lower than Q3. But we also need to bear in mind that because of the new equipment segment getting smaller, there is much more volatility on margins. Having said that, because of the positive trends we see in the moderating decline in new equipment sales, together with the accelerated savings in China transformation, we are positive at our new [indiscernible] margins being around 4% in the quarter. That full year would be approximately 130 basis points down versus previous year.

The next question comes from Jeff Sprague with Vertical Research.

Can we just talk a little bit more about price? You noted price continues to be up on the Service side. I would suspect there's still a meaningful geographic difference China versus rest of the world, but can you give us a little more color on what you're kind of booking on new business today?

Yes. In terms of Service pricing, like-for-like pricing increased 3 points in the quarter. Obviously, inflation has receded somewhat in most of the world. But in mature markets, where most of our service portfolio resides now, Jeff, EMEA was up low single digits. They had a tougher compare because of their [ ITC ] program in Spain. So they did have a tougher compare, but they're doing really well. And Americas was up mid-single digits and Asia Pacific up low single digits.

In China, as you know, the margin drivers are less on price and more on density and everything else. Mix and churn for Service was flat. Now China Service, our team continued to grow our Service portfolio in the teens yet again. And our Service units, that was the 16th straight quarter of teens growth in our China portfolio. We believe we're going to end the year approaching 500,000 units of those 2.5 million units in China. So our Service revenue there was up slightly. And our China team, I would tell you to put it all in perspective -- Cristina said maintenance repair. I would say, add maintenance, repair and modernization in China.

Our China modernization was up substantively. Our orders were up 150-plus percent in China for modernization. When we look at those bond stimulus orders, we were ready earlier this year. We're going to convert a lot of those to sales. We have a tough compare in fourth quarter from last year on those. So I wouldn't expect that similar number. But the China team has just really brought home this mod stimulus to where we do believe we are leading the order value in China amongst all of our peers for the [ MoD ] residential bond program.

Interesting. And then on the new equipment side, can you kind of do a similar kind of geographic rundown for us on price? And I think Cristina said, only pre 2025 backlog has not been repriced. I wouldn't imagine there's a whole lot of pre 2025 backlog left, but maybe I misunderstood the comment there.

Yes, there's still some pre 2025 backlog left in the U.S. So I think when you're looking at, will there be some tariff impact in 2026 based on what we know today? Of reciprocal and 232 tariffs, there will be some. It should not be as much as we had this year, but there will be some.

When we think about new equipment pricing, it's up low single digit outside of China. And obviously, China, the pricing was down roughly 10% in the third quarter. And what we have done to really drive back to close to price cost neutral is use cost-out, productivity, tailwinds on commodities and our China transformation program. So all of those have contributed. I would tell you, strategically, we were prepared for this.

And in new equipment market in China, Jeff, we are seeing sequential improvement. The second half, we think is going to be down 10%, versus down 15% for the first half. And our team outperformed that. Our third quarter [indiscernible] new equipment orders. And as you look at the second half, we really expect to be down mid-single digit versus second half last year. That's to [ me that the ] real turn in for us on stabilization.

The next question comes from Steve Tusa with JPMorgan.

Can you -- I guess you talked about retention. Is it still getting better sequentially? And do you still have a target for year-end to be -- for retention to be at least up year-over-year? Getting better?

I think it's very slightly improved. When we lose a customer, they do a multiyear service contract with someone else. So that's why it's so impactful and why we're laser focused on it to make sure that we're completing -- having the right quality of service, completing everything on time, being responsive to our customers. But I wouldn't anticipate a step function improvement, Steve, when we report this after fourth quarter. We've made the investment now, but it's going to be day-to-day, customer to customer, making sure that anyone who's going to renew, we're focused on them, and we're making the right investments now to keep them.

Got it. And then just on the Services growth for the fourth quarter. It does look like if repair is going to accelerate. I don't know, like the comp is like on [ mods ], but if you're kind of stable on the maintenance side, that you should see an acceleration in revenue growth in the fourth quarter at services, right, from 6% to maybe close to 7%?

Yes. Steve, for the fourth quarter, we expect services to be around 6%. And you rightly said repair is going to continue accelerating. We expect repair to be 10% or above which, by the way, is the growth we had last year in Q4. So this demonstrates that repair is back on track and kind of normalize.

On the other side, [ mods ] is going to be 10% versus 14% in Q3, reason for that is the calendarization of the bonds execution in China. Last year, bond projects that are the subsidized projects were very concentrated in Q4. China grew in Q4 more than 100% revenues there. This year is more level loaded between Q3 and Q4. So it's going to be 6% for the quarter.

Got it. And then just one last nitpick. But if I do -- you said new equipment was going to be down 150 basis points. I guess, was that -- was that a fourth quarter comment or an annual comment?

No. An annual comment. What I said is that new equipment margin is going to be 130 basis points down versus prior year.

30 or 50?

130.

Okay, great. Okay. Okay, that makes more sense. Okay. Got it. Okay. Just making sure I had the numbers right.

The next question comes from Amit Mehrotra with UBS.

I just wanted to ask about Service margins and maybe structurally as we think beyond the fourth quarter? Obviously, it was nice to see the expansion of the third quarter. We're up 40 bps year-to-date. Is kind of that 50 basis point expansion algorithm still structurally right? I'm just thinking about, obviously, the net impact of of higher mod mix in revenue that seems to be accelerating in '26 given the order growth.

