Good morning, and welcome to Otis' Second 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 the call over to Rob Quartaro, Vice President of Investor Relations.

Thank you, Tina. Welcome to Otis' second 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 everyone listening is safe and well. Starting with Q2 highlights on Slide 3. Otis delivered solid second quarter and first half results as the Service segment continued to drive strong performance with both a year-over-year and a sequential operating profit margin improvement. Organic Service sales in the second quarter were up 4%, with growth across all business lines and in all regions. Our maintenance portfolio grew 4% again in the quarter, adding to our industry-leading 2.4 million unit portfolio under service. Modernization momentum continued as we accelerated orders to 22% and ended the quarter with a backlog up 16% at constant currency. New Equipment orders decreased by 1% due to continued economic challenges in China, while orders in the rest of the world increased 11% versus the prior year. We continue to make progress with UpLift, and we remain on track to achieve $200 million in run rate savings by year-end. Additionally, in response to continued weakness in China, we're executing additional actions to reduce cost as part of our China transformation. We now anticipate run rate savings of approximately $40 million by year-end. Our 2025 in-year savings targets remain at $70 million and $20 million for UpLift and China transformation, respectively. Together, these initiatives are enabling us to deliver greater customer centricity and to invest in growth. In addition, we also now expect the impact of 2025 tariffs to be roughly half of our expectations in April to a range of $25 million to $35 million, reflecting more favorable reciprocal tariff rates and our mitigation efforts. We completed approximately $300 million in share repurchases in the second quarter, taking year-to-date repurchases to approximately $550 million. During the quarter, we closed on our previously announced acquisition of eight urban elevator locations in the U.S. This deal further expands our maintenance portfolio and enhances our ability to serve customers. Adjusted EPS was $1.97 in the first half of the year, growing 2% versus the same period last year due to solid margin expansion and continued tax planning efforts. In June, we published our Connect & Thrive report that outlines our progress and commitments to four key areas: health and safety; governance and accountability; environment and impact; and people and communities. These areas are closely aligned with our strategic vision and the Otis Absolutes of safety, ethics and quality that we live by every day. During the quarter, we were honored to be recognized with several sustainability awards. USA Today, in collaboration with Statista included Otis among America's climate leaders, and Forbes recognized Otis among 200 U.S. companies included on the net zero leaders list for reduction of carbon emissions. Newsweek also recognized Otis among companies from 26 different countries for our environmental sustainability performance. And most recently, TIME magazine named Otis among the world's most sustainable companies for the second consecutive year. Turning to our orders performance on Slide 4. Combined New Equipment and modernization orders grew 4% in the quarter, driven by continued strength in modernization. Excluding China, orders grew 14% with notable strength in the Americas and Asia Pacific. Our combined backlog remained relatively flat year-over-year. However, excluding China, it increased 10%. Our total backlog, including maintenance and repair, is at historically high levels, positioning us well for future quarters. New Equipment orders declined 1% in the quarter. However, excluding China, we saw a robust 11% growth. For the fourth straight quarter, the Americas orders were up in the low teens. Asia Pacific also delivered strong results with order growth exceeding 20% for the third consecutive quarter, led by Southeast Asia and India. This strength was offset by continued softness in China where orders declined by more than 20%. Note, however, that our China New Equipment orders were sequentially stable in the first half of 2025, and we anticipate year-over-year growth in the coming quarters. In EMEA, New Equipment orders declined low single digits as strength in the Middle East was offset by weaker demand in Europe. At constant currency, our New Equipment backlog declined 3% year-over-year, but excluding China, it grew 8%. Modernization acceleration continued as orders grew 22%, leading to our quarter-end backlog up 16% at constant currency, with Americas, China and Asia Pacific each growing orders more than 20%. The modernization opportunity is compelling, driven by the aging of the 22 million unit installed base. We continue to expect these aging units to drive a multiyear growth cycle across our regions. Our service portfolio grew 4% in the quarter with contributions from all regions. China's strong growth trajectory continued as the region grew its