Otis Worldwide Corp Q1 FY2026 Earnings Call

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 to everyone. We appreciate you joining us and hope you are all safe and well. Otis had a solid start to the year in terms of orders and sales, with continued demand driving visibility for future growth, particularly in our Service segment. Total organic sales increased by 1% this quarter, fueled by a 5% growth in organic service, showcasing strength across all service lines. Maintenance and repair sales rose by 4%, primarily due to a significant rise in organic repair sales, which grew by about 10%. In terms of modernization, we experienced strong demand with orders increasing by 11% this quarter and our backlog rising by 30% at constant currency. This backlog enhances our future visibility and strengthens our belief in modernization as a long-term opportunity, as the global installed base ages. The new equipment market remains mixed, but we are seeing some encouraging signs of stabilization. Orders grew by 1% at constant currency and by 5% when excluding China. Our backlog increased by 3% year-over-year at constant currency, with an 11% rise excluding China, providing us good momentum heading into 2026 and beyond. While results in China are still challenging, demand in the rest of the world is positive, especially in the Americas, where orders have grown over 20% for the seventh consecutive quarter. We achieved strong cash flow performance with adjusted free cash flow of about $272 million, up 46% compared to the previous year. This is due to a rise in orders, better working capital management, and an ongoing focus on cash conversion. We announced a 5% increase to our quarterly dividend recently, and since our spin-off, our dividend has climbed approximately 120%, reflecting our disciplined capital allocation strategy and commitment to returning cash to our shareholders. During the quarter, we completed around $400 million in share repurchases, maintaining our approach to capital deployment while keeping the flexibility to invest in our business for long-term value creation. We recently made a majority investment in a digital and AI-enabled elevator service provider, which we expect will contribute to our growth by offering a compelling connected solution that complements Otis ONE within our multi-branded portfolio. We are eager to welcome the team and explore the long-term value creation opportunities they bring. We are also focused on enhancing our service capabilities to drive growth and margins, continuing to invest in field and sales resources to bolster our service business. Additionally, we launched two new innovative offerings: the first is Otis Robust, a series of heavy-duty elevators tailored for data centers and other mission-critical environments. The second is Otis Veeva solutions, aimed at promoting safer and more accessible mobility for aging populations, improving usability and accessibility in both existing buildings through modernization and new installations. In terms of orders performance, combined new equipment and modernization orders rose by 4% this quarter, demonstrating ongoing strength in modernization alongside a return to growth in new equipment orders. The combined backlog for new equipment and modernization increased by 9% year-over-year, with our total backlog nearing $20 billion, providing a solid base for future earnings visibility. New equipment orders grew by 1% at constant currency this quarter, with North America performing strongly, seeing over 20% growth, while EMEA experienced low single-digit growth led by the U.K., Central Europe, and Western Europe. However, these gains were somewhat offset by a more than 20% decline in Asia Pacific due to challenging comparisons from the prior year and ongoing softness in China, which faced low double-digit order declines. Modernization remained strong, with orders up 11% at constant currency, largely driven by growth in North America and China, each exceeding 20%. This was partially countered by a decrease in EMEA and Asia Pacific regions due to tough prior year comparisons for major projects. Before moving to financial results, I want to highlight a few key developments from the first quarter. In France, Otis has been selected by the Marseille Metropolitan Transport Authority to fully replace and maintain 51 escalators across 10 metro stations, which includes both standard heavy-duty escalators and additional units engineered for high-demand environments. In the Americas, we've been chosen to supply 46 units for the Austin Convention Center redevelopment in Texas, which reflects a wider modernization trend across U.S. Convention Centers. In China, we'll upgrade 46 elevators in Harbin City as part of a bond-funded residential renewal project, featuring our new Gen 3 Comfort elevators designed to meet stringent housing standards. Lastly, as I mentioned, we've launched our Otis Robust range of elevators tailored for high-capacity, high-traffic demands across various infrastructure markets. These products reflect our commitment to innovation that meets the specific needs of our customers. Turning to our first-quarter results, Otis reported net sales of $3.6 billion with organic sales climbing by 1%. Adjusted operating profit, excluding a $28 million foreign exchange benefit, declined by $38 million this quarter, resulting in a 130 basis points decrease in adjusted operating profit margin to 15.4%. Adjusted EPS decreased by 3%, or $0.03, driven by operational performance but somewhat mitigated by favorable foreign exchange rates. Now, I’ll pass it over to Christina for a deeper dive into our results.

