Otis CEO sees potential in China amid property downturn

Elevator and escalator operator Otis Worldwide (OTIS) released its second quarter results, revealing earnings of $1.06 per share beating estimates of $1.03. Revenue was down 3.2% year-over-year to $3.6 billion against an expected $3.73 billion.

Yahoo Finance executive editor Brian Sozzi joins Catalysts to speak with Otis CEO Judy Marks, who provides executive insight into the company's performance the Chinese market's impact on the company's business.

Marks blames challenging times in China for some of the slowdown seen in the report.

"It was our highest margin quarter since we became independent [in 2020] at 17%, with 110 basis points of margin expansion," Marks explains. "What we've seen, though, is some challenges, some challenging economic times in China, specifically in our new equipment segment where volumes are down because consumer sentiment is not driving the property market to return or or really stabilize to a level where people are now continuing to buy real estate. "

Marks elaborates on the potential of the Chinese market as the government still encourages property investments: "There are still over 400 million Chinese living in rural areas that the Chinese government wants to raise from poverty and bring them to urbanized areas. So while the market we're seeing this year will only be between 425,000 and 450,000 elevator and escalator units available in the new equipment market, it's still the largest market in the world."

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This post was written by Nicholas Jacobino

Video Transcript

Shares of elevator and escalator manufacturer Otis are under pressure this morning after missing analyst expectations for revenue in its second quarter also lowering its full year revenue guidance, citing challenging market conditions, you got the stock off just about 5%.

When you dig deep though into this report, there was still a lot to like from foreign investors here at services of the business that was a strength here in the most recent quarter.

We wanna bring in Otis's CEO Judy Marks joining us now and also our very own executive editor Brian Sazi, bringing us this interview, Judy.

It's great to see you.

So talk to me about the quarter, some of the trends that you're seeing uh underneath the service and and ultimately what you're hearing from customers at this point in the cycle.

Yeah, Sean Brian, great to be with you.

Um Listen, we had a solid quarter.

We are a service driven business last year.

Over 60% of our revenues and 90% of our profits are driven by our service company and we were strong there.

Our portfolio grew 4.2% organic revenue was up over 5% in service modernization up six and both of our segments drove profitability.

It was our highest margin since we became independent at 17% with 110 basis points and margin expansion.

What we've seen though is some challenges, some challenging economic times in China, specifically in our new equipment segment where volumes are down because consumer sentiment is not driving the property market to return or really stabilize to a level where people are now continuing to buy real estate.

So we've offset.

Uh and in our outlook, we're still going to grow organically this year, 1 to 2%.

But we have taken our outlook down from what was a little higher than that uh while holding our profitability while holding actually increasing our eps.

Uh we had 15% eps growth this, this quarter and we're showing 9 to 10% in the guide.

So, uh but I think we're being realistic about uh what the lack of recovery in China and some of the headwinds we're seeing there, Judy, good to see you and look, we've, we've talked a lot about conditions in China and, and look like uh Otis is calling out a 10% to a 15% drop in China this year.

It seems like things are getting worse.

And I I would argue it's not an onus thing.

It's an economic environment thing.

Take us inside that China market.

Is this just a reflection of China over building and there's just ghost ghost buildings sitting unoccupied and nobody needs to buy elevators or escalators.

Is it that simple?

Actually, it's, it's, it's a little more complex and I think you're seeing it in the luxury brands on the consumer side.

I think you're seeing it across the board.

The government, Chinese government is driving for change and, and and has made multiple efforts to encourage people to, to invest in real estate and to buy homes.

There are still over 400 million Chinese living in rural areas that the Chinese government wants to raise from poverty and bring them to urbanized areas.

So while the market, we're saying this will only be between 875,000 elevator and escalator units available in the new equipment market.

It's still the largest market in the world.

It's healthy.

And I think what's important, Brian is when we spun besides growing our share in China and focusing our 17,000 colleagues there, we knew we needed to grow our service in our modernization business.

And now a third of our revenue is in service, which is two x 4.5 years ago when we spun and we're continuing to grow that uh you know, day after day quarter, after quarter.

So our China business is healthy, but the new equipment segment uh has slowed down third year in a row.

And we're saying the market's gonna be down 10 to 15%.

This year, which is pretty close to the last two years.

So it's a pretty big drop.

But the teams delivering, we're driving cost out, we're becoming more productive.

They're in a deflationary period.

So commodities are less competition is tough, but we're winning our share.

What?

Uh and I always like asking you about China duty.

Of course, you're on that Caterpillar Board to China key market for them as well.

What gets that market back to growth?

What has to happen?

Well, I think consumer sentiment has to change and, and you know, there are times that we see that in, in especially in the tier one cities.

Um tier one did better than any of the other series.

So you're talking the real large urbanized areas, there's still growth.

When you go to China, I was there in March, I'll be back in November.

You still see ample construction, you see cranes in lots of places, the smaller cities are slower to recover.

Um and, and we're going to continue, we think to see that over time, Judy, you sit on the business roundtable and I bring that up.

Obviously, there is a massive focus on November, ultimately.

What, what the outcome of the election is going to mean a across industries.

I'm curious, starting on the trade front.

We've, we've heard uh uh ramped up in rhetoric even from uh former or from former President Trump in terms of what he wants to implement from President Biden Now there's questions about what harris' uh policies could potentially look like if we do see any sort of um increase in terms of tariffs, what ultimately does that mean for your business?

Yeah.

Listen, I think tariffs impact the American economy, they impact the American citizen no matter what they buy.

We've seen that since tariffs have continued to go up regardless of which party wins.

We need a pro growth environment that allows us businesses that are multinational businesses to operate in a high quality trade environment that everyone understands so that we can compete.

And when we can compete overseas, it drives additional economic growth and jobs here in the US.

And that goes across all industries, a trade war, a tariff war is not in the American uh economy's best interests nor in our citizens best interest.

When it's going to create imbalance, it's going to potentially create uh other issues for American companies to continue to either export or to grow our businesses.

And all we want is a pro growth environment that allows us to continue you to make a difference for the lives of Americans, Judy.

I I'm just interpreting just trying to understand something like this in real time.

Are you and your fellow C OS on the business roundtable?

Are you concerned about working with another Trump administration?

When I hear things like a 10% universal tariff?

I mean to your point that can't be good for the bottom line of, of your company and many companies like yours.

Listen, we will work with either administration and we understand there will be, there will be new policies put forward and we just want our voices to be heard and the impacts of some of these moves, the government may choose to make clearly understood both the consequences they can think through as well as the unintended consequences.

But we really believe high quality trade agreements the way we've operated for many decades creates predictability.

Brian, we wanna be able to invest, we wanna be able to invest at home and we wanna be able to invest in, in very focused investments in other countries that again will drive us jobs, us intellectual property, R and D here in this country and with predictability, we can continue to do that, Judy Marks.

Thank you so much for taking the time to join us here this morning, CEO of Otis.

We really appreciate it.

And of course, our thanks to Brian as well for bringing us this conversation.