portfolio low teens, Asia Pacific grew mid-single digit and EMEA and Americas grew low-single digits. As our global teams continue to deliver, we're proud to share second quarter customer highlights that reflect our success in winning strategic projects through innovation, execution and trusted collaborations. In the Americas, Otis will modernize 21 elevators at the OneAmerica Tower in Indianapolis, expanding our long-term relationship with this customer. Otis provided the original elevators for the buildings in the 1980s, modernized them in 2009 and is the current maintenance provider. Otis will upgrade controls, doors, signals and cab finishes on the elevators. In Dubai, we continue to strengthen and grow our relationship with DAMAC Properties, one of the leading luxury real estate developers. Our latest agreement to supply and install 20 SkyRise elevators at DAMAC Bay 2 in Dubai Harbour brings our total orders with DAMAC to 88 elevators. This includes 72 SkyRise and 16 Gen2 systems across six high-rise projects in the city. These orders reflect the trust DAMAC places in our technology and service, and they underscore our growing footprint in the Middle East. In China, Otis recently entered into a contract for more than 400 escalators and connected elevators to support metro and infrastructure expansion projects in Hangzhou, Changchun and Tianjin. These orders reflect our ongoing role in supporting urban mobility across key cities. And in Ho Chi Minh City, Vietnam, Otis has been selected to install and maintain SkyRise and Gen3 elevator systems at The Kross, a 39-storey premium mixed-use development in the city central business district. These units will be supported by our Compass 360 and EMS Panorama 2.0 management system, delivering a modern integrated solution for enhanced passenger experience. Turning to our second quarter results on Slide 5. Otis delivered net sales of $3.6 billion, flat on a year-over-year basis, with organic sales down 2%. Adjusted operating profit margin was flat versus the prior year at 17%. Excluding a $13 million foreign exchange tailwind, adjusted operating profit decreased 2%, with growth in Service offset by a decline in New Equipment. Adjusted EPS declined 1% or $0.01 in the quarter, driven by a tough year-over-year comparison from an operational and tax standpoint. As I previously mentioned, EPS grew 2% in the first half of the year. Adjusted free cash flow was $243 million in the quarter and $429 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 4%, with growth in all lines of business. Maintenance and repair organic sales grew 4%, driven by growth in our portfolio and positive pricing of 3% in maintenance, partially offset by mix and churn. Our repair business accelerated in the second quarter as anticipated, growing 6% organically year-over-year compared to 1% in the first quarter. We are pleased with our progress. And with our backlog up 8% at quarter end, we are well positioned heading into the second half. Modernization organic sales grew 5% with notable growth in China, which increased over 20%, while modernization organic sales growth was muted. This was primarily driven by the timing of several large projects, which can vary from quarter to quarter. Our modernization backlog remains strong, up 16% at constant currency at quarter end, and we expect approximately 10% growth in modernization sales for the full year. Service operating profit of $578 million increased $26 million at constant currency with higher volume, favorable pricing and productivity, including the benefits from UpLift, more than offsetting higher labor costs and mix and churn. Operating profit margins expanded 20 basis points to 24.9% in the quarter, making it another record quarter in Service margins since the spin. Turning to New Equipment on Slide 7. New Equipment organic sales declined 11% in the quarter as the strength in EMEA was more than offset by declines in China, Americas and Asia Pacific. EMEA sales grew 7%, primarily due to strength in the Middle East, which grew greater than 20%, while Europe was up low single digits. Asia Pacific declined low single digits, with notable strength in Hong Kong and Taiwan, offset by weakness in Korea. Additionally, growth was negatively impacted by timing of project execution in India. However, the backlog in India remains strong. Americas declined high single digits as we work through last year's backlog, but in addition, backlog execution has been slower due to market concerns around global trade policy. China remained weak, declining greater than 20% as soft market conditions, a strict credit control on shipments and a declining backlog continue to impact our results. New Equipment operating profit of $68 million declined $41 million at constant currency, driven by lower volumes and unfavorable price and mix. Operating profit margins declined 240 basis points to 5.3%, driven by the headwinds of lower volume and regional mix that were partially offset by productivity, including the benefits from UpLift and our China transformation. I will now turn it back to Judy to discuss our 2025 outlook.

