Judy Marks
Chair, Chief Executive Officer and President at Otis Worldwide
Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well.
Starting with the second quarter highlights on slide three. Otis delivered a strong second quarter and a successful first half of the year. In Q2 we grew organic sales high single digits in both segments, expanded adjusted operating profit margin 20 basis points and achieved 7% adjusted EPS growth. This performance again demonstrates the strength of our strategy and our ability to execute and deliver. We have momentum going into the second half and beyond as New Equipment share was up slightly in the quarter and up about 50 basis points in the first half. We grew our maintenance portfolio 4.2% and continue to grow our New Equipment and modernization backlogs. We generated $409 million in free cash flow in the quarter and returned $175 million to shareholders through share repurchases, taking year-to-date repurchases to $350 million.
From an innovation standpoint, this quarter we launched our latest elevator in North America, the Gen3 Core, designed specifically to address the needs of customers in the large two to six storey building segment. Gen3 Core is built off the proven design and flat belt technology of Otis' Gen2 family while also being equipped with Otis 1, our IoT platform. Gen3 Core will be manufactured in Florence, South Carolina and sales will begin this fall.
Here are some exciting customer highlights from the second quarter. In Montreal, Otis Canada was selected to provide 28 units, including 11 SkyRise units to the Hopital Vaudreuil-Soulanges. Hospitals require reliable transportation between floors at all times and we're excited to be a part of this important healthcare initiative, expected to open in 2026. It's our latest collaboration in Canada with general contractor Pomerleau. In Egypt, Otis will provide a total of 57 units for the iconic Tower in El Alamein, including SkyRise and Gen2 elevators, as well as our Link escalators. At 267 meters, this will be the second tallest tower in Egypt and will offer more than 200,000 square meters of housing as well as services and leisure.
In China, another 280 elevators and escalators from Otis will keep people moving along Tianjin Metro's new line seven. This project will bring the total number of Otis units on the city's expanding subway network to more than 1,800. Since it opened, Otis equipment has kept Tianjin metro passengers on the move, and has been a critical part of the country's transportation network since 1984. And as the Indian government continues to invest in transportation infrastructure, Otis will install 255 units, including our heavy-duty public escalators and Gen2 elevators for the new Bhopal and Indore Metro. This is the first Metro Line in the State of Madhya Pradesh and is expected to serve 500,000 passengers daily. All the equipment will be manufactured at our factory in Bengaluru.
We made progress on our ESG priorities and in the second quarter, received Zero Waste to Landfill certification for all three of our Spanish factories from AENOR, the Spanish Association for Standardization and Certification. This is important progress towards our goal of achieving 100% factory eligibility for Zero Waste to Landfill certification by 2025. In addition, our factory in San Sebastian, Spain, received its LEED Platinum certification, the first factory in Spain to receive this designation. The facility opened last year and was designed to reduce environmental impact in the construction and operations through materials used and its waste control system. San Sebastian are fifth factory to achieve LEED certification. We continue pursuing ways we can improve our environmental impact, which is an increasing focus of our colleagues, customers and shareholders.
Moving to slide four, Q2 results and 2023 outlook. Overall, organic sales increased 9.5% with all geographic regions exhibiting strong New Equipment organic sales growth in the quarter. And in Service, all lines of business contributed to our best service organic sales growth performance since spin. We grew our adjusted New Equipment backlog at constant currency by 5% compared to prior year and 3% to the prior quarter, despite the tough compare on New Equipment orders which were down 12%. We continued the strong trend in modernization with orders up 16% at constant currency and backlog up 14% in the second quarter. This is the fourth consecutive quarter of 10% or greater mod orders growth. We grew adjusted operating profit by $60 million and expanded margin by 20 basis points. We generated $409 million of free cash flow, a conversion rate of 109% of GAAP net income.
Before sharing our updated 2023 outlook, let me update you on our current geographic outlook for New Equipment markets. In Asia-Pacific, there's no change to our previous outlook. We expect the New Equipment market to grow mid single-digits or better, led by India. In EMEA, the market is now expected to be down high single digits in 2023, worse than our prior expectations of down low to mid single digits. This decline is driven by Northern Europe as customer delays in buying decisions persist. The Americas market has weakened over the past few months and we now expect it to be down high single digits in units. From an end-market perspective, this decline is driven by multifamily residential coming down from a high level over the past two years, slightly offset by a more resilient commercial market. And finally, in China, we now expect the market to be down 10% compared to our prior guide of down 5% to 10%. This decline is primarily driven by a lack of momentum as we exited the second quarter at a weaker run rate than we had anticipated. Despite the weakening of the New Equipment markets globally, we've maintained a strong backlog, giving us good visibility to future sales growth. On the Service side, there is no change to our outlook for global installed-base growth of roughly 5%, led by Asia.
Our strong performance in the second quarter and the progress we've made on our strategic imperatives, gives us confidence to improve our 2023 outlook. Organic sales are now expected to be in the range of 4.5% to 6%, with net sales in a range of $14 billion to $14.3 billion. Adjusted operating profit is expected to be $2.25 billion to $2.28 billion, up $155 million to $175 million at constant currency. Adjusted operating profit at actual currency is expected to be up $125 million to $155 million, including a $20 million to $30 million headwind from foreign exchange translation. We're raising our guidance for adjusted EPS, and it's now expected in range of $3.45 to $3.50, up 9% to 10% versus the prior year.
Lastly, our expectation for free cash flow remains unchanged at about $1.5 billion to $1.55 billion or approximately 105% to 115% conversion of GAAP net income. We continue to prioritize returning cash to shareholders and I'm pleased to share we're increasing our share repurchases this year to $800 million.
Turning to slide five. As announced earlier today, we're launching a program called UpLift to transform our operating model, to continue to drive sustainable profitable growth within our business. After three-plus years as a public company in which we've grown New Equipment share, expanded operating margins, grown EPS, built a formidable backlog and returned approximately $2.7 billion in cash to shareholders, we're designing Otis for the next phase to ensure high performance and resiliency, regardless of the economic environment we may face in the future. We're launching UpLift to drive efficiency across the organization while continuing to prioritize the customer experience. Going forward, we expect our sales specialization to continue to accelerate our growth, our innovation cycles to continue at a rapid pace and our customer intimacy to continue unabated. Our management team is laser-focused on ensuring that our operating performance can achieve a new higher-performance tier through the transformation of our financial processes, improving our supply chain procurement and rightsizing our cost base where needed among other aspects of the program. Throughout the next two years, we expect the program to generate approximately $150 million in savings, as we drive efficiency across the organization. Our plan is to update our shareholders at regular intervals on the progress we're making with this program and ultimately you'll see the results in better performance, growth, operating profit and returns for our shareholders.
With that, I'll turn it over to Anurag to walk through our Q2 results in more detail.
