Anurag Maheshwari
Executive Vice President and Chief Financial Officer at Otis Worldwide
Thank you, Judy, and good morning, everyone. Starting with third quarter results on Slide 5. Net sales of $3.5 billion grew 5.4%, and organic sales were up 5.2%, with growth in both segments. Adjusted operating profit was up $52 million at actual FX, and $47 million at constant currency, with margins expanding 60 basis points to 16.9%. Drop-through on service volume, productivity, and pricing in both segments, and commodity tailwinds were partially offset by inflationary pressures, including annual wage increases and higher corporate costs.
Adjusted EPS increased 19% or $0.15, with over half of this improvement coming from strong operational performance, and the rest from a combination of capital allocation initiatives and ongoing effort to reduce the tax rate, which came in at 25.5% in the quarter. Free cash flow came in at $272 million, up $57 million versus prior year, largely driven by higher net income. Year-to-date, we generated $934 million of free cash flow, $81 million lower versus the prior year, driven by lower down payments on fewer new equipment orders and the continued outperformance of a repair business as this work tends to be paid in arrears.
Moving to Slide 6. Let me start by giving some color on Q3 new equipment orders and backlog. In the third quarter, at constant currency, new equipment orders declined 10% versus prior year. Despite this, our new equipment backlog increased 2% with mid-teens growth in Asia-Pacific, mid-single-digit growth in the Americas, and EMEA roughly flat.
China backlog is down low-single digits. Sequentially, outside of China, our new equipment backlog was relatively stable in all regions. Globally, pricing on new equipment orders was up low-single digits, building on a similar increase in the third quarter of the prior year. Excluding China, pricing improved by mid-single digits or better in all regions. Although pricing was down mid-single digits in China due to macro challenges, we remained price cost neutral in the region from our continued focus on driving material productivity.
New equipment organic sales were up 1% in the quarter, with strong growth in all regions outside of China. Asia-Pacific grew low-teens driven by continued performance in India, as well as traction with major projects. In EMEA, new equipment sales grew high-single digits, underpinned by the significant orders over the past several quarters in Southern Europe and the Middle East, while in the Americas, the region grew high-single digits for the second consecutive quarter, executing on its multi-billion-dollar backlog.
We grew new equipment operating profit by $10 million at constant currency, despite China sales coming in weaker than expected. Driving productivity, pricing flowed through from the backlog, and tailwinds from commodities more than offset the project in regional mixed headwinds, leading to a 7.2% margin in the
Quarter.
Turning to Service segment results on Slide 7. Maintenance units were up 4.2% with growth in all regions, led by high-teens growth in China for the fourth quarter in a row. We delivered another strong quarter of modernization orders, up 13%, including China mod orders growing double-digits from continued success of new product offerings. Asia-Pacific also grew double-digits due to a number of volume and major project wins, with standout performance coming from North Asia. EMEA mod orders grew 10% driven by major project wins. At quarter end, our mod backlog was up 15% with growth in all regions.
Service revenue came in better than expected with all lines of business contributing to organic sales growth of 8.4%. Performance and repair was up 8.6% from higher than anticipated repair volumes, and mod was up 7.6% with growth across all regions highlighted by a double-digit increase in Asia.
Service pricing, excluding mix and churn, came in around 4 points, similar to last quarter's performance, and adjusted for mix and churn, was a net 2 points. Higher volume, favorable pricing, and productivity were partially offset by annual wage increases and high material costs, leading to $53 million of service profit growth at constant currency. Service-adjusted operating profit margin expanded 90 basis points in the quarter to 24.8%.
Overall, we are pleased with our results in the quarter as well as year-to-date. We have grown our new equipment and mod backlogs, expanded the portfolio at 4%, and delivered over 10% EPS growth.
Moving to Slide 8 and the revised outlook. Starting with sales, total Otis organic sales are expected to be up approximately 5.5%, consistent with the midpoint of a prior guide, including slight adjustments by segment. Adjusted operating profit growth at constant currency is expected to be $170 million, a $5 million increase versus the prior guide's midpoint, and the result of strong performance in the Service segment.
At actual currency, we expect adjusted operating profit of $2.265 billion, as the better operating performance is offset by a slightly higher foreign exchange headwind, driven by a change in the euro and the weakening of various Asian currencies, such as the CNY. Our margin expectations remain unchanged, with service margins expected to expand 50 basis points to 24% and new equipment margins expected to expand 20 basis points to just under 7%. This puts overall operating margins at approximately 16%, up 30 basis points.
We have grazed our guidance for adjusted EPS, now expected to be up 11% versus the prior guide, to $3.52. This represents a $0.04 increase versus the prior guide's midpoint, largely driven by strong operational performance and improvements in below-the-line items, including tax, now expected to end the year at 26%. We expect to generate approximately $1.5 billion in free cash flow, a roughly 105% conversion rate, and returned substantially all of it to shareholders through $1.35 billion of dividends and share repurchases.
Taking a further look at the organic sales outlook on Slide 9. We now expect new equipment organic sales growth of approximately 3% at the low end of the prior range, driven by larger-than-expected headwinds in China, which we expect to be down mid-single digits. The Americas and EMEAs are still expected to grow mid-single digits organically.
In service, organic sales are expected to be up approximately 7.5%, a 1-point increase versus the midpoint of the prior guide, driven by maintenance and repair. Consistent maintenance portfolio growth and pricing, together with another quarter of strong repair volume, enable us to raise the outlook by 130 basis points to up 7.3% versus the prior guide. Modernization organic sales expectations remain unchanged, up 8% as we execute on a backlog, which was up 15% at quarter end.
Moving to Slide 10. We have raised our expectations for adjusted EPS and now anticipate growth of approximately 11% or $3.52, a $0.35 increase versus the prior year, driven by $0.30 of operational improvement.
In closing, we continue to execute well on the things we can control, and our resilient service business is driving profitable growth in an uncertain macro environment. Our strong year-to-date performance gives us confidence to again raise our EPS outlook and deliver a solid fourth quarter, while positioning us well to perform in '24 and beyond.
With that, Michelle, please open the line for questions.