Starting on Slide 8 with the market outlook. Before discussing our updated 2025 outlook, I'd like to briefly discuss our global market expectations, which are largely unchanged. We continue to expect a low single-digit decline in the Americas. However, we are beginning to see trends improving sequentially. Our market outlook for EMEA is unchanged with low single-digit growth. Asia is now anticipated to decline high single digits. This is driven by mid-single-digit growth in Asia Pacific, offset by a low teens decline in China. Our outlook for China is now slightly lower than our beginning-of-year expectation due to continued softness in the market. While year-over-year comparisons are easier in the second half, we now believe the market will be down approximately 10% for the remainder of the year. Taken together, we expect the global new equipment market to decline mid-single digits in 2025. On the service side, we continue to expect the global installed base to grow mid-single digits, driven by low single-digit growth in Americas and EMEA and mid-single-digit growth in Asia. This growing installed base should further support growth in our maintenance portfolio and expand our service flywheel. Turning to our financial outlook for 2025. We now expect net sales of $14.5 billion to $14.6 billion, a slight decline from our previous outlook, driven primarily by a lower outlook for New Equipment sales. This is largely driven by the new equipment market environment in China and the U.S. In China, market conditions have remained soft as liquidity challenges are causing a slowdown in the execution of our backlog. In the U.S., continued uncertainty over global trade policies are causing project delays. That said, we have driven low teens or greater order growth in the Americas for four consecutive quarters, and our backlog remains strong there, up 5% at the end of the quarter. This backlog positions us well as we head into 2026. And as you know, our resilient Service business is relatively insulated from tariffs. This resilient business is our core earnings driver, representing approximately 90% of our total operating profit. Looking ahead, we expect our Service organic sales growth to continue to ramp up through the remainder of the year. Our outlook for adjusted operating profit is unchanged at $2.4 billion to $2.5 billion, up $55 million to $105 million on an actual currency basis, including the impact of incremental U.S. tariffs imposed in 2025. This is in line with our prior outlook as reduced reciprocal tariff rates for China and favorable foreign exchange rates offset lower expectations for our New Equipment profit this year. Service profitability should remain strong from growth in all three areas of the business: maintenance, repair and modernization. Our outlook for adjusted EPS is unchanged at $4 to $4.10 per share, representing an increase of 4% to 7% compared to 2024. We expect adjusted free cash flow to be between $1.4 billion to $1.5 billion for the year, which we expect to largely return to our shareholders through our dividend and $800 million of share repurchases. Note, we are well on track to meet our share repurchase target, having bought back approximately $550 million year-to-date through June. 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 now expect organic sales growth of approximately 1% for the year. This is driven by continued strength in Service with organic growth of approximately 5%, partially offset by a decline in New Equipment of approximately 7%. Within New Equipment, we have lowered our outlook for Americas to down high single digits and Asia to down low teens due to the macroeconomic concerns Judy previously noted. Within Asia, we expect strong growth in Asia Pacific, offset by a greater than 20% decline in China. We continue to expect EMEA to grow mid-single digits for the year. Within Service, we continue to expect growth in all segments through the remainder of the year. Maintenance and repair is expected to grow approximately 5%, driven by portfolio growth and pricing, partially offset by mix and churn. We saw solid acceleration in our repair revenue in the second quarter, and we expect continued acceleration through the second half. In modernization, we are anticipating approximately 10% organic growth as we execute our strong backlog. Turning to Slide 10 to provide an update on tariffs. While circumstances remain fluid, our anticipated tariff exposure has meaningfully declined from expectations in April. This is driven by more favorable reciprocal tariff rates as well as our successful mitigation strategies. Given these changes, we now expect an approximately $25 million to $35 million negative impact to our 2025 earnings, net of our mitigation efforts. Note that this impact is primarily expected in the second half, as the year-to-date impact has been minimal. As a reminder, our tariff exposure is primarily in our backlog as we have adjusted contract terms and pricing for the current environment. Therefore, after execution of the backlog, the impact of the new tariffs on our results should be offset by pricing and contract language. Turning to our financial outlook on Slide 11. We currently expect adjusted operating profit to grow $55 million to $105 million on an actual currency basis, including the impacts of tariffs. This growth is driven by the strength of our Service segment as well as cost savings from UpLift and our China transformation. Adjusted operating margin is expected to expand 30 basis points, driven by expanding Service margins and mix, offset by declining New Equipment margins from tariffs as well as the flow-through of last year's backlog and regional mix. Adjusted free cash flow is now expected to be between $1.4 billion to $1.5 billion for the year. The decline from our previous forecast is primarily driven by our reduced outlook for New Equipment sales as well as the impact of the mix. As New Equipment sales are more favorable to working capital, we continue to anticipate approximately $800 million of share repurchases for the year. Moving to the 2025 EPS bridge on Slide 12. Our adjusted EPS outlook for the year remains $4 to $4.10 per share. This represents 4% to 7% growth compared to the prior year, driven by strong operational growth from our Service segment. The New Equipment segment remains a headwind due to soft economic conditions in China and the impact of global trade policy in the U.S. Favorable foreign exchange rates and a lower share count are expected to offset the impact of tariffs and higher interest expense. And while conditions remain challenging for our New Equipment business in the near term, our U.S. backlog is growing, and China orders are expected to stabilize in the coming quarters. Furthermore, the resiliency of our Service business continues to drive earnings on the back of mid-single-digit top-line growth and continued margin expansion. We are also continuing to execute our UpLift and China transformation initiatives, which will allow us to better serve our customers while driving $240 million of run rate cost savings by year-end. We have good line of sight to deliver our targeted savings and as UpLift is approaching the end of the program in the second half of the year. We are making good progress with our China transformation, and as I previously mentioned, we are raising our cost savings target to $40 million due to additional restructuring actions underway. Looking at the third quarter, we expect New Equipment organic sales growth roughly in line with our full year guidance, with sequentially lower margins in the quarter. This margin pressure is due to lower volumes, but will be more acute in the third quarter due to the execution of cost mitigating actions such as the temporary furlough of some of our production facilities. Service organic sales are expected to ramp to around 5%, and we anticipate solid year-over-year margin expansion with positive contribution from UpLift as we execute the last wave of the program. Taken together, we expect the third quarter adjusted EPS growth of around 5%, followed by a strong fourth quarter to deliver 6% full year growth at the midpoint of our guide. With that, I will kindly ask Tina to please open the line for questions. Thank you.

