Good morning, and welcome to Otis’ Third Quarter 2024 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 it over to Michael Rednor, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Christa. Welcome to Otis' third quarter 2024 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President; and Cristina Mendez, Executive Vice President & 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 additional details on important factors that could cause actual results to differ materially. Now, I'd like to turn the call over to Judy.

Thank you, Mike, and good morning, afternoon, and evening, everyone. Thank you for joining us. I hope all are safe and well. Starting with Q3 highlights on slide 3, Otis returned to topline growth in the third quarter as we continued to demonstrate the strength of our Service-driven business model with solid third quarter results. In Service, we delivered high single digit growth in Q3, bringing year-to-date service organic sales to 6.4% with all lines of business contributing. We achieved maintenance portfolio growth of 4.2% and our modernization backlog increased 12% at constant currency. Through the first nine months of 2024, we have expanded overall adjusted operating profit margin by 60 basis points and achieved adjusted EPS growth of 8.2%. In Q3, we generated $381 million in adjusted free cash flow and completed $200 million in share repurchases. Year-to-date, we've generated approximately $900 million in adjusted free cash flow and returned $800 million through share repurchases as we execute on our disciplined capital allocation strategy. Otis had several exciting accomplishments recently. For example, our manufacturing hub in Korea obtained ISO 50001 certification. Otis now has 11 manufacturing sites certified through the global standard for establishing, implementing, maintaining, and improving energy management. In addition, we announced the expansion of our Bengaluru manufacturing facility. This will increase our capacity and capabilities to help meet the growing residential, commercial, and infrastructure demand for elevators and escalators in India, while also expanding our localized manufacturing strategy in the country. And last, earlier this month, we're proud to name one of the world's Best Employers by Forbes Magazine for the third year in a row, reflecting our commitment to our colleagues' wellbeing. Moving to our orders performance on slide 4. New Equipment orders were down 3% in the third quarter, a sequential improvement versus the…

Thank you, Judy. Starting with Q3 segment sales performance on slide 6, total organic sales growth of 1.2% in the quarter was driven by Service, which was up 7.7%. New Equipment organic sales were down 8.2%, driven by a greater than 20% decline in China as market conditions remain weak, excluding China, New Equipment sales increased low single digits. The decline in China was partially upset by low single digit growth in APAC, driven by a strength in Japan and Taiwan, as well as low single digit growth in the Americas. EMEA was roughly flat, as a strength in Southern Europe was upset by Western and Central Europe. New Equipment pricing was up low single digits in all regions outside of China. Similar to last quarter, China continues to be under severe price pressure, with continuous declines of approximately 10% year-over-year, although pricing was relatively flat sequentially. Service sales were $2.2 billion, with organic sales growth of 7.7%, as we delivered on our expected acceleration from the mid-single digit growth in the first two quarters of the year. We grew in all regions and in all lines of business. Maintenance and Repair increased over 6% in the quarter, supported by continued strong portfolio growth, maintenance pricing up around four points, excluding the impact of mix and churn, and a ramp up in repair volumes. Modernization organic sales accelerated in the quarter, up about 14% bringing year-to-date organic sales to approximately 10% with excellent growth in Asia-Pacific which was up 20% including contributions widely across geographies. Turning to Q3 segment operating profit performance on slide 7. New Equipment operating profit of $84 million was down $20 million at constant currency as tailwind from pricing that continues to flow from the backlog productivity including the benefits of Uplift and lower commodity costs…