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 gives 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 but 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 margin 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 continuing 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 Cristina 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 costs 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 services 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 costs. 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 the 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 will resume expanding in the future.

Your first question comes from Joe O'Dea with Wells Fargo.

Can we focus on the progression of service margin expansion? I'm trying to understand if this is correct: does it go from about 23% in the first quarter to maybe 24.5% in the second quarter, and then in the latter half of the year, you're expecting year-over-year margin expansion? If that's reasonable, could you provide any details on the factors contributing to the change from the first quarter to the second quarter? It would represent a significant margin increase.

Christina here, thank you for your questions. Let me explain the changes in service margins throughout 2026. We began Q1 with a decline of 160 basis points to 23%, and we expect this to improve sequentially in the upcoming quarters. As you noted, Q2 will likely see a negative EBITDA margin around 24%, stabilizing in Q3 and returning to margin growth in Q4. For the full year, we anticipate margins in the high 24s, slightly below 2025 levels. This adjustment is due to actions we're taking in the first half of the year. Regarding pricing, we are currently experiencing temporary challenges in the Middle East which will balance out for the full year as we are adjusting our contracts for inflation; however, it takes time to align prices with upfront inflation. We are optimistic about our strong sales momentum. Our backlog in modernization and repair is robust, and we expect to start ramping up execution as early as Q2. Considering all of this, along with the returns on our investments and the shifts in our portfolio, we project maintenance sales to grow by 3% by year-end. As mentioned by Unit, we are confident that service margins will return to normal by year-end.

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, we are looking at a 3% growth for the full year, and to address that directly, we have been very focused. While we were disappointed in the first quarter due to the lack of acceleration from our strategic shift last year towards higher value parts of our portfolio, that remains our focus. We are making investments in our people to ensure service excellence, which includes adding maintainers that we haven't billed yet, aimed at enhancing service quality. The key metric I monitor is retention, and I’m pleased to report that our retention rate at the end of the first quarter matched our full year rate from ’25, indicating stability. Comparing first quarter ’26 to first quarter ’25, we see an improvement of about 50 basis points in retention, supporting our confidence that the investments are yielding positive results. We concluded last year with a 94.5% retention rate excluding China. As we continue to add units in higher value countries, we anticipate a corresponding increase in margin contribution and profit dollars. Furthermore, we are focused on micro pricing and are encouraged by the pilots we conducted in the fourth quarter of last year. We are currently extending this approach in our higher-value countries for both maintenance and repair services. As we renew our maintenance contracts, we are seeing them adhere well, despite the pricing adjustments we are making to address the inflationary pressures in the Middle East from fuel costs and other factors, which will positively impact revenue.

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

And Judy, 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.

Do you think the war and disruption affected that specific metric? Or is it related to decision-making or something else? Or is it simply unclear?

I wouldn’t attribute this to the war in terms of portfolio retention. This is about us fulfilling our commitments with exceptional service. Again, we’re beginning to see improvements, Rob. I can assure you that based on our detailed analyses and the retention we’re observing in each of our operating regions. I believe you’ll see those results as the year progresses.

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 the 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 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 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 generic 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, these are the tools you use and you use them 24/7 and when we look at the 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 basis points gain in the Q4 service margin. You're comfortable with Q4 2026 exceeding Q4 2025 even with that gain?

Yes, we are confident that our performance in Q4 '25 will be supported by asset sales, which contributed $50 million from a few transactions. We believe, based on what I have previously described, that we have the backlog and resources necessary to execute successfully. We are optimistic about the positive effects of the pricing initiatives we implemented last year, which will continue to grow throughout the year. Additionally, we plan to introduce further price increases to address the inflation we experienced in Q1 and anticipate for Q2, particularly related to costs from the Middle East. Furthermore, we expect maintenance sales to recover in the latter half of the year. Given all these factors, we are looking forward to an expansion of the service margin in Q4.

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

I just wanted to follow up on that, Cristina. 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 surcharges and some of the cost reductions, that would be helpful.