And our first question comes from Jeff Sprague with Vertical Research.

Sprague here at Vertical. Judy, I wonder if you could just maybe unpack Service growth a little bit more for us. And the spirit of my question is, I think we've got two quarters in a row here now where Service revenue growth organically is equal to portfolio growth, where historically revenues outperformed portfolio growth. So you mentioned churn and mix. I guess, I'm particularly interested in churn. In this kind of economic period of uncertainty, are you seeing leakage and retention? Or really, what's going on underneath the surface there?

The Service continues to perform well. Maintenance and organic sales increased by 4%, driven by growth in our portfolio. We experienced positive Service pricing, with like-for-like pricing rising by 3 points this quarter. This figure is slightly lower than in previous years, but inflation is not as pronounced in some areas. In developed markets, Service pricing performed excellently. EMEA saw low single-digit growth, while our Americas team achieved mid-single-digit pricing increases, which is very encouraging. Comparing this quarter to the last, repair sales have rebounded significantly. They were at 1% in the first quarter and jumped to 6% this quarter, with expectations for continued growth in the third and fourth quarters. Our repair backlog has increased by 8%, giving us a strong foundation to work from for the rest of the year. Mod revenue declined by 5% due to a number of major projects we secured, and our mod orders rose by 22%, showing exceptional performance with three of our four regions reporting over 20% growth. In North America, our team saw mod orders increase by over 50% this quarter, reflecting significant growth momentum that we now need to convert into revenue. We expect mod revenue to grow to 10% over the next two quarters, supported by a 16% backlog. Despite this, we tempered our year-end outlook to 5%, having achieved 4% in the first half. However, we're anticipating an incremental improvement in the third quarter and even more in the fourth quarter. I have full confidence in the Service operations; we've sustained portfolio growth at 4% for almost multiple years, and I am certain this will continue in the next two quarters. Our operating profit reflects the impact of Service growth, with a record operating margin of 24.9% for Service since the spin-off, which will support our growth in operating profit going forward. This marks the 21st consecutive quarter of operating profit in Service. We have a clear growth story for the top line, which we own, and this will be evident as we progress through the latter half of the year.

But just to be clear then, I mean, if units are up 4% and Service price is up 3%, the fact that organic revenues are only up 4% is a function of New Equipment mix, project-related stuff you're talking about. Or is it retention?

No. Retention was actually slightly better in the second quarter compared to the first quarter, but there is a mix and churn effect at play. As our portfolio expands, we're seeing more growth in less mature markets, which contribute less, particularly in China where we're experiencing growth in the teens. It's primarily a mix and churn effect. Additionally, when we lose units and fail to retain them, replacing them with a recapture results in a lower margin and price.

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

Regarding retention, I understand you mentioned a slight improvement quarter-over-quarter. Could you quantify that? I'm particularly interested in your observations on New Equipment orders in the Americas, especially given the ongoing challenges in the multifamily sector. It's quite unexpected to see this trend. I'm also curious about the areas of growth you're identifying in the Americas. Additionally, please elaborate on your expectations for year-over-year growth in China in the upcoming quarters. Is this primarily due to easier comparisons, or are we witnessing positive effects from the stimulus measures in China?