Now on slide 8. Before discussing our updated 2024 financial outlook, let me first update you on our industry outlook, including giving some color on how we anticipate 2025 markets to shape up. On the positive side, we now expect the Americas to be roughly flat, up from the prior outlook as customer demand signals are showing signs of improvement. We expect China to be down approximately 15% and this takes our Asia outlook down to a roughly 10% decline. There is no change to our New Equipment outlook in EMEA or APAC. Overall, we expect global New Equipment units to be down high single digits for 2024. Offsetting the pressure on New Equipment markets, the Service market remains resilient, and we expect the global install base to grow mid-single digits this year as units that were booked a few years ago are coming off warranty and converted into the service base. Looking towards 2025, we expect the global New Equipment market to improve despite the New Equipment softness in China. We anticipate the combined Americas, EMEA, and APAC New Equipment markets should be up low single digits in units. China remains a question mark, but at this point, we currently anticipate a decline somewhere in the range of 5% to 10% in units, clearly dependent on the impact of government stimulus measures. Overall, across all regions, we currently anticipate a sequential improvement in New Equipment market growth rates next year versus this year's rates. On the Service side, the installed base should continue to grow at around mid-single digits, a clear demonstration of the resiliency of the industry. We anticipate the modernization market will continue to grow strongly in all four regions. Turning to our financial outlook for 2024, we now expect sales of approximately $14.2 billion with organic…

Thank you, Judy. Taking a more detailed look at our outlook and starting with sales on slide 9. Total organic sales are expected to be up approximately 1.5% driven by solid performance in our Service segment. We expect New Equipment organic sales to be down mid to high single digits driven by a decline in China due to the challenging market conditions that Judy mentioned earlier. Total Asia is expected to be down high teens in 2024 with a strong high single digit growth in Asia Pacific, more than offset by severe declines in China. Our outlook for the Americas, EMEA, and Asia Pacific are unchanged from the prior guidance. Overall, the New Equipment segment has performed weaker than we expected this year, driven by the market situation in China. However, the rest of the world has performed better than we projected at the start of the year and we anticipate the combined growth of Americas, EMEA, and APAC to be mid-single digit up for 2024. Our Service segment continues to perform quite well and has been largely in line with our expectations as we have gone through the year. In line with our prior guidance, we anticipate Service organic sales to grow a bit more than 6.5%. This includes Maintenance and Repair growth of approximately 6% and Modernization growth of at least 9% at or above the high end of our prior range. We anticipate continued modernization sales momentum in the fourth quarter due to the timing of project execution from the backlog. We expect this to be the third year in a row of Service organic sales growth of 6% or better, offsetting the severe headwinds we have faced in New Equipment over the past years, and demonstrating the power and resiliency of our business model. Turning to…

[Operator Instructions] Your first question comes from the line of Nigel Coe with Wolfe Research.

Thanks. Good morning, and I hope all is well. Thanks for the details on FY25, Cristina. So it seems that China fundamentals are starting to really sort of deteriorate. And I'm just wondering the message has been obviously pricing pressure has been offset by deflationary import costs. So I'm just wondering if the OE pressure we're seeing right now, whether that's really a function of lower China margins, not just the mix of China. And I'm just wondering if the pricing is getting irrational and whether there's any changes in strategy over the next year, one or two years within China.

Yes, thanks, Nigel. And good morning. Listen, the New Equipment market, as you heard myself and Cristina say in China, remains weak. It was down 15% this quarter, similar to second quarter. And we think that's how the year is actually going to finish. We are constantly trading off volume, price and liquidity to make sure that our China business remains strong as we go into 2025. We now believe that China segment for 2024 will be at about 415,000 units. As we've looked and as we've shared our New Equipment revenue is down fairly significantly double digit. Our Service revenue is flattish to up slightly. Our portfolio units are still up high teens. So the pivot and the strategy we've been making to Service is working about a third of our revenue now in China is Service. And as you heard Cristina say, we're down $400 million in revenue year-to-date in China. We are going to put in our guide, we're going to be down a $0.5 billion of revenue in China this year and still have organic top line growth for the company. Now, when we look structurally at China, our New Equipment total contribution is really only down a couple of points. So we are still seeing the deflationary environment. We're optimizing commodities to the best of our ability and really trying for and focused on delivering down a few points, even though pricing remains competitive, it has always been competitive in China on New Equipment. We are not seeing irrational pricing. We're seeing sustained competitive pricing and a 415,000 unit market, to me, is still a healthy market in terms of segment size for us to secure the business we want. The Mod market is growing and is picking up nicely and you'll see us drive…