Thank you, Nigel. Starting with Q1, we initially anticipated a margin contraction of 30 basis points, which stemmed from investments we began last year in Q2 and Q3. We made these investments to boost growth in high-value markets primarily through customer retention. Our business has a high level of stickiness; satisfied customers have fewer reasons to leave. The results from our first pilot have been promising. However, as the year began, we noticed that the headwinds related to our portfolio mix were greater than we had expected. Consequently, we decided to increase our investments since we are encouraged by the results and noted that the retention rate has stabilized. The additional margin deterioration we observed in Q1, which amounted to 160 basis points compared to the initially expected 30 basis points, is due to three main factors: 50 basis points from mix headwinds, another 50 basis points from the incremental investments made in Q1, and approximately 30 basis points from various issues, mainly headwinds in the Middle East. We also experienced shipment delays in modernization and began noticing cost inflation. As we move through the year, we expect service sales to pick up, forecasting about 7% organic growth in the second half of the year, driven by the ramp-up in repair and modernization, with repair projected to grow around 10% each quarter. Repair orders in Q1 exceeded 10%, and we expect modernization to also surpass 10%. Our organization backlog has grown by 30%, and we will see pricing effects as well. Earlier this year, we projected an additional $50 million FIFO from pricing compared to previous figures. We will also implement pricing adjustments to account for inflation related to fuel and logistics. Finally, while this isn't directly related to services, we will also focus on cost reduction efforts to improve operating profit in the second half. We are taking a selective approach to eliminate costs that are not essential to frontline operations, ensuring that we protect frontline sales and field execution while cutting non-frontline expenses.

Okay. Cristina, 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, the reason we are implementing micro pricing is to avoid a uniform approach that could potentially lead to customer attrition, especially for those on the edge. We want to retain those customers by understanding where we can provide value. When assessing repairs that are urgent and immediate, we analyze the price elasticity in real time according to the market, whether it’s in hospitality or healthcare. We are effectively micro-segmenting to better understand value and elasticity. Therefore, I’m not concerned about this. Regarding fuel prices, you’ve likely noticed that many logistics companies are already responding to this trend, and we have 22,000 vehicles at our disposal to transport parts globally to meet customer needs in real time. We have successfully navigated fuel price increases in the past, and we expect to achieve similar results this time without worrying about any factors that could lead to 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 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 Cristina. 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 begin, and then I'll pass it over to Cristina. The repair business is essential, unlike the modernization business. With around 9 to 10 million units now over 20 years old, we are experiencing an increasing frequency of what we call reactive repair. This is an area where Otis has always excelled. As I've mentioned before, it's our highest margin product offering, surpassing maintenance and modernization as well as new equipment. As these units age, they are more prone to breakdowns. Therefore, the demand for reactive repair is robust and growing independently. Additionally, we are introducing what we refer to as proactive repair, which addresses parts obsolescence. Thanks to our Otis ONE platform, which connects over 1 million units, we have the capability to predict when an elevator might shut down or face issues, allowing us to reach out to customers in advance and conduct repairs to avoid shutdowns and minimize downtime. When you combine the reactive and proactive approaches, we estimate the growth rate to be in the teens. This growth is expected to continue, especially as customers defer modernization, whether it's phased or full. Cristina, I’ll let you provide some details on the 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.

I wanted to follow up regarding service margins and understand if there are any changes in the market compared to self-inflicted challenges. Judy, do you see any shifts? Our understanding is that service pricing in China is quite challenging, and there may be increasing pressure on U.S. service pricing. I'd like to know if you agree with that. Additionally, concerning the cost headwinds related to labor, materials, and fuel in service, is that a significant factor as we progress through the year? Cristina, you didn't mention it as a major headwind in the first quarter, but it has been brought up during the call. Does the pricing net of materials and other costs in service contribute positively to margins year-over-year for the remainder of the year?

Let me address the first question, Julian, and thank you for asking. You're the first one who's brought up China this morning. Our service business in China, similar to elsewhere, includes maintenance, repair, and modernization. This is the first quarter since our restructuring in which our service revenue has exceeded our new equipment revenue. It accounts for 52% of our total revenue for the quarter, while China has dropped to 9% of Otis's overall revenue. Our service business continues to grow there, adding more units to our portfolio, though at a lower revenue value and margin compared to higher-value markets. However, the modernization sector in China has made a significant contribution this first quarter. As we've mentioned for three years now, we initiated the bond stimulus that started earlier this year, and there are about 180,000 units for modernization in China this year compared to 120,000 last year. Our mid-first quarter orders in China rose by over 50%, with revenue close to that increase and a substantial boost in our modernization backlog. In the Americas, the maintenance structure hasn't changed significantly. While many independent service providers have been consolidated by private equity, they are essentially the same providers we competed with previously, just under different brands or names. Consequently, we are not experiencing pricing pressure in the Americas. We do have unique customers and key accounts globally with whom we maintain special considerations due to our long-term relationships.