Yes. We will provide all the retention data once a year, so I won’t go into detail on that. In terms of the U.S., we had a strong fourth quarter with double-digit growth. North America saw a 15% increase in new equipment orders. This quarter, we experienced some contraction in Latin America, including Brazil, Mexico, and Chile, but North America constitutes a larger share of our business in the Americas. We also had a robust performance in infrastructure, while residential remained flat this quarter. Regarding multifamily, our orders were flat year-over-year, which I consider a positive sign compared to the pullback we experienced in recent quarters. However, commercial orders were down. Overall, we had strong infrastructure projects, resulting in significant volume business, and I am very pleased with our performance in North America, with four consecutive strong quarters following nearly six quarters of order contraction, which impacted our new equipment backlog there. In China, the new equipment market continues to be weak, with a 15% decline in the first and second quarters, though we expect improvement to around a 10% decline in the second half. Comp comparisons will be beneficial, but no sectors or tier cities showed growth in the second quarter. Tier 1 cities performed better relative to others, but overall, there was no growth. The strongest sectors for us in the second quarter were infrastructure and industrial buildings, both showing signs of stability. However, both commercial and office sectors fell by double digits, and residential declined by high teens to double digits, indicating ongoing market stress. Now we are focusing on sequential improvement and our performance quarter-over-quarter, particularly regarding new equipment in China, where we are emphasizing delivering value due to the competitive landscape and low prices. We are also concentrating on enhancing our service portfolio and avoiding opportunities that don’t yield margins or service attachment, which reflects a disciplined approach to improving our backlog situation. Our new equipment orders decreased by 1%, but excluding China, the other three regions saw an 11% increase. Although our new equipment backlog fell by 3%, it rose by 8% when excluding China, which gives me reason to feel optimistic about the rest of the world excluding China. If China stabilizes, the rest of the world is experiencing growth, and our backlog is showing nearly an 8% increase.

That's great information. My follow-up is for Cristina. It seems like your earnings for the third quarter are around $1 per share. The midpoint suggests an increase in earnings from the third to the fourth quarter, which is quite unusual. I'm curious about how we should expect this to unfold as we analyze the second half of the year and consider the anticipated increase in earnings for the fourth quarter.

Nigel, thank you very much for the question. So let me give you some color on Q3 outlook, but also the calendarization between Q3 and Q4. So starting with Q3 on the New Equipment side, we expect revenues to be in line with the midpoint of the guide, around minus 7%, with margin sequentially down. Margin will be around 3% for New Equipment in the quarter. The reason being is because we are anticipating the volumes drop in the second half, and we are executing cost mitigating actions. Among others, we will implement furloughing some production facilities. That will mean that the volume shortfall will be more acute in Q3 and will come back to regular level in Q4. On the Service side, however, as Judy said, we are accelerating execution, both on repair and modernization. They are going to be around 8% growth in the quarter. And we have very good line of sight to execute repair because our ending backlog in Q2 was around 8%. So it's the execution of the backlog, and margin is going to go up sequentially, too. We also have an easier compare to Q3 last year. So total operating profit will be around 2% up, and EPS will be around 5% up. That means that for the calendarization of EPS growth in the year will be $0.03 first half, $0.05 Q3 and around $0.14 Q4. So it is kind of a backloaded profile. And the growth in Q4 is based upon three areas. One is on the New Equipment side, we expect a better stabilization in China in terms of shipments, coming from better liquidity conditions in the market, but we also have an easier compare in China versus Q4 last year. So New Equipment contribution in Q4 will be back to normal levels, around $70 million in the quarter. And on the Service side, we expect an additional acceleration of repair and mod, will be around low mid-teens in the quarter. That implies for repair a ramp-up in orders, but also ramp-up in execution. And we do have the resources. You may recall that last year, we hired around 2,000 mechanics. Those mechanics are productive now. And we are also, this year, selectively hiring in those countries where we see further growth potential of the backlog. And on the mod side, it will be around 15%. This is based upon the acceleration of mod in China on what we call the bond projects. These are the governmental subsidies. And you may recall that last year, we had a similar acceleration because the subsidies come to an end at the end of the year, so they need to be used. And this year, we are planning to do the same with a bigger scale because the program this year is bigger. It's around 100,000 units versus 40,000 units last year. So the acceleration in Q4 is based upon New Equipment, repair and mod.

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

Maybe we could start by discussing the savings from the transformation in China. You have outlined what you’re adding, but what implications does that have for savings that will carry over into 2026? Is there anything we should keep in mind for next year?