Okay, that's great, Judy. That's great color. Thanks very much. And then just a quick one on Service, the flat Service margins year-to-year. Obviously, you've kept the Service outlook unchanged. Was that sort of your plan for the quarter? And maybe just obviously the Mod mix would have been adverse. So just maybe just a bit more color on terms of the operating average within Service’s and whether the labor inflation is actually getting a bit worse there in terms of impacting the margins, perhaps.

Hi, Nigel. This is Cristina. So on Service margins, they are coming broadly in line with expectations. And in fact, when you see sequentially, they are going up. It was 24.7% in Q2, 24.8% in Q4. And this is thanks to the flow through of good volumes. And you have seen that there was a good ramp up of Service’s in the quarter, coming mainly from the timing of repair and modernization. And we also have a very good performance in price. Price was up in the quarter, approximately four points, including the impact of mix and churn. And we also have productivity and Uplift measure, and all of this is compensating wage inflation that is rolling line with expectation. So I would say very steady state performance in Service, in line with expectations, and this can be even an opportunity for Q4, as we see modernization is ramping up very nicely.

Yes, Nigel, the other thing, if you recall last quarter, we anticipated Repair picking up in the second half of the year and Mod conversion picking up in the second half of the year. Both of those are contributing nicely. Repair was up 10%, really led by the Americas. And Mod, if you look at really how we performed on the delivery side of Mod, we were over 13% in terms of sales. That's going to continue with our backlog up 12%. We keep anticipating Repair to come to normalize, so like a point above Maintenance. But it looks like we'll wrap this year and fourth quarter again with strong Repair, similar to third quarter.

Your next question comes from the line of Jeffrey Sprague with Vertical Research Partners.

Hey, thanks. Good morning, everyone. I hope everyone is well. Hey, Judy, can you also just drill a little bit into mod China? And I guess the specific angle on my question is kind of if we think about mods globally or certainly rest the world, right? We're thinking historically a little bit below New Equipment with the trajectory above New Equipment as you realign the business. Does that playbook exist in the same way, shape, and form in China?

Yes, it does, Jeff, and good morning. So mod margins in China look attractive, like New Equipment margins do in China, relative to the rest of the world. So and we're seeing that play out this year as well. It's early days for mod in China, obviously a younger portfolio, but a portfolio that will accelerate and grow more rapidly when you think about CAGR versus anywhere else in the world. So we're in a unique position to do mod, an industrialized mod with our kits from the start. There's not a lot of old units to modernize in mod. So most of these are our Gen2 units, which means we're going to get the benefits of scale, commodities. We're already handling Gen3 mod on our Gen3 line in our factories in China. So I'm very optimistic about mod in China in terms of available segment, in terms of demand, in terms of rapid growth. And again, what we've seen early orders in October in mod is very promising. This equipment renewal program that I spoke about, just to give you a little context, was announced, I think, in the July time frame. It was for everything from appliances to cars, but elevators and escalators were included, which we thought was very important. The challenge is, obviously, with all these getting the rules out locally, and that has taken a little time. And the reason why I believe our mod orders weren't as strong as they needed to be in the third quarter. You're going to see mod bounce back nicely. We've already seen it in October in China. You're going to see more significant mod orders. As we came into this quarter globally, our mod orders were up for seven or eight quarters double digit. You will see a return to double digit in the fourth quarter. And then the rest of the world, we saw some timing issues in mod in the third quarter, in terms of some major projects. Those have moved to the fourth quarter, but we expect those to come in. And we did have a slight compare with a couple projects in the Middle East from Q3 last year that were pretty significant mod projects. So we'll be back to double digit in the fourth quarter, which means the backlog will remain strong going into next year. And I think what you've now seen is we've proven the conversion. The mod margin for the third quarter in a row, globally, was better than the New Equipment margin. So the strategy we put in place last year to industrialize mod, we're seeing that take hold. And we're seeing mod margins now greater than New Equipment. And we do have line of sight to the 10% mod margins we anticipate in the medium term.

