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Otis Worldwide (NYSE:OTIS) reported stronger second-quarter organic sales growth in 2026, driven by its service business, but lowered parts of its profit outlook as investments in service quality, retention initiatives and productivity pressures weighed on margins.
Chair, CEO and President Judy Marks said the company delivered "a solid quarter with a significant step-up in organic sales growth," citing accelerating service revenue, improving new equipment trends and strong cash generation. Net sales were $3.9 billion, with organic sales up 6%.
Adjusted operating profit declined by $32 million in the quarter, excluding a $7 million foreign exchange tailwind, as higher volume and price were offset by inflation, mix and productivity impacts. Adjusted operating margin fell 180 basis points to 15.2%, while adjusted earnings per share declined 4%, or $0.04, due to operational performance, partially offset by favorable foreign exchange rates.
Service Growth Leads Results, But Margins Decline
Otis' service segment remained the company's main growth driver. Cristina Mendez, executive vice president and chief financial officer, said service organic sales rose 9% in the quarter, with growth across all lines of business and regions.
Maintenance and repair organic sales increased 6%, including 3% maintenance growth and 12% repair growth. Mendez said repair delivered its strongest performance in the past 10 quarters. Modernization organic sales increased 24%, which she described as the highest growth rate since Otis' spin-off.
Modernization orders rose 9% in the quarter, helped by significant growth in China and low-single-digit growth in EMEA and Asia Pacific, partly offset by a mid-single-digit decline in the Americas due to a difficult comparison with the prior year. Modernization backlog increased 26% year-over-year at constant currency.
Despite the revenue growth, service operating margin declined 170 basis points from a year earlier to 23.2%. Service operating profit rose $16 million at constant currency to $599 million, as higher volume and pricing more than offset labor costs, strategic investments, productivity headwinds, material costs and unfavorable mix.
Marks said service margins were pressured by labor and material cost increases as Otis ramps operations to execute its repair and modernization backlog. She said the company expects margins to recover in coming quarters as service revenue growth continues.
New Equipment Shows Signs of Stabilization
New equipment organic sales declined 1% in the quarter, which Mendez said was the lowest rate of decline in the past nine quarters. Growth in the Americas and Asia Pacific was more than offset by lower sales in China and EMEA.
Americas new equipment sales increased 10%, supported by backlog conversion and orders growth from prior periods. Asia Pacific sales grew in the low single digits, driven by strength in Japan and India and partly offset by lower sales in Korea. EMEA sales declined 4%, primarily due to weakness in the Middle East and Southern Europe. China new equipment sales declined in the high teens, consistent with the backlog decline, though Mendez said the region showed slight sequential improvement.
New equipment orders declined 5% year-over-year. Double-digit growth in the Americas and low-single-digit growth in EMEA were more than offset by declines in Asia Pacific, due to tough comparisons, and in China. New equipment backlog increased 4% year-over-year at constant currency, or 9% excluding China.
New equipment operating profit declined $30 million at constant currency to $40 million, and margin fell 220 basis points to 3.1%. Mendez said the decline reflected lower volume, unfavorable price and mix.
Service Quality Investments Affect Outlook
Otis said it is investing in service quality as part of a broader effort to improve customer retention and strengthen its operating model. Marks said the company previously outlined a plan to invest $50 million in service excellence and pricing during 2026. Otis invested $15 million in the second quarter and $30 million in the first half, with another $20 million expected in the second half.
Marks said service quality metrics improved in territories targeted by the program, with the company's service quality index up seven points in those operating territories. She said some territories also showed retention improvement, though overall retention excluding China was down in the quarter.
Marks said the timing of retention benefits has shifted, prompting Otis to temper its AI micro-pricing implementation in maintenance. She said the company continues to see strong results from micro-pricing in repair, where pricing actions flow through more quickly because repair backlog is typically executed within one or two months.
Mendez said Otis had expected $50 million of incremental price impact this year, including $35 million from repair and $15 million from maintenance. The repair portion remains in the outlook, while the maintenance micro-pricing upside is being balanced against retention concerns.
Otis also cited productivity and cost headwinds. Mendez said the company now anticipates an additional $50 million impact versus its prior outlook, with $30 million related to temporary ramp-up costs for resources and higher labor rates to accelerate execution, and $20 million tied to material inflation and service quality investments.
Full-Year Guidance Revised
Otis maintained its 2026 sales outlook, continuing to expect net sales of $15.1 billion to $15.3 billion and organic sales growth in the low- to mid-single-digit range. Marks said the company still expects the global new equipment market to stabilize, with growth in all regions except China, and expects modernization to remain robust with double-digit growth across all regions.
However, Mendez said Otis now expects adjusted operating profit to range from down $30 million to flat on an actual currency basis, and down $45 million to down $15 million at constant currency. The revised outlook reflects retention and tempered maintenance micro-pricing impacts, as well as productivity and cost headwinds.
Adjusted free cash flow is now expected to be between $1.5 billion and $1.55 billion. Adjusted EPS is expected to be in a range of $4.01 to $4.05, reflecting the lower operating profit outlook and a $0.04 negative impact from foreign exchange.
For the third quarter, Mendez said service organic sales are expected to remain strong at mid-single-digit growth, driven mainly by repair and modernization. New equipment organic sales are expected to continue improving sequentially. She said total adjusted operating profit is expected to be roughly flat year-over-year in the third quarter, while adjusted EPS is expected to decline at a level similar to the first half due to tax rate timing.
Cash Flow and Capital Returns Remain Priorities
Otis generated adjusted free cash flow of $290 million in the second quarter, up 19% from a year earlier. Marks said the company's cash generation allows it to invest in growth and strategic investments, including the acquisition of a majority stake in WeMaintain, while returning capital to shareholders.
In the first half of 2026, Otis repurchased approximately $800 million of shares and raised its dividend by 5%, returning more than $1.1 billion to shareholders.
Marks said Otis remains confident in its strategy, pointing to revenue growth, improving service quality metrics and progress on operational initiatives. She said the company is working to standardize field and sales processes across its 1,400 operating territories through a service operating model aimed at improving frontline execution.
"While the timing of retention benefits has shifted and we have observed headwinds in productivity and cost, we are as confident as ever in our strategy and our service flywheel," Marks said.
About Otis Worldwide (NYSE:OTIS)
Otis Worldwide Corporation is a manufacturer, installer and servicer of vertical transportation systems, including elevators, escalators and moving walkways. The company designs and supplies new equipment for commercial, residential and industrial buildings, and provides ongoing maintenance and repair services aimed at maximizing equipment availability and safety. Otis also offers modernization solutions to upgrade aging systems and improve performance, accessibility and energy efficiency.
In addition to new equipment sales, a significant portion of Otis's business derives from long-term service contracts and responsive maintenance work.
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