You're obviously making a lot of investments to -- that maybe Service debit to density, if I'm thinking about that correctly, to drive retention higher over time. I assume that's a little bit of a headwind. I'm just trying to understand, as we look beyond '25, like are those net headwinds to that margin expansion algorithm in service?

Yes. So we are very pleased with the margin expansion in service in Q3. Was 70 basis points, 25.5% margin, the highest margin rate in service we have had [indiscernible]. The reason for this strength is essentially very good performance in volumes, both repair and modernization ramping up, volumes drive productivity, drives absorption. Also mods ramping up in principle is a headwind in margin rate, but we also see mod margin rates improving sequentially. We have good line of sight to reach 10% margin rate for mod in the midterm. And we see this sequentially happening quarter after quarter.

And last but not least, on repair, we also have the flow-through of a better price. So we see the rate of repair improving because of the price increase we executed in Q2. So with all of this, we expect full year margin for service around 25%, which is going to be 40 basis points up. And going forward, we are going to be laser-focused on growing service contribution in dollar basis. And we have very favorable tailwinds for that. So one is the volume growth, we have price and we have productivity, from a rate perspective, mods will be slightly a headwind. And we are also going to calibrate investments in order to continue growing top line. But the focus is going to be service contribution growth in dollar basis.

Yes, Amit, it's Judy. I would also tell you every quarter since [ Spin ], so 22 quarters, this is our 23rd, we have increased services adjusted operating profit dollars. And as Cristina said, it's going to be those dollars versus sustained margin rates at the levels we've shown now going on 6 years. Those dollars will contribute in terms of profit dollars and they'll contribute in terms of cash as we grow the portfolio.

Got it. Okay. That's helpful. And just a quick follow-up on China. You mentioned pricing was still weak in China, but some of the data that we look at kind of assumes, or shows that it's finding a floor. I don't want to get too cute with the data, but when you look at the month-to-month trends, it feels like it's finding a floor. Is that appropriate or accurate? If you can just comment on what's happening on the pricing side in China in real time?

Yes. Real time, we are seeing stabilization in the second half, and it's what we predicted in January. That we thought the first half would still see a fairly significant decline, but we're seeing that sequential improvement in China in the new equipment market. And so we are leading in the infrastructure segment. We're leading in the high-rise segment in China. And we are making sure that the units that we bring into our portfolio are actually -- that we win in new equipment will be a higher conversion probability for us into the service portfolio.

As we look at our China business as a whole, China, just like last quarter, represents 12% of our global revenue, and it's now similarly 21% of our new equipment revenue for the quarter. Our Service business now in China is 40% of our business in China. And so this 40% would equate to a few -- quite a few years ago, 15%. So we have had this focus on conversions, on new equipment driving our Service flywheel, and China has done a great job to now make us a 60-40 business, new equipment to Service in terms of revenue. And that Service business in China is going to continue to grow between portfolio growth, which will drive maintenance, and repair and modernization growth, which in China, they tend to modernize at the 15-year point.

We have all indications that this bond modernization stimulus will continue into 2026. And as part of the 15th 5-year planum, some of our interpretation of what's happening there is there's a focus on quality and digital versus involution. That we believe that the [ MoD bond ] will continue potentially after 2026 as well. It may look a little different in terms of how much stimulus the government contributes versus the consumer, but we are making sure that we are optimized in bond and in regular modernization in China.

The next question comes from Chris Snyder with Morgan Stanley.

Judy, you mentioned it's going to take time to get the retention rate back to where it was. And I think you specifically said you have to rebuild some customer trust. I guess, can you just maybe talk a little bit about why that trust has deteriorated over the last 12, or maybe it's been longer than that? Any color there would be helpful.

Yes. Thanks, Chris. And it's -- listen, this is something that we own. This is mainly about operational execution versus these customers going somewhere else just for price. I want to be clear about that. The good news is it's something we own and we can control and we can address.

But we've gone through some changes in personnel. As you can imagine as we went through our uplift program. And some of those were customer facing, although most of those were back office. We know that we can become more accurate in everything from invoicing to that. And we've now focused on having a [ GBS ] partner to help us do that. So we're taking actions. We're adding mechanics. Cristina said, we've added pretty comparable numbers of our field professionals this year. And I have to thank our field professionals for the work they do and how they represent our company every day. Because they are the heart and soul of this company.

So we've added more where perhaps we had gotten to some ratios where we weren't able to deliver the outstanding service that we should and we commit to. So we're making sure we have better coverage. Some of that is an investment. We think that investment is worthwhile because of our Service flywheel, and we're going to continue to do that in all parts of the globe. But especially in our high-value lifetime value countries where we understand really the value of every service contract and every unit in our portfolio.

I really appreciate that. If we -- I guess, to follow up, is a lower retention rate have an impact on the rate of margin expansion in the Service business? I would imagine that retention is very good incremental business. And now if you guys need to go out in the world and win more new work from someone else, would that be -- maybe lower incremental margin because there's more costs associated with winning new business rather than retaining business you already have?

Chris, the best business for us is when we convert a new equipment customer into our portfolio to start. And then depending where you are in the world, maybe 1 to 4 years later or more, we want to retain them with another Service contract. Even though during that period, we've got inflationary adjustments, we've got price adjustments and we're servicing the customer. So you are absolutely accurate that, that's -- those are the customers we want to retain because of the contribution margin that they drive.