And then just really big picture on China as we sort of step back, right, going from, I don't know, call 650,000 to 415,000 which you characterize are still healthy, I just wonder like big picture though, is that the right number, right? I think the second biggest market in the world is India at like 75,000, right? So if China is overbuilt and the population is shrinking, doesn't that number just have to actually grind lower over a number of additional years?

I think there's a potential for it to grind lower, as you say, Jeff, but it's going to grind lower at a lower rate. You've taken a third of the volume out from 650,000 to 415,000 and next year when we are looking at, again, without stimulus impact down 5% to 10%, what that means is we're actually going to see sequential growth improvement in New Equipment in ‘25 at Otis over ‘24 because of the China not decaying or decreasing as much as it did this year. So when we look at the compares and sit here this time next year, we actually, and we'll give you the guide clearly in late January with all the specifics, but we actually see sequential top line growth improvement in ‘25. We're going to see it in Service and we're going to see it in New Equipment.

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

Hi. Good morning. Maybe I just had one clarification on the sort of fourth quarter operating profit dynamics. So I think you've guided the full year up about $140 million at constant currency. That's on slide 11 and 10. And then I think the nine months was up $96 million on slide 20. So you have this sort of $40 million plus increase year-on-year in Q4, but I think New Equipment's down 20 or 30 in Q4. So it's just sort of a bigger Uplift in service, it looks like, just maybe help us understand kind of what's driving that. And it looks like the sort of general seasonality in the Q4 guide is a bit stronger than your normal seasonality on profits.

Hi Julian, this is Cristina and it's a very good analysis. So as you have said, year-to-date, we have grown operating profit at constant currency of about $96 million, which means margin expansion of $60 million. And when you look into Q4, we expect Service to continue performing very strong, topline to continue growing on the back of good ramp up of repair and modernization. And a good flow through of operating profit with additional margin expansion. Margin is expected in Service to be above 25% in Q4. But it's not driven by seasonality, it's just driven by the performance of execution, ramping up the topline and continually working on productivity. On the other side, on New Equipment , we expect Q4 to be more or less at the same level of topline decline as in Q3, approximately minus 8%. And that means a flow through into operating profit with operating profit margin below 5% because we have the volume and the mix effect. And additionally, we see price and commodities gradually fading out in Q4. But overall, we compensate the declining New Equipment with a very strong performance in Service in order to deliver, as you rightly said, approximately $40 million - $50 million operating profit growth in the quarter.

Yes, and that 25% rate is very achievable based on everything we're seeing, Julian.

Thanks very much for that detail. And then maybe for the 2025 equipment margin outlook, I think, Judy, you had talked about the sort of New Equipment margin when you're thinking about next year and realize it's early, but a good placeholder might be sort of margins next year in New Equipment similar to this second half. So I think it's sort of third quarter, you're running at third and fourth quarter, you're running at sort of mid-single digits there, 6% Q3, and it sounds like 5% or less in Q4 for New Equipment. So sort of five-ish percent margin in 2025 for New Equipment, as it looks today. Just help us understand kind of what's that assuming maybe for pricing and are you planning or starting to enact further cost out measures? There's the Uplift program sort of working through in its second year. Anything happening on there to try and get the sort of nose up on New Equipment margins?