Julian, I can add to what Judy mentioned about pricing. Firstly, we aren't encountering any new competitive challenges in the marketplace. Secondly, pricing is a significant advantage for us this year. We have two main initiatives. The first is the micro pricing we implemented last year, which leverages our AI algorithm and a more value-driven pricing strategy. This allows us to adjust our prices based on customer perceptions and service management agreements, rather than applying a standard approach for everyone. This initiative has contributed to a $50 million improvement sequentially, year-over-year, on top of our usual inflation adjustments in contracts. The second initiative is linked to the geopolitical conflict in the Middle East. While Q1 inflation effects were minimal, contributing to a 30 basis point margin decline that I mentioned earlier, these effects will increase in Q2. This is reflected in our guidance of a 3% to 5% decrease in EPS for the second quarter, which accounts for inflationary impacts. However, we are confident in our ability to recover for the full year as we are already adjusting our pricing strategies, although there is a time lag before we see the benefits. In summary, pricing will be a strong advantage in the second half of the year, benefiting from both macro pricing and the pass-through of Middle East inflation.

That's very helpful. I have a follow-up question, not specifically about this year, but rather a broader one for Judy regarding the service business. You mentioned the strategic shift over the past year. As we look at the medium term for service, do you expect maintenance portfolio growth to be around 2% or 3%, while also aiming to increase ARPU by adding more technicians and other measures? How long do you think it will take for us to begin seeing that higher ARPU coming in alongside the lower maintenance volume growth?

Well, there is lower growth in maintenance unit volumes, which is why we're focusing on value instead of volume. You will begin to see this next year in addition to what we've already projected for the rest of 2026. This will be reflected in our revenue per unit, although we do not report on revenue per unit directly. However, you will notice it in our maintenance revenues, which increased 5% organically this quarter. As Cristina mentioned, this trend will continue to grow due to our backlog. We have visibility on repairs and modernization that will allow us to convert this backlog this year, and this is part of our EPS guidance 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.

Thanks, Nicole. That’s a valid question. I would say retention has stabilized outside of China, which has its own unique structural challenges, including competition and no auto-renewals. Our investments in this area are crucial because they drive retention and enhance our skilled mechanic workforce. Looking at the medium term, beyond this year, retention in the maintenance portfolio is just one aspect. Achieving retention also leads to additional repair work and paves the way for modernization opportunities. This creates a positive ripple effect across our business, as part of our maintenance portfolio comes from recapturing units, which are not all newly sold equipment. They enter our service life at various stages, and we know what it takes to maintain and keep them in our portfolio. Although we won’t specify our medium-term guidance, I believe the pace of investment will slow, and importantly, those trained individuals will transition to billable roles. This could lead to a dual benefit as they become operational, build customer relationships, and contribute to maintenance, repair, and modernization. By having a more skilled workforce, we can better allocate our resources and convert investment into revenue-generating opportunities. Yes. We have colleagues, and I'm thrilled to report that they are all safe. We have teams across the Middle East, including in the UAE, Qatar, Kuwait, Bahrain, and Saudi Arabia, and they are performing well. Revenue from the Middle East represents a low single-digit percentage of Otis' overall revenue, so the regional impact isn't significant. We're actively back on construction sites where our customers need us for new equipment. The Middle East leans more towards new equipment business rather than service because of ongoing construction and substantial investments from governments and commercial entities. We view the current situation as a delay in projects, which is recoverable. Our teams are on construction sites, modernizing buildings, and we've maintained our essential services, similar to our approach during COVID. We are confident that the overall impact will be minimal. However, as Cristina mentioned, if there are disruptions in demand for new equipment projects, we estimate a potential EBIT impact of about $5 million to $10 million in the third and fourth quarters. While we don't anticipate this happening, we wanted to communicate what we're observing.

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. 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 the 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.