When we lose them and replace them with what we call a recapture, and we share the recapture rates, we'll share those as well in fourth quarter. They're strong, but obviously, to recapture from someone else, you have to take it away from them. We don't always just do that with price, though, which is your margin comment of why that would be lower. It is inherently lower, but we add functionality like Otis ONE. And we add other value differentiators and we bring them back also on a road to modernization, and a path there. So for us, the long-term value of that makes sense, but there is some margin headwinds by that loss of retention? Absolutely.

The next question comes from Nicole DeBlase with Deutsche Bank.

Just a couple of tie-ups from me since we've gotten through a lot of questions on the call. I guess maybe first, if we look at 4Q EPS, I think typically, you see like about a mid-single-digit decline. If I look back into your history, post [indiscernible] you're embedding something more like 1% this quarter. So just can we understand what's maybe a little bit better this year than what you've seen in the past?

Nicole, yes, so on EPS growth, we are planning $0.11 of growth in Q4 versus $0.09 in Q3. This is essentially coming from operating profit. So operating profit performance will improve because of new equipment decline of sales moderating as we have seen in Q3. So it's continuing the trend we saw in Q3. And on the Service side is the acceleration of repair, plus also ongoing margin expansion.

Although Q4 is typically a lower margin rate quarter from a seasonality perspective, both on new equipment and service, and we are considering this seasonality. But we have very good line of sight to deliver this EPS growth because essentially, as I said before, is continuing the trend of what we have executed in Q3.

Cristina, that's super helpful. And then on the buyback, you guys have basically completed your $800 million commitment for the year. Should we assume that you're done? Or is there room to maybe execute more buybacks if you see the opportunity in the fourth quarter?

Yes. In terms of capital allocation, Nicole, we are we are sticking with our [ app ] capital allocation model in general, which includes beyond dividends and buybacks also include some M&A activity. Our M&A activity through the third quarter is up more than most years. We've already invested a little over $100 million in M&A as we went through the third quarter. So we've been looking at all different cash usage.

Again, these bolt-on M&As really give us that addition -- they give us additional maintenance. They give us additional mechanics, they give us additional density, and they are very -- they are accretive, if not in year 1 by year 2. So they make sense for us. And now that more have become available, we've been using cash deployment to do that. So to answer your question specifically, we are -- we believe we are through. We still have authority from our Board, obviously, in terms of the capacity to do more. But we were opportunistic.

Unfortunately, our stock price dropped fairly significantly after 2Q earnings, and we were opportunistic then to buy more shares back.

The next question comes from Julian Mitchell with Barclays.

Just wanted to start with the free cash flow because I guess you've this trend in Q3 and recent years where the adjusted operating margins rise year-on-year, but the free cash flow margin falls. So just wanted an update on do you think that can turn around anytime soon? And maybe clarify a couple of things on the free cash, specifically.

One would be around how do we see the burden from cash restructuring, changing from here? And also wondered how the rise in modernization affects the free cash flow dynamics of the business, if at all?

Yes. So Julian, on cash flow, Q3 was a sequential improvement versus Q2. We delivered $337 million. That was $100 million better than Q2. And in terms of conversion rate, it was around 81%. This is much below the conversion rate we have historically had, and we are convinced that our business model should be at 100% conversion rate. The reason for this is the working capital build out related to the change of the business mix. So year-to-date, our new equipment sales have declined $300 million, versus Service growing $340 million. And as you know, new equipment has a more favorable working capital compared to Service.

But all of this is just temporary, and we are confident that as new equipment stabilizes, and Service continues growing, we are going to come back to the regular levels of 100% conversion rate. In fact, for Q4, we are planning cash flow to be around $700 million. That's the same amount of cash we generated in Q4 last year. And we have positive signals that gives us the confidence that we are going to deliver.

One is the fact that the orders in the equipment turned positive in Q3 were plus 4%. And as you well know, we have advances coming from these bookings. You also mentioned modernization, and you are totally right. Modernization working capital is pretty similar to new equipment, is at the end an installation project. And we also get advances from those projects.

And last but not least, new equipment sales are moderating. And there is a component of the transition of our collections activity to a third party. We have recently outsourced this process to a third-party partner. We have seen a performance not at great levels so far, but we see improving going forward, and we are confident that with all of this conversion rate in the year is going to be above 90%. And by 2026, we should be back to 100%.

That's great, Cristina. And then just my quick follow-up would be on the maintenance portfolio in the service business. I think based on your comments, it looks like China will comprise maybe half, or almost half of your maintenance portfolio unit expansion in 2025. And -- so just wondered if there was any update around the Service pricing and Service margin dynamics within China, please?

Yes. I don't think you will see China approach half of the portfolio growth next year. But we'll get back to you on that over time. We're very pleased with the growth we've had. But again, with this focus on the growth now being able to convert to service, we're being a little more disciplined as we go, so I would say that.