Yes, without guiding, I think you're very accurate in terms of what you're seeing for ‘25 New Equipment margins, again, driven by the impact of mix as China contribution is less. And the rest of the world is now, as Cristina said, over 75% of the revenue for New Equipment. Just so you get a sense, China is going to finish this year all in at 13%, a little over 13% of our revenue. So it's really changed the dynamic. But our Uplift program is on track. Last quarter you saw we updated the outlook and the run rate. And that is holding well, and that will continue to deliver in 2025. And we've planned on that. Before I turn this over to Cristina on maybe a little more color, why don't I just give you a how to sales and the top line look for 2025. So in New Equipment, again, excluding China, our New Equipment backlogs up low single digits. Right now our New Equipment backlogs down three total. And we'll see where the fourth quarter ends up in terms of orders. Our New Equipment topline, we'd expect low single digit growth next year for everywhere outside of China. In China, we would expect along the lines that we saw this year. But we'll, we have to wait and see. We haven't pre-programmed any stimulus. I think we're all waiting to see what happens in next week at the end of the week with the National People's Congress. And we are prepared for the stimulus, whether it comes in New Equipment or mod. We have the capacity; we have the capabilities both in our factory and in our field. So New Equipment i.e. all in the growth we think will be down low to mid-single digits, kind of…

Yes, no, thank you, Judy. And let me comment, Julian, on the profit side, and you had a very good analysis. So as you did recapping the topline, we expect next year low single digit up, that is sequentially slightly better because of less decline or lower declining new equipment. But now on the margin side, Service will continue with margin expansion you recall that we said back in February in our Investor Day that Service was going to grow 50 basis point of annual margin expansion, this year we have overdriven, we are 75 basis point but when you put together ‘24 and ’25, we expect margin expansion of around 100 - 125 points in service. On the other side, new equipment, as you rightly said we have the effect of volumes are mixed but additionally as I mentioned before next year the commodities and price tailwinds that we have benefited this year are going to gradually fade out. So all of these together would mean that the second half of the year [inaudible] rate is going to persist in 2025 and it would mean approximately 50 to 100 basis point of margin decline, but when you put everything together, we have a stronger service segment, a weaker new equipment but overall operating profit is expected to grow mid-single digit next year.

Your next question comes from the line of Joe O’Dea with Wells Fargo. Joe O’Dea: Hi, good morning. Thanks for taking my questions. Can you elaborate a little bit more on Americas and Europe and the growth that you're seeing in the backlog and price versus volume and I think just as we consider multifamily pressure and office pressure but the growth that you're seeing in an outlook for growth into next year? Trying to understand kind of market versus share gain and other factors at play.

Yes, thanks Joe. Listen, in the Americas, I'm really pleased this for -- this is really the first quarter, we're seeing really early projects moving forward again with green shoots. We all know the indicators, ABI and Dodge, I won't repeat them for you. And I know we like to think some are leading, some are lagging. I think that you're going to see this all settle out over the next 12 to 18 months. We are definitely seeing improvement in the new equipment market segment in Q3. You saw our orders were up 23%. We knew we needed that. We said we'd come back in the second half, and we delivered. And actually, in North America, we increased our pricing. It was the best we did anywhere in third quarter. It was low single digit, but it was the best anywhere in the quarter in the world. If you look at Americas for the year, year-to-date, we're down 9.5% in orders. But if you eliminate that large infrastructure job we won in Canada in the first quarter of ‘23, we have shown nice sequential growth quarter after quarter, and we're really seeing more new equipment market stability. And again, we get this from our sales teams. As they're talking to customers, the sentiment has gotten a lot better after the Fed changed the rates. We've got a really strong backlog in the Americas, a good 18-month plus line of sight to perform, even though our backlog's down, because our sales have been up significantly. Our new equipment sales in the Americas came in 6% for the quarter. It was hotter than the prior low single-digit and mid-single digit for the full year. We expect the fourth quarter to be mid-single digit as well. Service sales in the America portfolios…