Yes. So the China transformation savings at the beginning of the year, we guided $20 million in the year, $30 million run rate. We are executing according to the plan. We have $5 million in the first half of the year, and the remaining $15 million will come in the second half. But because of the more acute decline of volumes, we are taking additional cost reduction actions. That's why we have increased the run rate from $30 million to $40 million. So this is going to be an incremental savings for 2026. And when you step back and you look at our overall picture of New Equipment in the year, New Equipment sales are going to decline around $400 million versus $450 million last year. This is a very similar decline. In terms of contribution, last year, the decline was $44 million. This year, excluding tariffs, it is an extraordinary effect, we are going to decline $60 million. This is an incremental decline of $15 million, but we are facing new headwinds. One is the price because price in the backlog in China became negative last year as we deteriorated prices and market deteriorated prices. This is a headwind of around $100 million BPY this year. And the second one is commodities that last year was $20 million positive. This year, this is flat. But we are only deteriorating incremental $15 million. So this shows you all the cost actions we are taking in New Equipment at our UpLift program, but also the transformation of China and the usual productivity, material productivity actions. So there is a lot of cost mitigation in the New Equipment side.

Yes. Nicole, let me put this in kind of the business perspective versus just the financials. Yes, we made a major organizational transformation change in China as we started the year. We went from basically two separate, almost wholly operating companies with very different brands to being more laser-focused on New Equipment and modernization together in China for good rationale and Service. So we now offer both those brands in Service, and we offer both those brands in New Equipment and modernization. But now we have the ability to optimize, to have our agents and distributors and our direct sales folks make us more customer centric. So we're going through this transition. And at the same time, obviously, market conditions are a headwind in New Equipment. Especially, Service is growing nicely. Modernization is growing very nicely in China, over 20% mod growth in China, over mid-teens portfolio growth in Service. So we are preparing. While we're taking this cost out, we're preparing for and implementing our new China approach to market, which will position us not just for the fourth quarter of this year to get to that stabilization point, but for '26 and beyond to go to market in a different way than we have in the past 20 years.

Okay. That was a very comprehensive answer. Appreciate that. And then just maybe a quick follow-up. The discussion around 3Q versus 4Q cadence is really helpful. Just one follow-up to that. What about the cadence of free cash flow? Does that look more akin to normal seasonality? Or will it look similar to the earnings profile?

Yes. So cash flow in the second half of the year is going to be at the level of the second half in 2024. So we have a good line of sight to deliver as we delivered last year. Cash flow is weaker than what we expected, but it's primarily driven by the business mix. So we have seen New Equipment deteriorating further and Service remaining strong. And as you know, New Equipment is favorable in working capital because of the advance payments, but also because of billing according to milestones. And for example, in the case of China, we don't ship unless we collect. On the other side, in Service, we bill after rendering the service. So this is a headwind in working capital, but it's a temporary one as we stabilize New Equipment. And for the second half of the year, we have good line of sight to deliver the cash flow. There is another component related to our UpLift transformation. We are transforming our processes while outsourcing our collections areas to third party. The transition is progressing very smoothly. We are collecting with no disruption in the business. And we are positive that as we end up the transition towards the end of the year, the support of our new partner is going to help us accelerate and optimize collections even further.

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

Can you guys just talk about how you're set up into like just mechanically what the backlog would suggest for next year in China? And I'm sorry, did you say that the orders there are looking to improve sequentially now? I didn't quite catch that in the beginning on any.

Yes, the orders in China are expected to improve sequentially. Let me provide an overview of the backlog status globally. In the Americas, we finished last year with a backlog down by 4%, which impacted our revenue in New Equipment, particularly in North America. However, we are ending this quarter with a 5% increase in backlog there. This, along with the anticipated orders for the rest of the year, positions us well for 2026. In the Asia Pacific region, we have a strong backlog with double-digit growth, which we are pleased about. EMEA looks fine as we move forward, especially with strong performance in the Middle East, Spain, and other areas. Regarding China's backlog, it contributed around 12% to our global revenue this year, down from 10% last quarter. We're monitoring this closely and making adjustments to our costs as needed. While the modified backlog and service backlog in China will be up next year, the New Equipment backlog is projected to decline.

Okay. So from a profile perspective, is China going to be significant enough next year to completely negate what's happening in the other regions?

We're not going to guide for next year yet, Steve, but the other regions are really growing strongly.

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

Just wanted to clarify, demand in North America, I mean, what you just referenced, backlogs being strong. I think earlier in the call, you kind of talked about some project delays. You mentioned recovery in multifamily. So I wonder if you could just square that circle.