In terms of service pricing, again, with that discipline comes a little bit more focused on which tier cities we're going to serve. So we're not trying to cover the broader spectrum of countries. And if you look at where a lot of the property sequential improvement is, Tier 1 cities are doing the best and the further out you go to Tier 5 and beyond, they're not. So we do have agents and distributors who can cover that if they choose. But we are -- as part of the China transformation, we've merged our two Service brands to make us more efficient and productive so that our service contribution in China continues to improve. That will happen through density, and it will happen through us with our two brands now being able to service, and have shared routes, or even improved coverage, we think we're going to see that improvement come through in '26 as well.

This concludes the question-and-answer session. I'll now turn to Judy Marks for closing remarks.

Thank you, Sarah. As you've seen, our Service [ flywheel ] is performing. This performance momentum is across the board in both segments and all regions. With the growing service portfolio approaching 2.5 million units and an accelerating modernization business, we're confident we'll continue to deliver attractive and sustainable shareholder value for the remainder of this year and beyond. Thank you for joining us today. Stay safe and well.

This concludes today's conference. Thank you for joining. You may now disconnect.

Well, thank you, everybody. Chris Snyder, U.S. multi-industry analyst. First, thanks to everyone in the audience for really filling up the room, great to see the attendance on the last day of the conference. And no better way for me to wrap things up then with Otis, we have the CEO, President and Chair, Judy Marks with us. So thank you for joining. Judy is going to start with some opening remarks.

Yes. Thanks, Chris. Please note, except where otherwise noted, I'll speak to results from continuing operations excluding restructuring and significant nonrecurring items. A reconciliation can be found in our second quarter earnings presentation on our Investor website. We also remind listeners that today's discussion contains forward-looking statements Otis' SEC filings provide details on important factors that could cause actual results to differ materially.

So with that, Chris, I'm delighted to be the closing for this conference.

The closing. I appreciate that. Maybe starting off high level, a lot going on in the world. Otis is as global as any company I cover with operations pretty much everywhere. Can you guys kind of maybe talk about what you're seeing across geographies?

Sure. And we're proud that we're global. We actually think that plays to our strength, especially with the strength of our service business. So we don't have quite the volatility you see in the construction cycles. But let me start with new equipment and what we're seeing if you really look at how we're performing ex China, really pleased with our results. We're seeing all 3 other markets doing very well. Our orders second quarter were up 11% ex China. Our backlog in new equipment is up 8%. So it says -- so where are we doing well? Clearly, North America 4 straight quarters of teens growth in new equipment even with interest rates where they are.

So our team is performing well. We're gaining share. And it's really setting up nicely. We ended the second quarter with backlog of 5%. It's setting us up nicely for some time in '26 and beyond because of about the 18-month cycle from book to final installation and sell off. Asia Pacific, great highlight for us, sustained growth in new equipment India, Southeast Asia, Japan is growing. And probably the weakest of the Asia Pacific markets would be Korea. We've seen that now. They're down almost as much as China has been for the past few years but we're seeing a nice inflection with the new President and a focus on increased housing well over 1 million units before the end of the decade for housing units.

Europe and for us, that's EMEA, Middle East and Africa is strong. South Europe is strong. Mixed story a little bit in North Europe, not surprising with everything going on in France and Germany from a new equipment, but still opportunity in every market, assuming we have sales coverage and people are ready to buy. And you'll finally obviously, China is an important part of our business but only 12% of our revenue second quarter versus the whole enterprise revenue. We're very focused on making sure we hit that stabilization point and making sure we can see that in the market there. The China market has been down about 40% over the past 4 years. But incrementally, as you look at second half of '24 to first half of '25, we've seen sequential improvement from what we see this quarter and second half of the year, that sequential improvement is going to continue. And we believe we will see stabilization in the China new equipment market before year-end with everything we're seeing across the country that will translate to revenue sometime in later '26.

Well, I appreciate that. When we'll get back to the new equipment market, but maybe we could start on the service side. That's really the value of service. That's why people own the stock. We have seen the service organic growth soften in the first half of the year. Can you, I guess, maybe just talk about some of the headwinds faced there? And what gives you confidence that the growth will get better into the back half?

There are 2 primary reasons why we saw softness in the first half of the year. The first was in our repair business. And this was really driven by the first quarter as we were operationalizing uplift, especially in certain large regions, it took us some time to absorb those organizational changes. Uplift still on track, going to provide $200 million in run rate savings. But our repair business slowed down a bit, not the backlog, it's not the work, not the availability of mechanics but we only increased by 1% in the first quarter. We knew that wasn't acceptable. We were kind of a high single-digit repair business across the globe since the end of COVID.

So what you saw was the progressive -- the sequential growth. We were up 6% in the second quarter, backlog of 8% and that 8%, you will see flow through in the second half of the year. Repair, our highest margin product globally, really strong. It will get back to that high single-digit and not only should you expect that in the second half of the year, that should be what you expect from Otis as elevators continue to age. Some will modernize, others will wait and that means that break-fix business will be strong.

The second issue and the second area that we are very focused on is this modernization growth. Think about refurbishment, 8 million units over 20 years old of the 22 million installed base. For us, it looks a little bit like new equipment in terms of major projects versus volume business. So at times, it's lumpier because if you're going to modernize in a building, it's not construction, it's a live building, a hotel, an airport where you can only work certain hours. So we were up 10% in the first quarter, only up 5% in the second. Again, it was the lumpiness. We have the resources, the backlog, our second quarter orders in mod were up 22%. You should expect something like that going forward not every quarter, but really strong. U.S. and Canada was up 50% in the second quarter. China mod revenue was up 20%. Our backlog is up 16%. So we did guide an outlook that we'll finish the year at 10-plus percent in mod revenue. So you can figure out where that's going to come in second half. Those are the 2 items. We've got them under control. We've got the resources. I'm looking forward to the second half performance in both.