You will definitely hear more about costs coming out in China, and this is for two reasons. One, we would do this based on the market, but second, with our Uplift program, we're changing the way we work to be more customer-centric, to have common processes everywhere, to have the ability to actually continue to drive significant growth. But in China, we're looking at everything from our operational footprint. We have moved our modernization into our new equipment factories, so any facilities that used to do modernization don't do that anymore, and we're obviously looking at our workforce. I have to give Sally and the team incredible credit for operating under some pretty tough economic times right now. As I said, I think in my first answer, we're trying to balance rational volume with pricing and with our customers' abilities to pay. That's what's really driving our cash guide coming down. We're not going to take business just for the sake of volume to fill factories or to keep the field gainfully employed. We're taking what we believe is smart business that will put us in a strong position to continue to grow our service business in China and get ready for that nascent mod business to really take off. When I think about mod and new equipment, I can't tell you where that crossover is going to happen yet, but when you think about the price of a unit in mod is about the same as the price of a unit in new equipment everywhere in the globe, including China, where our mod margins are highest. And so as that picks up, right now we have 415,000 units in the new equipment segment this year in China. As that mod market picks up, we will hit 415,000 units sometime this decade, just as the mod segment. I can't peg when that's going to be, but we're actually going to have a larger market to serve in China and around the world than we have today.

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

Thank you. I mean, I appreciate all the color on China potential range of outcomes next year. But Judy, I would just be interested in your perspective on the stimulus actions we've seen in China so far. Anything more that you're watching that could come here in the coming weeks or months and ultimately just kind of what it means for China construction. Thank you.

Yes, thanks, Chris. Listen, we are encouraged by what's been announced to date. The key is going to be the implementation methods, the regulations. We're in a regulated environment and how the local governments use the potential liquidity, debt relief, all of that. The announcements that were made are positive. To us, it's now the how. We believe the first indication of this and we talk, yes, we've talked to the party secretaries because we're focused on economic development. We want to grow in China and we will grow in China despite this $0.5 billion of revenue. You will watch our service and our mod business continue to grow and we'll stabilize this new equipment business. Our early look is with the stimulus, with the aging population, we think this is going to actually accelerate modernization more. It's going to allow with the 5,100 white projects for projects to get finished which will give us more confidence in liquidity with some of our customers as well and our key accounts. But the first time I think we're going to know more, Chris, is there's a special meeting in the National People's Congress, the most senior members next week, within a readout next Friday, November 8. So we'll see what happens there. I will be on the ground in China in November. I think it's important to be able to talk to our customers, to be able to talk to our colleagues and thank them for their dedication under this stressful time. And they are delivering. When you think about the decline we've had in the topline, and yet our focus on continuing to deliver for our customers and grow our service business. So I think we'll all know more. We do not anticipate that impacting fourth quarter financials, even if rules come out. If it does, I'll be happy to share that with you in our fourth quarter earnings. We see this more as a potential for ‘25. But in all the color Cristina and I have given you today, because we're not going to guide for ‘25 yet, we have not anticipated any positive impact of the stimulus on China. So when we say down five to 10 next year for China new equipment at the segment level for units available in the market, that does not anticipate any stimulus. Same with the modernization market. There's 10 million units available for service. We added mid to, our service growth this quarter was high teens. So now in China we're up to 425,000 units in our service portfolio. That's still 4% share. We got plenty more we can recapture, plenty more to convert. So we are hopeful, but we need to understand the implementation rules. And most importantly, our customers and the local governments need to do that.

Appreciate that. If I could just follow up on the Americas. You talked about customer better demand signals from customers, if we look at the orders in Americas, it's obviously very sharp rate of change, Q3 up 20, first half down 20. Are you starting to see that better customer demand in Q3, or is that Q3 order number really just a function of comps? And then that improvement is really maybe a Q4 into ‘25 driver. Thank you.

