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'Construction is still going strong,' Otis CEO says

Otis Worldwide Corp. Chair & CEO Judy Marks joins Yahoo Finance Live to discuss company earnings, supply chain constraints, the ability to drive productivity, the probability of a recession, and the outlook for growth.

Video Transcript

[MUSIC PLAYING]

- Shares of Otis Worldwide are getting a slight boost today after reporting mixed second-quarter earnings. The elevator maker cited COVID lockdowns in China, high commodity prices, and the strengthening of the US dollar as key headwinds in the second quarter. Joining us now discuss is Otis Worldwide chair and CEO Judy Marks.

Judy, always great to get some time with you. So compared to three months ago, how has the business changed? And how are you thinking about the back half of the year?

JUDY MARKS: Hey, Brian. The business-- great to be with you. The business is going strong, solid second-quarter results. We grew organic sales about 40 basis points, margin expansion of 20 bips, and grew earnings per share at about 12%. And that came off some weakness in China, but strength across the globe that really countered for this.

Our service business was super resilient, including in China. And our service business contributed $39 million at constant currency to our bottom line. So we've got the resilience.

And then as we look to the new equipment side, record orders for Otis this quarter. We were up 16 and 1/2% in our bookings of orders, including 57% in the Americas. So construction still going strong. And our service, resiliency, and just really keeping buildings and people moving continues to pay off.

- In a normal supply chain period, how long would it typically take to work through some of those orders that you were mentioning and the backlog particularly versus now, where you do have to monitor this broader supply chain crisis that every company has tried to account for in one way or the other?

JUDY MARKS: Yeah, Brad, we are a longer-cycle industry, especially for an industrial. From the time we get to the order typically until the elevator's installed and tested really could range, depending on the part of the world, six months on the quickest, 18 months on the longest cycle. So we have the ability, which you've seen in our results, not just this quarter, but in the past, to really drive productivity, material productivity in our factories, installation productivity in our field. And that's what's created our margins on our new equipment business, which do contribute to our bottom line.

We have not changed our outlook for commodities. We've stayed at about $110 million impact this year over last year. So we think we have that really well identified. And as commodities continue to come down in the second half of the year, although we're long cycle, we'll try to optimize to the best of our ability and drive that to the bottom line as well.

- Judy, yesterday we had a conversation with the team over at Whirlpool. Obviously, they're making appliances. You're making elevators. Different businesses, but both manufacturers.

And they told us they have pulled out their recession playbook. Do you have something like that on your table over Otis right now? And what would it even entail?

JUDY MARKS: Yeah, I think we're actually in a better place now than we we're in the former recession. We have a strategy we've been executing since spin that allows us to control everything we can control, Brian. And that's what we're focused on. Inside our factories we've got the right footprint. We've got multiple suppliers across our global supply chain.

We tend to be local for local, both in our service business and in our manufacturing, our 18 manufacturing plants, so that we have really the flexibility to respond to a recession. Our service business holds up very well. Again, safety is our top priority. And the regulations and codes that drive the amount of visits we have to do and the tasks we need to perform under these annual maintenance contracts have to happen whether there's a recession or not.

- Have you made a decision yet, Judy, to cut back on manufacturing and slow hiring?

JUDY MARKS: We're seeing a strong demand signal in new equipment, with an orders book up 16 and 1/2%. Our backlog is up 10% as we ended the quarter in constant currency, about 6% for new equipment at actual currency. And our modernization business, which also drives retrofitting and rehabbing older elevators, that orders book was up 9%.

So demand signals fairly strong across the globe. Backlog's strong. It's flattish in China, but backlog, obviously, everywhere else has to be about 15% to make up for that. We've got 70,000 colleagues, 41,000 of them in the field providing installation and service.

We've grown year-over-year in headcount. And we feel really comfortable with where we are both in manufacturing and in service. And again, I can't thank our colleagues enough for delivering for all the passengers globally.

- Judy, even as we track across industries and talk about everything from menu innovation all the way to fitness tech innovation or fashion innovation, for elevator innovation specifically, how does that continue to also allow you to go back to your existing clients and have them upgrade into some of the future products that Otis is getting out to the market as well? And what does that rate of turnover in equipment actually look like over an extended period of time? And are you seeing that type of demand?

JUDY MARKS: We're seeing the demand for the connected technologies, both in new equipment and new buildings, as well as in buildings where customers are modernizing, because they want to attract new tenants, be it residential or commercial. And over half of our 2.1 million units are in residential buildings. Think apartment complexes, condominiums across the globe. So we're seeing people who modernize for technology and modernize for aesthetics. So both of those are driving innovation to what we call being connected, having real-time displays in the cab itself, the ability to see infotainment, to get information real time, and just the ability to connect with your cell phone, to be able to call an elevator with your mobile phone so that it really is on demand for the passenger.

But probably the biggest connected piece that we've had success with is our Otis ONE offering that allows us real time to monitor elevators and escalators. And we decided we would invest in that and deploy that across our install base. And we're well on our way, so that we have the ability to predict problems before they occur, so that people won't get entrapped, so there won't be shutdowns.

And it's making a difference. It's making us more productive in terms of being able to be predictive and proactive and transparent. And the customer is getting the value of it as well because they can see it real time as well.

- All right, if you can hail a ride, why not extend that to hailing an elevator as well? Judy Marks, Otis Worldwide Corp. chair and CEO, thanks so much for joining us here today. We appreciate it.

JUDY MARKS: Thank you.