Yes. I appreciate that. And I think we can -- I think the mod business, I think that lumpiness makes sense, that's a bit of an upgrade. Obviously, the orders tell us where it's going. But I guess on repair, that does not seem like a business that is thought of as being lumpy. But obviously, great to see the ramp back in Q2. Anything to call out on the Q1 that caused some of that volatility?

Again, I think it was more internal. I think you've seen the reaction already, and you'll see that as we run through the second half of the year on repair. Repairs are really stable business. And as these units age, they break more. So this is our break-fix unit, break-fix volume. Our customers within our 2.4 million service portfolio come to us for repair. They call us, we come and it's got great attributes. It's fast because it's book ship, install. We don't want a huge backlog here because people don't want their elevators or escalators down long. But we've got -- as I said, we're ready to deliver and you'll see more of that. It's -- again, as people age, as buildings age, elevators age. And until people really commit to that modernization or refurbishment our repair business is going to continue to grow.

Yes. I appreciate it. The engine for the service business is obviously the maintenance part of the portfolio. Pre-spin, if I remember correctly, maybe 1%. You've gotten up to 4% coming out of the spin. There's been, I think, a lot of skepticism in the market on ability to sustain that particularly in a world where you kind of called it out, a lot of these new equipment markets have been pressured. So can you just kind of talk about that move from 1% to 4% why is it -- and why is it sustainable?

Yes. So the portfolio itself, to think about our portfolio today being 2.4 million units, that 4% growth, we are netting adding 100,000 units a year. You're right, for the past decade before we spun in 2020, we were growing at a fairly anemic 1%. And when you realize that we're a service company that 90% of our profits come from service, over 60% of our revenue, when you realize that's the main thing. You look at all the levers it takes to drive this portfolio growth because our strength and our competitive advantage is in density.

And when we have this density, you'll be able to see it in our service operating margins. Our service op -- I'll get right back to the portfolio that our service operating margins have increased every quarter since we spun 21. You could argue this is our 22nd quarter and we're really proud. And actually, it was the highest in second quarter at 24.9%. But the portfolio itself, we've always told our investors is watch that growth because it drives maintenance, it then drives repair, and we retain that for 20-plus years, and then we modernize. That's what you should watch for us. The 4% is absolutely achievable. There's multiple levers. We incent each of our 1,400 branch managers on what we call net churn. So what happens right now is basically our cancellations or lack of retention gets offset with units we bring back on the portfolio and we recapture and then we grow based on converting new equipment.

We can control all 3 of those levers and especially the retention rate, where increased quality of service, increased performance will help. So as we grow new equipment share, which I'm really proud of our team. We've been doing that between the innovative products we have and coverage. As I said, the U.S. is up 4 straight quarters before any interest rate changes, and we're getting ready. We have a lot of proposals on the cusp. If there's going to be some interest rate changes. We're excited about that. So we're going to drive new equipment share gain all over the globe. Second, we're going to focus on quality of service. retention.

And lastly, modernization enters the portfolio when we modernize a unit that's not on the Otis portfolio today and we bring it on after we modernize it, we go through the warranty period. So we've got all these different levers that really make this flywheel, not just comprehensive but resilient. And I think that's what we've seen 4%. We're going to have an Investor Day next year, we'll lay out the targets but the market is growing at 4%. The installed base is growing at 4%. So we should be at least at market. And if we're the market leader, we should be doing better.

Well, I mean, maybe following up on that and obviously, I don't want to front run the Investor Day, but particularly just the new equipment market gets better, is there a reason to believe that, that could pick up if the headwinds alleviate.

So listen, I think the most important thing to watch for the new equipment markets because the new equipment markets are strong everywhere but China. So if we wait and watch and China stabilizes, it can only get better from a compare from there. Again, 8% backlog growth in new equipment ex China. So all the other 3 markets are doing well. We've got high-growth markets that will continue to contribute. But then again, you think about modernization with 8 million units over 20 years old. The new equipment segment this year, about 730,000 units versus a pool and a total available of 8 million. They're not all going to happen overnight. But every night in the modern -- every year in the modernization market, 400,000 to 500,000 units now move into that TAM, move into that addressable market.

So we're actually, from an equipment standpoint, a unit count, a front-end load to the flywheel, we're going to have a larger market over the years when new equipment and mod combined than we ever saw at the peak of new equipment, significantly more, which gets us excited.

Yes. I mean maybe kind of following up on that. You kind of mentioned the new equipment market, relatively small to the installed base. So really kind of driving retention is paramount. You guys talked about how that retention rate softened in the back half of last year which was a surprise to me because it felt like a lot of the Otis ONE digital initiatives are really about getting closer to the customer, which felt like it would then better position you for that kind of work. So can you just maybe talk about what's going on with the retention rate and any opportunities to improve that?