There were certainly some comps. I want to be clear about that. But we are seeing between proposal activity, and we had a lot, and you know, Chris, we get a down payment when we sign an order everywhere in the world, but especially in the Americas, and it's not something that is really negotiable or that we give back if a project gets canceled. So our customers have to have that conviction that their project's going to go. And we had a lot that were just really close, but waiting, I think waiting to hear what the Fed was doing, waiting to see what the economy was doing. But as I said, for all the segments, we're talking commercial, office, residential, infrastructure, and industrial to have turned positive in the market in the third quarter. It's more than comps. Our team's performing, and you can expect that kind of positive performance, regardless of comps, fourth quarter and into next year.

Our final question comes from Patrick Bowman with JP Morgan Chase.

Hi, good morning, Judy, Cristina. Thanks for letting me squeeze in here. Just had one, maybe two, but first one on free cash flow, the $1.4 billion to $1.5 billion this year. Can you talk about what working capital drags embedded in that and parse that out in terms of drivers, maybe size the China down payment drag you called out or anything else unusual depressing this year that should flip around next year to give you better growth? Because I'd assume, and you could correct me if I'm wrong, that free cash flow growth next year should be better than kind of the mid-single digit you expect on operating profits. So just wanted to check on the dynamics there.

Hi, Pat, this is Cristina. And so yes, you are right, the production of the guide to $1.4 billion to $1.5 billion is related to the down payments and the new equipment order situation in China. But overall, when you see our cash flow performance year-to-date, we have generated an adjusted net income of $1.1 billion, $1.2 billion, and $900 million year-to-date cash flow. That means that year-to-date we have built up approximately $250 million working capital. And there are two reasons for that. One is the business mix. On the one side, new equipment declining, especially because of China, and we don't get the down payments. But on the other side, we are growing in service. And the collection time in service is later because we collect when we execute the job, for example on repair. We also have some payables impact because of the ramp up of modernization because of payments to suppliers while we execute the projects but we expect these business mix to stabilize now in Q4 will start collecting the good ramp up of topline in Q3 now in Q4 and overall the $200 million working capital is going to be unwound. So the expectation in the guide is to deliver in Q4 approximately $550 million cash flow that is more less the same level of cash flow we delivered last year in Q3. And then to your question in to 2025, yes, you are right, we should expect that as we stabilize the business mix cash flows to pick up at a faster pay than operating profit flows.

And Patrick from a capital allocation perspective, if you think about it, we're going to do a $1 billion of share buybacks and $600 million roughly of dividend versus this $1.4 billion to $1.5 billion, we have the ability to do that because teams done a great job bringing our cash balance down probably since the first time significantly since spin from a $1 billion to almost $800 million. So we are working every element of this to be able to share to obviously share this cash back with our shareholders.

Makes sense and so conversion next year should be back above a 100% of adjusted earnings?

At least a 100%. We will guide in January.

That make sense and then last one just on service margins, if you could talk about just the factors around why the margin expansion for next year would slow to something less than 50 basis points relative to the 75, you're guiding for this year. Just any color on the factors that were better than expected this year that will reverse I guess next year to make it closer than 50 over the two year period.

Yes, at the end, we are not guiding now is we are just providing some color of the trends and the 50 basis points is what we committed back in the Investors Day and this is going to come and of course on top of that we continue working on the same actions we have implemented this year in terms of price, productivity and Uplift. And we will target to overdrive, but for the time being it is what we can mention.

Understood and modernization business, those margins are expected to continue expanding as part of that guide for next year.

Yes, you'll see that in January, yes.

And, ladies and gentlemen, that does conclude today's question and answer session. And I would now like to turn the call over to Judy Marks for closing remarks.

Thank you, Christa. Our solid results in the first nine months of the year demonstrate the resiliency of our service driven business model. We remain focused on mitigating macro headwinds and further driving shareholder value in order to deliver a strong final quarter and beyond. Our growth in modernization, maintenance, and repair, and the overall service portfolio validates that our flywheel continues to fuel profitable growth. As I close the call, I'd like to take this opportunity to thank Mike for his many contributions to Otis and wish him success in his new role. Stay safe and well, everyone. Thank you for joining.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. And you may now disconnect.