Otis earnings: Despite choppy markets, we’re ‘pleased with the results,’ CEO says

Otis CEO Judy Marks joins Yahoo Finance Live to discuss quarterly earnings, declining Chinese orders, inflation, global economic development, and the outlook for Otis.

Video Transcript

BRAD SMITH: Otis, the elevator maker, hoping to rise above the gloom in commercial real estate. The lift company reporting an earnings beat but seeing new equipment orders decline in China. Joining us now with more, Judy Marks, Otis CEO, alongside Yahoo Finance's executive editor, Brian Sozzi.

Great to have you here with us this morning, Judy. And thanks so much for taking some time here on the back of the earnings results here. If there are any catalysts that kind of stick out to you from the quarter, what would you really point to?

JUDY MARKS: Yeah, Brad, Brian, great to be with you. I mean, this was all about a service-driven growth and acceleration in our service business. We were able to grow organically our service business about 6%. It drove margin expansion of 40 basis points. We grew our service portfolio 4.2%, still the largest in the world at 2.2 million units. And really our colleagues delivered for our customers.

On new equipment side, pleased with the results in choppy markets. And the challenge is, although China the market was down 10%, we had great share gain because we were only down 3% in orders. We gained 70 basis points in new equipment. And both of those are through execution of our strategy-- great product introductions, delivering for our customers, being there when they need us in terms of repairs.

And when you look at our orders book, it's looking pretty bright. Our orders were up 15% in the Americas, 7% for new equipment, and almost 30% for modernization of older buildings. So we've got a great backlog, and we're looking forward to executing as the year goes on.

BRIAN SOZZI: Judy, Brian here. Good to see you. I remember I was talking a lot last year on inflation. And you continue to call out high levels of inflation. What are you seeing at this point in the year?

JUDY MARKS: Yeah, we're seeing inflation in most parts of the world, Brian. I would tell you, in Europe, we're seeing it at varying levels. We've been able to get price realization on that inflation that takes more than care of the wage inflation and the collective bargaining agreements we have. New equipment prices were up mid-single digits this quarter. Service pricing was up 3 and 1/2% like-for-like.

So we've handled it between pricing and productivity. And I think that's what you see in our outlook, that we expect not only top-line growth but continued margin expansion and our earnings per share to grow significantly. We're up 5% earnings per share this quarter. And we're going to continue that as the year goes on.

JULIE HYMAN: Judy, it's Julie here. A lot has been made of potential headwinds in commercial real estate. And so I would ask, first of all, is commercial real estate a pretty good proxy for Otis? At least here in the United States is what we're talking about now, where you guys get about a quarter of your revenue. And what are you seeing in terms of trends in commercial real estate and how your new orders here in the US might reflect that?

JUDY MARKS: Yeah. So again, orders in North Amer-- in the Americas were up 15% this quarter, and that's after a really strong year. We got about a 20% backlog. What we're seeing-- and I'm not an economist, but what we're seeing in segments, Julie, is infrastructure's up and industrial's up. Resi and especially multifamily is down a little, but that's off of some really tough comps from last two years where multifamily has been at almost record levels.

If you look at the two main indicators we use, the Architects Billing Index for the US, that just turned into positive territory in March after five months of contraction. So that's architects being paid to design projects going forward. And then the Dodge Momentum construction starts turned very positive in March, including for residential and multifamily. So perhaps we're at an inflection point. But we'll see. We have to wait another quarter or two to make any judgments.

BRIAN SOZZI: Judy, I'm seeing so many different trends from very large companies such as yourself as it pertains to China. So the economy clearly there is opening. I see strength in consumer goods, a little less strength in industrial goods. What's happening there, and what's your outlook for that country this year?

JUDY MARKS: Yeah. Well, let me talk from having just returned from 10 days in China, Brian. It was an amazing trip-- four cities and had the ability not just to talk to customers and colleagues but also to government officials, party representatives. China is back in terms of driving for economic development, and that includes industrial.

We had a really strong quarter considering how the market was down. And we anticipate real estate, especially with the state-owned enterprises, in the second half of the year to be much stronger. So China will move at a pace that you don't see elsewhere in the world. And again, we-- it was up in industrial. It was up in commercial in the first quarter and in infrastructure. So when residential comes back, as well, and the others continue to move, especially in the tier one and tier two cities, with the sales coverage we have and the products we've introduced in China, we're expecting a strong second half recovery.

BRAD SMITH: How does the services requirement on the new products that you introduce differ from the legacy Otis line that's already installed within a lot of real estate?

JUDY MARKS: So the mandatory requirements by code vary by country. But what the new units have is they're all connected. And through sensors, through our cloud communications, we have amazing connections to 800,000 of our units already, and that grows every day. That gives us the ability to predict when a unit's going to go down. It allows us to deploy a mechanic before a unit shuts down to actually replace a part so that the customer never has to have that downtime. And it also allows us to avoid what we call running on arrival, sending someone when the unit's already back up and operational because someone had the door jammed or something like that.

So the ability of having digital-connected technology helps us, helps our customers, and helps our passengers, because in our newest products, if there is a shutdown, not only do they call our Otis line Help Center, they can actually see that call center person on a video screen to calm them down. So it's just a much more comprehensive offering, which gives us more stickiness that lets us retain more customers.

BRIAN SOZZI: Judy, a couple of years ago, United Technologies spun off Otis, spun off Carrier. Now, Carrier has done some good work under the leadership of CEO Dave Gitlin. You have done some very, very good work too over at Otis. Carrier just made a pretty large acquisition last night. Are deals on your horizon? Do you want to expand beyond your core business?

JUDY MARKS: So we're a pure play already, and what we love about our business is, since the spin, we've had incredible focus. We've grown EPS double digits over the past three years, and we've returned all of that to our shareholders. Last night, we increased our dividend over 17%, 70% since we spun. So we're always looking at small bolt-ons. But we like our position. We're the leader in the industry. We've got great organic growth in service, in modernization, and we believe, with this continued share gain and execution of our strategy, we've got good growth in new equipment as well. I like where we are. We'll continue to do $50-70 million a year of buying small service companies. They give us density and scale in specific routes and specific countries. But I really like our position.

JULIE HYMAN: All elevators, all the time. Judy, thanks so much for being here. I appreciate it, as well as Soz. Judy Marks, Otis CEO. Appreciate it.