We were not satisfied with the retention rate. We ended 2024 with. It was at 92.4%. Our best performance since spin was in 2022, we were just at 94%. That means 6% of our portfolio and our customers are canceling us. At 94%, we were world-class, but that doesn't mean we're not shooting for 95% but we need to get back there. It's not about price, it's about the quality of service. So what we're doing is we're investing. And the way you invest to improve quality of service is you add more field labor. Now they're not going to be billable, but we think because of the total lifetime value of a unit over 20 years, this customer retention is going to make a difference. Otis ONE is absolutely making a difference.

We've got 1 million connected units in our 2.4 million portfolio. It's absolutely making a difference in terms of stickiness. But we need to wake up every day providing the best quality, meeting our commercial commitments. And to do that, we are going to seed some investment in some of our not top quartile 1,400 branches, but in the others to make sure that we're visible, we're showing up on time. We're doing the commercial commitments we said we were going to do. The repairs are on time, and these customers don't even think about canceling us. They just auto renew.

I appreciate that. I think when the market sees that softer retention rate it brings up competitive concerns. Can you -- has there been any competitive land -- changes in the competitive landscape on the service side?

So most people know we have a tremendous landscape of independent service providers, many of which are extremely hyper local. It's probably the best way I can put it. 55% of the 22 million units roughly are serviced by independent service providers. There will always be a place for independent service providers. We welcome them in the competition sphere. However, they tend to now service the older units, the nonconnected units, the units that are less sophisticated, which is why we're committed to Otis ONE, which is why we want this stickiness. As I said, there's a place for them, and I get asked, what can you tell are they consolidating, can you tell amongst the 20,000 or 30,000 of them, there's a few less. You really can't see that because they also still have market ahead of them in the nonconnected world.

And that's fine. As I said, there's a place for them in the competitive landscape. We've seen, again, in certain regions, we've seen bundling of ISPs but integrating small service companies for a larger, whether you're private equity or someone else, there are challenges with that. So we only see one national ISP in Japan. They exist nowhere else. And we're not seeing them take our share. We don't lose because of price. We don't get canceled. We get canceled because of quality of service and our customer not believing that we are the one they want to partner with. And that's why we're investing to address that.

Obviously, Otis ONE and the digital initiatives, I understand how that improves the customer experience. The uptime is better. But can you talk about what it does for Otis' -- the cost to serve that because in a world where people are worried about price competition, maybe the cost to serve is actually the most important thing?

Yes. So as you think about our network, again, 2.4 million units, the most dense there is, what Otis ONE provides us is the ability and it's actually the core part of where we've gotten these productivity gains in the service business to allow our 44,000 field mechanics, of which about 80% focus on service to be more productive, to have the right information at their hands to actually see in the morning before they even start work, what units they need to work on so they can plan their day with route optimization, they can bring the right part and they can have a better first time fixed rate. So it's giving us that ability, again, for productivity. It's giving us a data lake that allows us to do predictive maintenance. For example, if you think about we know what parts break on which units at what frequency and what periodicity.

So if we know that's going to happen to a customer's unit, say, in about 2,000 more uses than on our next scheduled maintenance before we get there, we'll send them a proposal. We'll say, "Hey, should we replace your door opener, and here's the proposal we'll do it so that your elevator escalator will not go down. And customers value that, whether it's that, whether it's obsolescence parts, elevators do not leave the building. They are aging. They need this care, and no one can provide that better than us.

I appreciate that. Maybe I wanted to go over to mod, modernization, obviously, the fastest-growing piece of that service portfolio been growing double digits. Obviously, we see the huge growth at Otis. But the industry as a whole has been seeing really strong growth on mod. I guess maybe I think a lot of people think about the installed base of elevators and escalators and they say, "Okay, look, it's not really growing that much. Why is mod growing at this rate? So can you maybe talk a little bit to that? How big is this opportunity? And then just ultimately, like how does that, of course, come back to the service flywheel?

Yes. So great question. I want you to think about a mod unit at a unit value level to look like a new equipment unit. And you'd say, well, But, you may not be replacing all the parts, right? You're not doing construction in a brand-new building. But what we are doing in a mod is we're doing deconstruction in a live building. We're taking an old elevator out and then we're putting a new one in. So at a gross level, the unit value of a mod looks like the unit value of a new equipment. So I think of them at a high level as units. The market itself out of the 22 million units in the world, 8 million are over 20 years old and think about any other product you use in your apartment, in your condo, in your office building.

Think about if your Class B space and you're trying to compete with Class A space for office with everyone returning to work, you're going to want to upgrade your elevator. You're going to want to make the aesthetics better, you're going to want to add technology and you're going to want to move people more effectively. And what people don't understand about mod is it does allow us to group people when we use our Compass product and do a mod. It allows us to use our most current and advanced product, our Gen 3 product as a Gen 3 mod and it allows us to address the market. So the market itself again, at about 8 million units available, growing 400,000 to 500,000 a year. I mean, again, the new equipment market peaked at 1 million units a year. So you can -- if not -- it's discretionary, let's be clear. We can't mandate mods unless a government says, no, you have 5 years to bring every old elevator up to the new code for safety reasons. We've seen that in Korea. We're living it now in Spain. We'll probably see it in more locations.