Sure. The June ABI data released this morning showed a slight decrease from May, but there has been an increase in inquiries and momentum for Dodge in June. For the segment, we are still experiencing a slight decline. However, as we approach the end of the second quarter, we are beginning to see some encouraging opportunities in proposal activity and pending awards in North America. The uncertainty we mentioned earlier pertains to our current backlog and the projects underway. Our backlog decreased by 4% in North America for New Equipment this year. We have been shipping from our Florence, South Carolina facility and are ready to install, but some job sites have slowed down. It's not due to our workforce, but there is general concern regarding tariffs and the broader project landscape. Nevertheless, our order volume remains strong, with four consecutive orders in the teens and a 15% increase in New Equipment orders this quarter. Locally, the data supports this, and we are hearing that as tariffs become clearer, there is increased enthusiasm. We are all anticipating how interest rates will evolve, especially with the Fed's actions expected in the second half of this year. Many projects become viable with a small reduction in interest rates, and we are prepared to bid on these opportunities, ready not just to win contracts but to deliver strong performance.

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

I wanted to start with a broader question about free cash flow because, based on the updated dollar guidance for this year, it appears that you have maintained the same level of free cash flow for four consecutive years, despite mid-single-digit sales growth and mid-single-digit plus net income dollar growth during that time. I'm trying to understand what's happening more generally with free cash flow margins or conversion, rather than just in Q2. Is there anything changing in industry dynamics regarding payment terms or competition that you would like to mention?

Thank you for the question, Julian. As I mentioned to Nicole, the business mix is changing. The working capital for New Equipment is currently more favorable compared to Service. In recent years, New Equipment has seen a decline due to the situation in China. In 2025, this situation may worsen because, in addition to challenges in China, we are also experiencing a decline in U.S. sales, which is a result of the negative backlog from last year and delays at job sites due to uncertainties about tariffs. However, this is only a temporary issue. Service is showing strong growth; although we receive payments later, it will just take some time. Once New Equipment stabilizes—as we anticipate since the U.S. backlog has grown by 5% in Q2—we expect the U.S. to stabilize and the situation in China to improve, with orders expected to stabilize towards the year's end. Our fundamentals remain strong; our business models maintain a cash flow conversion rate above 100% due to low capital intensity and lower R&D costs. The current shift in business mix is temporary until we achieve stability in New Equipment.

Yes, Julian, there are no structural changes in payment terms across the industry. Everything remains strong. I want to acknowledge our colleagues for their excellent execution and cash collection, which enables us to share that cash with our shareholders. We are committed to the $800 million share repurchase and our dividend, and I believe we are effectively returning that capital to our shareholders.

That's helpful. And then just a shorter-term question on the operating margin dynamics. Just to understand, so in the first half of the year, the operating margin is up 20 bps or so. And including the Q3 guide, not much. And then you've got this step-up for the whole year guided of including tariffs sort of 30 bps or so. So that margin step-up is happening, I suppose, despite a bigger tariff headwind later in the year. Maybe just help us understand sort of what's the puts and takes there around sort of the degree of tariff margin headwind in the back half of Q4 and what all those countervailing factors are to offset that.

Yes. Julian, you are right. So the tariff impact is going to be in the second half of the year. We are guiding the midpoint of $30 million. Year-to-date, we have had $5 million, $6 million in the P&L. So this is going to be a headwind that we have quantified in around 10 basis points, 20 basis points of margin. But on the other side, the business mix improves in the second half of the year because we are accelerating very strongly repair and modernization, again, on the back of a strong quarter-end backlog growth. And as you know, Service margins are higher, so this is going to be a tailwind. But in addition, we are finalizing the execution of our UpLift program. And we have very good line of sight because most of the actions are now to be executed. They are progressing on plan. And also in China, as I mentioned before, the $20 million in year savings, we have captured $5 million in the first half. So the remaining comes in the second half. So essentially, it's a combination of business mix, productivity and the flow-through of the UpLift and China transformation savings.

Yes. I want to emphasize our confidence in the Service business for the second half of the year. We have a strong backlog and the necessary resources, as Cristina mentioned, and now we will execute. You will see this make a significant impact and guide our performance, allowing us to manage the tariff effects. This will help us return to the outlook that we have now confirmed twice.

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

I wanted to follow up on the prior commentary around margins into the back half. So I guess, is Service mix getting more favorable into the back half versus Q2? Because it seems like much of the uplift in growth from the 4% back to, I guess, something like 6% is driven by mod, which I thought would have been more dilutive to Service margins. Any color on that?

