Otis Worldwide: Judy Marks Confirms Retirement While Detailing the $50 Million Margin Drag That Masked a Record Service Quarter
Morgan Stanley's 14th Annual Laguna Conference, September 17, 2026
Otis Worldwide CEO Judy Marks used her appearance at Morgan Stanley's Laguna Conference to walk investors through the mechanics behind a Service margin decline that spooked the market last quarter, while also addressing her recently announced retirement and offering the most granular detail yet on the company's China stimulus tailwind and a new internal initiative called the Service Operating Model.
Retirement Confirmed, But No Immediate Change in Strategy
Marks confirmed this week's retirement announcement but was clear that a transition timeline has not been set. "I'm not going anywhere right now, I'm committed, working hard, but we'll help the Board in terms of assisting in the succession, both internal and external candidates," she said. She framed her tenure around the creation of Otis's Service-first business model since the 2020 spin from United Technologies, noting the company has returned over $8 billion to shareholders via dividends and buybacks. Her parting message to the incoming CEO was pointed: the elevator industry, historically a low-growth business, is entering a multiyear growth phase led by Service, an area where she argued Otis holds structural advantages difficult to replicate, including 45,000 field mechanics and a 2.5 million-unit Service portfolio, the largest in the industry.
The Margin Miss Explained: $50 Million Is Temporal, Not Structural
The most actionable disclosure of the session was Marks's breakdown of the 170 basis point Service margin decline reported in the second quarter. She quantified the drag at approximately $50 million in 2026, attributing it not to permanent cost inflation but to a deliberate decision to accelerate backlog conversion in repair and modernization. That meant deploying higher-skilled labor and subcontractors faster than originally planned, including moving mechanics across borders, from China to Japan, and from Peru to Spain, to keep pace with demand while newly hired mechanics complete their training curve. "We're comfortable our mechanics are at the right place in the learning curve where we hired them in '24, '25 or now in '26, that will take care of that situation," Marks said, suggesting the drag should unwind as apprenticeship classes mature. Investors should note the modernization backlog fell from 30% to 26% of revenue during this conversion push, evidence the investment is translating into throughput rather than sitting idle.
AI Pricing Tempered to Protect Retention, Not Abandoned
Marks pushed back on the narrative that Otis has pulled back on AI-driven pricing, clarifying that repair pricing, which is generated reactively when a unit breaks, continues to perform strongly and is embedded in current backlog. The tempering has been isolated to maintenance contract pricing, where local sales teams have been given discretion to pull back from theoretical AI-optimized price points if doing so risks pushing a customer toward cancellation. "What we've tempered is how much more they think they can get versus the theoretical, what we believe is possible, tempering that with if that's going to push your customer over the line to cancel us," she explained. The company is still capturing annual contractual price increases and surcharges tied to fuel and logistics costs in the Middle East, and is already preparing pricing actions for anticipated material cost increases next year.
Retention: The Metric Investors Should Track Into 2027
Otis disclosed unusually specific detail on how it measures Service quality and its linkage to retention, which slipped from a historical 95%-plus level to 94.5% as of the end of 2025. The company built a four-part Service Quality Index tracking scheduled maintenance visit compliance, checklist completion, inspection pass rates, and elevator downtime, and used it to identify underperforming branches among its 1,400 global operating territories. Investment in additional mechanics lifted the index by 7 points in targeted North American branches, a level Marks said has held steady through September. She was candid that the payoff in retention numbers will lag, with a return to 95% likely landing in 2027, and that the ceiling on retention is real. "You will never get to 100%. I don't think you'll even get to 98%," she said, benchmarking the business against software subscription churn dynamics.
Service Operating Model: The Next Leverage Point on Margin
Marks previewed a new initiative, the Service Operating Model, as the next phase of margin expansion following the earlier UpLift restructuring that centralized non-customer-facing administrative work. Unlike UpLift, this is described explicitly as a process and technology build rather than a restructuring, leveraging agentic and generative AI along with data from 1.1 million connected units on the Otis ONE platform to standardize field workflows across a network where performance varies significantly by branch. The rollout will be sequenced deliberately, starting in the United States before moving to high-value European markets including Germany, France, and Spain. Marks declined to quantify the total margin opportunity from closing the gap between top- and bottom-quartile branches but characterized it as significant, tied to better workload planning and resource allocation.
China: From New Equipment Collapse to Modernization Stimulus Beneficiary
Fresh off a trip to China that included meetings with Premier Li and provincial officials, Marks detailed how thoroughly the business mix has shifted. Service now represents 48% of China revenue, and the installed Service portfolio has grown from 220,000 units at spin to over 500,000 today. The standout data point was the government-funded modernization stimulus, originally aimed at white goods but expanded to include aging residential elevators. Volumes under the program have scaled from 80,000 units in 2024 to 120,000 in 2025 to 180,000 this year, with Otis modernization orders in China doubling in the second quarter alone. Marks said the program is expected to continue into 2027 and potentially expand beyond residential buildings. The dynamic has structurally lowered China's contribution to group New Equipment margin, historically the company's highest, but Marks argued the Service and modernization mix shift more than compensates.
New Equipment Inflects Positive for the First Time Since 2023
Perhaps the most concrete forward signal was Marks's disclosure that group New Equipment orders, down just 1% in the second quarter, will turn positive in the third quarter, the first positive print since 2023. The recovery is being driven by eight consecutive quarters of New Equipment growth in North America, which is now working through an 18-month installation lead time and beginning to overwhelm the drag from China, where the New Equipment market has fallen roughly 45% over five years. China New Equipment now represents 18% of group revenue, down from 33% in 2020. Marks does not expect China New Equipment to return to growth but said stabilization alone would reveal underlying strength in Americas, EMEA, and Asia Pacific that has been masked by the China comparison.
Modernization Growth Set to Moderate From 24% Pace
Modernization sales grew 24% in the second quarter with backlog up 26%, but Marks guided toward mid-teens growth going forward, distinguishing between steadier "volume mod" work such as apartment buildings and schools versus lumpier "major projects" like the Beijing Metro escalator refurbishment, which carry revenue recognition profiles closer to New Equipment. She emphasized that modernization, while margin-dilutive relative to maintenance and repair, is strategically valuable because a large share of the work is performed on units outside Otis's existing 2.5 million-unit Service portfolio, creating a conversion opportunity to capture new long-term Service contracts once the modernization is complete.