And it's providing better service in a life safety business to residents like in China, where there's a stimulus to help mod. But mod itself, Chris, I'd say kind of we've always done it. It's been bespoke. We're now industrializing it to look more like new equipment with the -- with manufactured packages, with supply chain scale, with installation crews that can go from mod to mod with a dedicated sales workforce. And so I'd say first inning, second inning and it will continue, if you think about the quantity in 400,000 to 500,000 every year coming on board, I believe it will continue for almost until we start the next mod cycle. So we're kind of a first inning of a super cycle. The good news is great opportunity. ISPs, except the very largest primarily here in North America, don't tend to play in this. So it's the OEM competitors because an ISP is not a general contractor. We're the GC when we go do a mod. They don't always have -- they have some access to OEM equipment, but not the latest and greatest that's coming off our factory.

So I'd say first inning with a lot more to go and at the contribution level on the price that's one thing. Mod as of 1.5 years ago is now our mod margins have surpassed consistently our new equipment margins with the goal of getting mod margins to 10% in the medium term. And just as importantly, then it reenters the flywheel either as an existing unit or a new unit. So we're excited about mod as you think about it's not a construction driven. It's not a cyclical driven. It's more of a thesis driven just based on aging. So just like the population is aging, buildings are aging and elevators are aging. We're in a sweet spot. It's just starting.

I appreciate all of that. And kind of you started off by kind of talking about some of the service pressure you guys faced in Q1, repair under pressure -- or the first half, repair under pressure in Q1, saw a nice recovery in Q2. Mod, on the other hand, kind of offset some of that by softening in Q2. So we hear -- we see the orders, we see the backlog. Like why did that soften to, I believe it was 5%, if I remember correct.

It was 5%. Our mod orders in Q2, again, another great quarter, up 22%. Our backlog is up 16%. We've guided that by year-end, our mod revenue will be up over 10%. So you can see that we are going to -- it's going to come back strong. Mod also looks a little bit like new equipment. There's volume mod right, which are these packages. You can go into a 1 unit, a 4-unit building and handle that. And then there's major projects. The Space Needle is a pretty major project, unique mod over multiple years. So we just probably hadn't instrumented correctly for the second quarter, but that backlog at 16%. I think you'll see we need to do that backlog conversion. But with the order staying 20-plus -- the backlog is still going to be high as we go through this year. We've got the resources. We can -- our mechanics are ready.

We've got the supply coming off in our factories and our spare parts centers. And it's synchronous growth mod globally. I haven't been able to say that since I've been at Otis that we've had synchronous regional growth in any product line. I would tell you, mod is that product line synchronous growth. And in China, there's a stimulus program for residential for really aging buildings to where in '24, they fund the entire mod. It's to a set amount of RMB and we've developed packages for that. There were 40,000 available to bid in '24. We've got some really strong market share. It's 120,000 this year. Not -- and it will continue into '26, not only will we do well, but you have to not only take the order, you have to deliver it in this calendar year. So our China business mod, you're going to see some pretty high even with a good compare to fourth quarter last year, which was high, you're going to see some real growth there.

Okay. Interesting. Maybe talking about repair, high single digits since the company spun out. There was a couple of years, I remember where you guys are saying, repair is growing maybe a little bit above trend. We think it's going to fall off. It obviously hadn't really happened. I guess, is that sustainable? I would imagine all the pressure on the new equipment side is providing some tailwinds longer-term there?

We thought that repair, we'd see an initial early snapback after COVID because during COVID, we didn't have access to every elevator all the time. We were an essential service, but repair obviously was muted. Think about the hospitality industries that were just closed. We couldn't -- those buildings, we had little access. So we thought this high single digit was a snapback. What we've learned is it's not a snapback. It's a sustained high single digit because it goes hand in hand with modernization. If you don't modernize, you sit at your condo board and you say, yes, we're starting a reserve fund, but let's wait 1 more year, 2 more years because our elevators work, they break if -- they break, but they work.

Well, they break more as they age. And that break-fix is what we call repair. Not the best for customer satisfaction, right, because people don't want their elevators down. But if they choose not to modernize the only offset is sustained maintenance contract and repair, which ticks up. So our outlook for repair is it stays at high single digit, and that's year-after-year growth of these 8-plus million units let alone the other units. So we've got 2.4 million units in our portfolio, repair backlog is strong. It's the only backlog though I'll tell you, you don't want to grow too large. I love backlog. We all -- as an industrial love backlog, you don't want it to grow too large or you really will have some customers. Nobody wants their elevator down too long.

Yes. No, yes, absolutely. Maybe moving over to the new equipment side. You started off talking about the big orders you've seen on Americas into the double digits. So I guess the question is, what drove the negative revisions in the Americas new equipment outlook? And are you seeing demand soften despite the orders going up?

I think it's similar to probably what you've heard from the last few days here at the conference is we're seeing some project delays in implementation. They're not Otis project delays. Let me be clear. We have the mechanics. We have the parts on site. But there are other trades that may not have as much staff as they need. And some of these projects, they're already underway. Recall for us, new equipment in mod, when you sign an order, you put in advanced nonrefundable payment with us. When we ship from our factories, there's additional payment, which is why our cash profile is the way it is.

But on the job sites themselves, we're seeing projects elongate. We don't think this lasts for long, but we think that it -- through the end of this year until we have some more certainty then that's what we're seeing. And again, I think you've heard that all week. I don't think it's major for us. We went down mid-single to down high single, primarily in the U.S. So not worried about it after that, but it's had a small impact.

Yes. No. I mean, it has been a theme that elongation or kind of waiting for things to convert. Maybe going over to some of the company's cost savings initiatives. Any update on either uplift or just the China transformation initiatives you've announced?