Yes. I mean, the simple answer and the candid answer is it's actually more driven by repair step-up, which, again, we have 8% backlog going into the third quarter. There will be additional repair orders added. The demand we're seeing there is strong everywhere in the world, all four regions, EMEA, AsiaPac, China and the Americas. And that mod will pick up, too. But the relative contribution both in sales and in profits will come from repair.

Appreciate that. And then maybe just on the Americas. Obviously, orders have been pretty good, not converting at the rate expected. I guess, what do you think the market needs to see to start converting those orders? Is it visibility around tariffs? Is it interest rates? Any thoughts on that?

Yes, it's a great question, Chris. We do convert well. The challenge in North America is that it has the longest lead time from when we book an order to when we get to a job site. This is due to various reasons, including permitting and general construction challenges in the U.S. We've been working through a backlog from 18 months ago, and now we've seen four consecutive quarters of order improvements. This will significantly boost revenue for North America starting in 2026. That aspect is not a problem. What we are experiencing is a bit of uncertainty on current job sites from the backlog, as we are not only delivering but also installing, and each job takes another week or two longer than expected. We are not seeing an impact on the margin or labor side because we can adjust our crews, but it does affect the timing of when we realize the revenue.

And our final question comes from the line of Joe O'Dea with Wells Fargo.

Can you just expand a little on where the furloughs are occurring, how long you expect those to be in place at this point?

Yes. So they're temporary, let me be clear, I mean, measured in weeks. And you're mainly seeing them where we're seeing our New Equipment challenges in terms of revenue, North America and China.

Got it. Makes sense. And then just in terms of order expectations as we get into the back half of the year because the first half of the year, pretty stable with total orders down 1% organically. We do get comps that move around quite a bit. And so just any color on how you're thinking about order activity in the back half of the year, if you could revisit. I think you gave a little bit on China that in particular, but then also Americas and EMEA, how you're looking at order trends there.

Yes. Let me start with modernization and then I'll turn kind of New Equipment over to Cristina, and we'll pair up on this one as partners. Listen, the modernization order strength will continue, and you will see that continue globally. And I think you'll actually see more strength coming out of EMEA relative to how they performed in the first half. They had a challenging second quarter, but it was due to a tough compare to a major modernization they won in second quarter last year. So we expect to be talking about EMEA mod orders becoming far more positive, but the other three are on good trajectories to continue at this rate. We've always believed that mod orders, because of the market demand we're seeing, China will be up far more than 20% because you'll see this, we call it this bond mod, this government stimulus mod at 100,000 units available that they have to spend the money by year-end, you'll see that pick up well beyond 20% that we saw last quarter. And as I said, Americas had a phenomenal quarter with 50% plus in North America. I don't expect them to sustain that rate, but I do expect them to be in the teens plus for mod. And APAC has strong mod growth as well. They were 20-plus percent, and they should be at least teens plus. Cristina, I'll let you talk to New Equipment.

Yes. So on the New Equipment side, we have talked about China. China has been sequentially stable in the first half of the year. We expect a ramp-up in the second half BPY back to flat to even slightly positive in orders. The reason for that is, of course, the easier compare, but also the fact that we have been working on the transformation initiatives of New Equipment in the first half of the year, in consolidating the two brands, consolidating agents and distributors. So we are now in very good shape to start getting the results in terms of orders. On the Americas side, Americas has had a super strong performance since the second half of last year. It has been growing mid-teens or above. For the second half of this year, we expect the growth to slow down a little bit, but it's just a matter of the compare because they started growing very strongly last year. So we expect them to be sequentially stable, but the growth will slow down. And then on EMEA, EMEA is expected to be kind of low mid-single-digit up for the year. The reason for that is we have a very strong growth in Middle East. There are certain markets in Europe that are more muted, I'm talking about Central Europe, Western Europe or the North of Europe. But we are also taking selective investments in those markets where we see possibility to grow Service segment, but always with a prospect of converting into Service afterwards.

I will now turn the call back to Judy for closing remarks.

Thank you, Tina. While we face near-term challenges in our New Equipment business, we remain confident in our long-term outlook. The global installed base continues to expand, while the population of aged units presents an attractive and growing opportunity for modernization. Together, these strong fundamentals should continue to drive our Service flywheel. As we look ahead, we're confident our service-driven business will continue to deliver attractive long-term shareholder returns. Thank you for joining us. Thanks to our Otis colleagues, and thank you to our investors.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.