Executive Vice President & Chief Financial Officer at Otis Worldwide
Thank you, Judy, and good morning, everyone. Starting with third quarter results on Slide 5. Net sales of $3.3 billion were down 7.6% driven by the broad strengthening of the U.S. dollar, a 7.2% headwind in the quarter. Organically, sales were up 80 basis points, the eighth consecutive quarter of growth driven by Service, which increased over 6%.
Adjusted operating profit, excluding a $50 million foreign exchange translation headwind was up $35 million. Drop-through on higher Service volume, favorable Service pricing, strong SG&A cost control and the benefit from productivity in both segments was partially offset by impact of lower New Equipment volume, commodity price increases and annual wage inflation.
Adjusted SG&A expense was down 90 basis points as a percentage of sales as we continue to drive cost reduction and containment to help mitigate the inflationary headwinds. Despite the challenging environment, we maintained investment in the business and R&D spend and other strategic investments were about flat versus the prior year. Overall, adjusted operating profit margin expanded 60 basis points driven by segment mix, strong Service performance and cost containment.
Adjusted EPS was up 5% or $0.04. An $0.08 headwind from foreign exchange translation was more than offset by strong operational performance, driven by the Service segment, accretion from the Zardoya transaction, and the benefit of $700 million in share repurchases completed year-to-date.
Moving to Slide 6. Q3 New Equipment orders were down slightly at constant currency and up 7.4%, excluding China. Orders in the Americas were up 3% with solid growth in multifamily residential and infrastructure. EMEA orders were up 11% with growth in both Europe and the Middle East. And orders in Asia, outside of China, were up approximately 10% driven by strong growth in South Korea and India.
The strong orders growth over the last 12 months contributed to New Equipment backlog increasing 12% at constant currency with growth in all regions including China, which was up slightly. Backlog in Americas, EMEA and Asia, outside of China was up high-teens.
Pricing trends improved year-over-year in all regions, excluding China, where pricing was flat. Globally, pricing on New Equipment orders continues to accelerate and was up 4%, leading to sequential backlog margin improvement. New Equipment organic sales were down 5% in the quarter as mid-single-digit growth in EMEA and low-teens growth in Asia, excluding China, was more than offset by a 4% decline in the Americas due to a tough compare and delays in building construction and a high-teens decline in China driven by the challenging market conditions.
Sales declined $191 million and adjusted operating profit declined $23 million, largely from the impact of lower volume and related under-absorption. Commodity inflation of $18 million that was in line with prior expectations, was more than offset by productivity and lower SG&A expense.
Service segment results on Slide 7. Maintenance portfolio units were up 3.8% with recaptured units more than offsetting cancellations in the quarter. Conversion rate continues to show improvement this year in China which contributed to mid-teens portfolio growth in the region. Modernization orders growth accelerated to 18% in the quarter with growth in all regions driven by good traction on newer mod package offerings and several major project wins.
Backlog was up 7% at constant currency. Service organic sales grew for the seventh consecutive quarter, up 6.2% with growth in all lines of business. Maintenance and repair grew 5.4% from the benefit of high-single-digit repair volume and growth in contractual maintenance sales that outpaced our unit growth due to improved pricing, which was up 3 points on a like-for-like basis.
Modernization sales continued the recovery that started in Q4 of '21 and were up 10% in the quarter with growth in every region. Service profit at constant FX was up $49 million, driven by the drop-through on higher volume, favorable pricing and productivity, which more than offset the headwinds from annual wage increases. As a result of this, margins were up 50 basis points, the 11th consecutive quarter of margin improvement.
Overall, despite the significant macro headwinds, our year-to-date results are strong. We gained approximately 1 point of New Equipment share, delivered the best portfolio growth in over a decade and more than mitigated $195 million of headwinds from FX and commodity inflation through strong execution to achieve an 8.5% EPS growth.
Moving to Slide 8 and the revised outlook. These changes reflect revised expectations in the China market outlook, the continued strengthening of the U.S. dollar and our focus on productivity initiatives to offset the headwinds. Starting with sales, we are expecting organic sales to be up 2% to 2.5% versus 2.5% to 3.5% previously. This 75 basis point reduction is driven by lower expectations for China New Equipment, partially offset by an improved modernization outlook in Service. The New Equipment margin outlook is down 10 basis points at the midpoint from the impact of lower volume in China offset by cost-containment.
Service margins are now expected to be up approximately 50 basis points, a 10 basis point reduction from the prior outlook, reflecting the mix impact of modernization sales growing faster than the maintenance and repair business. The overall margin outlook remains unchanged versus the prior outlook and is expected to be up approximately 30 basis points to 15.7%.
Adjusted EPS is expected to be in the range of $3.11 to $3.15, up 5% to 7% versus the prior year. This adjusted EPS growth is driven by strong operational execution, accretion from the Zardoya transaction, progress on reducing our tax rate and a lower share count that more than offset $0.47 of headwind from foreign exchange translation and commodity inflation.
We now expect free cash flow to be in a range of $1.5 billion to $1.6 billion versus approximately $1.6 billion previously. Foreign exchange translation continues to weigh on cash flow generation and we anticipate a moderate build in inventory heading into 2023 to support project execution on the growing backlog.
On capital deployment, we are increasing the share repurchase target to $850 million, having already completed our previous outlook of $700 million in the first three quarters. This is an over 2 times increase from the $300 million to $500 million guidance we had given in the beginning of the year, and combined with a 20% dividend increase, underscores our commitment to return cash to shareholders.
Taking a further look at the organic sales outlook on Slide 9. The New Equipment business is projected to be down approximately 2.5% versus down 0.5% to 1% previously. We now expect Asia to be down approximately 6% from down low-single-digits, previously driven by China. Despite our backlog being up slightly versus prior year and up from the end of '21, we now expect Otis China organic sales to be down 10% driven by the shift of project execution to the right and lower market expectations now expected to be down roughly 15%. This has been partially offset by improved outlook in Asia Pacific from the benefit of strong orders growth momentum in India and South Korea. The New Equipment outlook in the Americas and EMEA is unchanged, expected to be flat and up low-to-mid single-digits, respectively.
Turning to Service, we now expect organic sales to be up 6% to 6.5%, an improvement of 50 basis points at the low-end, driven by a conversion of modernization backlog that is up 7%.
Moving to Slide 10. We expect adjusted EPS growth of 5% to 7%, an $0.18 increase at the midpoint. We expect to more than offset the $110 million headwind from commodities with $230 million to $250 million of operational improvement from higher Service volume and pricing, productivity in both segments and other cost- containment actions resulting in profit growth of $120 million to $140 million at constant currency. This is $5 million lower than our prior outlook at the midpoint driven by reduced China New Equipment volume expectations that we are partially mitigating through better cost containment and productivity.
Accretion from the Zardoya transaction, over 2 points of tax rate reduction versus last year, and the benefit from over $1.5 billion of share repurchases since spin, partially offsets the $0.29 or $175 million headwind from the significant strengthening of the U.S. dollar. We have now assumed the euro at 0.97 for the fourth quarter or 1.04 for the full year.
Overall, since 2019, this outlook represents 50 basis points of annual margin expansion and low-teens three-year adjusted EPS CAGR, reflecting the execution of our long-term strategy and our ability to mitigate the macro challenges we have faced. We feel confident that this momentum along with our growing backlog and Service portfolio sets us up well to deliver strong financial performance in 2023 and beyond.
And with that, I will request Norma to please open the line for questions.