If you recall from the first question you asked, I said China for us, we're trying to get to that place where we have stabilization. But we haven't waited. We know that we're switching our China business to look like more of a mature business. The mod opportunity, 9 million of those 22 million units in the installed base are in China, and they change those out at about 15 years due to heavy usage is going to be huge. Our service portfolio, we've more than doubled as we started 200,000 at spin. We're now at about 435,000 in our service portfolio. That's some -- that's a pretty small share on 9 million. So we knew we needed to restructure our new equipment business to prepare us for the service growth we know we're going to get and the mod growth we know we're going to get. That's why we did our China transformation program.

We're on track for the $40 million of run rate savings. Uplift has been underway for several years. This year, the major activity has been transitioning to our global business service, a GBS partner, which we think will help us in multiple ways in terms of recurring transactions as well as multiple ways of being able, once we standardize the processes with them to apply AI, to apply new technologies and new software. So we're excited about that. We will conclude the uplift program at some point this year and have hit our $200 million run rate. We started with a $150 million estimate, but we've been able to secure more as we go. And that's what really helps us in the second half of this year confident in the step up we have in the service -- in that service profit in the EPS. It's a combination of maintenance, repair and modernization growth, new equipment stabilization and uplift in China transformation helping all 3 of those come together.

No, I really appreciate that. May kind of turning over to capital allocation. And I guess specifically, M&A, do you think there is more opportunity for Otis to do M&A?

Absolutely. We do bolt-ons today. If you look historically, we target in our capital allocation, about $50 million of bolt-ons. We are already closer to $100 million as we finish the second half -- the second quarter and that's because there's more available in the market. We knew these days would come where more of the ISPs were ready to retire. We understand where they are. We have the ability to integrate them. The price is right. They're accretive in the second year, if not sooner. And it's just if we can add to the portfolio and that lifetime value of the portfolio, especially in high lifetime value countries. If we can add mechanics that way, who are already experienced on both Otis and non-Otis equipment, it's a win-win for us.

We've also been kind of cleaning up some JVs, which you'll see our NCI line going down, as you monitor our Qs. So I think we've been really good stewards and while we've done all that, we return from an investor-friendly perspective, our dividend is up 110% since spin. We raised at 7.7% in April. Our share buyback. We targeted $800 million. We're at $550 million through second quarter. I can share today, we have completed that $800 million already. So I think we -- all the cash we bring in, we share with the shareholders, always looking for M&A where it makes sense as a pure play, right? The bolt-ons make sense. And someday, if there's a transformational or generational acquisition, we think we have the balance sheet ready for it.

Interesting. Interesting. Kind of maybe kind of coming back to the micro here, I guess how confident are you in the back half guidance? It's calling for the service growth to improve, the service margin expansion to widen. So I guess how confident are you in that back half guide? And how will you get there?

So we -- if you think about it, a little slower start in the first half of the year. We don't tend to be -- we don't tend to have calendarization or seasonality in the service business. And that's 60-plus percent of our revenues, 90% of our profits. But we had a few challenges in the first half of the year admittedly. We have line of sight. Obviously, we'll share our third quarter earnings but I do feel comfortable sharing that what we shared at second quarter earnings on third quarter, what we would achieve, we believe you will see that. And whether that's repair increasing, where we are on portfolio, mod, obviously, mod revenue increasing and order strength.

So we're continuing to see and that early sign of the stabilization in China. That's what you should be looking for without predisclosing anything specific. We've got the confidence in that because we've got the people, we've got the -- we've got the customers, we've got the backlog. Again, backlog is up 8% from a new equipment standpoint. Mods at 16%. Repair is at 8%. We'd have to perform. And I can tell you, as we look at the current business today, we are performing to get the step up in 3Q and it's a trajectory from there. That gets us back to what you should expect on an annual basis from Otis, right, in terms of service performance, top line and bottom line. It's where we've been before, but the bottom line continues to improve on margin expansion. Now will that improvement on margin expansion stay at the same rate over time? Probably not. Will we continue to grow the portfolio and drive really good EBIT dollars and cash dollars? Absolutely as the leader in the industry.

My last question of Laguna 2025, I guess, just kind of take the floor, what makes Otis unique? Why should investors invest in Otis?

We're a service company. We've got resilient, reliable, predictable business with a strong backlog and a great structural flywheel and service that allows us to be, as I said, predictable and to deliver. When you look at Otis versus our competitive peers, we have the largest portfolio, which gives us the service density advantage. We have an incredible workforce of 44,000 of our field professionals who show up every day. I couldn't be more proud of them. And any time I get to see any one of them I tell them that.

We have organic growth in front of us that's noncyclical from a mod standpoint, regardless of construction cycles that's just in the early innings. So we have growth coming for the top line, think repair and mod is the 2 biggest generators. We have a solid growth story in our service portfolio at 4% and we'll see how much further we can take that. And we're still the innovator in the industry with an investor-friendly capital allocation and just really a business that as a service business continues to perform. I think we've shown this now 22 quarters and it just shows that resilience regardless of headwinds and China stabilizes everything else continues to advance. New equipment looks good, but that's not the core. The main thing about Otis, remember the main thing, we're a service company. Thank you.

Thank you, Judy. Enjoy the conversation. Thank you so much.