Q4 2020 Otis Worldwide Corp Earnings Call
Okay.
Good morning, and welcome to Otis fourth quarter 2020 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 Dot Otis dotcom.
I'll now turn it over to Stacy Laszewski Vice President on S. P. E. S. P N E and Investor Relations.
Thank you Justin and good morning, everyone. Welcome to Otis is fourth quarter 2020 earnings conference call on the call with me today are Judy marks President and Chief Executive Officer, and Rahul Guy Executive Vice President and Chief Financial Officer.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and significant one time nonrecurring items. The company will also refer to adjusted results were adjustments were made and so Otis was a standalone company in the current period and prior year. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners on the presentation.
Contains forward looking statements, which are subject to risks and uncertainties.
Just one SEC filings, including our form 10-K upcoming annual report on form 10-K, and quarterly reports on the form 10-Q provide details on important factors that could cause actual results to differ materially with that I'd like to turn the call over to Judy.
Thank you Stacey and good morning, everyone. Thank you for joining us and we hope that everyone listening is safe and well.
I'm pleased we have delivered a strong quarter and a solid year.
Spite the challenging environment, our 2020 results demonstrate the resiliency of our business and the benefits of becoming an independent Otis. We grew adjusted earnings for the second year in a row generated $1 $3 billion of free cash flow expanded our product and service offerings and remained agile to support our.
<unk> as the pandemic evolved.
We expanded adjusted margins by 70 basis points in 2020, following eight years without margin expansion at the segment of U T C demonstrating the benefits of our independence.
I could not be prouder of our 69000, Otis colleagues, who rose to the unique challenges presented throughout the year and never wavered and their commitment to provide essential services to our customers and.
And we did this while staying true to who we are recognizing the challenges within our communities and allowing our Otis absolutes to keep each other safe and guide our actions and behaviors toward a more equitable future.
For the full year organic sales were down two 1% at constant currency adjusted operating profit was up $52 million $17 million improvement from the midpoint of our prior outlook.
Margin expanded 70 basis points, reflecting the strong performance in our service segment throughout the year.
Adjusted EPS was $2.52 up 28 cents or 12.5% versus the prior year and a 10 cent improvement from our prior outlook now.
Now turning to page four.
In our new equipment segment, we grew share by 60 basis points with growth in all major regions.
We proudly mark the 20th anniversary of our Gen. Two platform and he had a major milestone surpassing more than 1 million Gen. Two units delivered to date.
We continue to innovate introducing new solutions for customers for example, in India and other developing markets. We introduce the gen. Two prime a low cost entry level elevator and in China, We began shipping new equipment units enabled with our Iot platform Otis one this.
This year, we'll expand this offering to include shipping Iot enabled units in the U S Asia Pacific and EMEA.
And we continue to pilot Gen 360, our next generation digitally native elevator that brings the advantages of connectivity into a new more compact platform.
We anticipate formally launching this transformational solution in the EMEA region later this year.
We enhanced our sales force its ability to address the market by increasing sales coverage mid single digits, including adding more than 850 agents and distributors in China and implemented tools to improve efficiency on the backend today more than 85% of our business is on a common CRM system and we continue to find new way.
To reach customers in this dynamic and more digitally enabled environment.
Service is the core of our business in 2020, we added to our industry, leading maintenance portfolio by approximately 2% with growth in all major regions, including high single digit growth in China.
This growing portfolio, which accelerates our recurring revenue business model, along with cost containment actions and productivity initiatives allowed us to grow earnings. This resulted in adjusted margin expansion in all four quarters and 110 basis points of expansion for the year.
I'm pleased with our progress made on the Iot deployment, we added approximately 100000 Otis one units as planned bringing us to approximately 540000 connected units over the medium term, we plan to accelerate portfolio connectivity to approximately 60% of units up from the roughly 25% Kirk.
Connected creating value for our customers and productivity benefits for Otis.
This year organic modernization sales were flat globally as we faced project delays in some regions due to COVID-19, However, modernization demand in Asia Pacific was particularly strong with orders up approximately 30% and sales up double digits, driven largely by regulatory demand.
Our operational initiatives generated favorable outcomes, we're very focused on material and service productivity to offset headwinds from labor inflation in commodities.
<unk>, 70% of our service cost basis, labor and approximately 70% of our new equipment cost basis material.
We have material productivity initiatives to more than offset any potential impacts from raw materials and in 'twenty 'twenty, we achieved our goal of 3% material cost savings, helping to offset some of the volume headwinds in new equipment.
The early actions taken by our supply chain team leveraging our scale rationalizing spend and taking cost out of products provided the protection and assurance even during COVID-19 that we would deliver on commitments made to customers.
Our focus on cost containment extended to adjusted SG&A, where we reduced expenses by $38 million versus the prior year, while expanding our sales coverage.
As noted we generated $1 $3 billion in free cash flow with conversion of 143% exceeding our prior outlook by $150 million.
We channel of our strong cash generation into our capital allocation strategy, including bolt on acquisitions to increase our scale and density $350 million to repay debt head of our original schedule and returned approximately $260 million to shareholders through dividends in the last three quarters of the year.
We made significant progress on our tax structure throughout the year, reducing our adjusted tax rate by 370 basis points versus prior year, and 260 basis points better than Investor day expectations.
We expect over the medium term to bring our adjusted tax rate to a range of 25% to 28%.
And as a final comment to 'twenty 'twenty and amid promising news of vaccine approvals and distribution plans. The three month study using scientific data and analysis on elevator airflow sponsored by Otis and led by Purdue University Professor and indoor air quality expert.
<unk> the elevators have significant air exchange by design and required by code and a short elevator ride has a risk of exposure level less than that of outdoor dining.
Turning to slide five and starting with the industry's outlook.
While market dynamics remain fluid the industry's long term fundamentals remain solid we are encouraged by the pace of recovery and signs of wider availability of COVID-19 vaccines.
The industry's new equipment segment is expected to return to growth in all regions with mid single digit growth in Asia low single digit growth in EMEA and slight growth in the Americas. The recovery in new equipment will continue to feed the global installed base and present future service opportunities.
The core of our business is based on our service model and the service market itself is expected to grow about 1 million units per year globally industrywide.
Industry install base in the Americas is expected to grow low single digits.
EMEA, we're roughly 50% of the Otis maintenance portfolio sits is expected to grow low single digits and in Asia, We're expecting mid single digit growth driven by China.
At Otis we are confident in the momentum we built in 2020 and our ability to execute on our long term strategy.
Looking specifically at our 'twenty 'twenty, one Otis outlook.
For the year, we expect sales growth of four and a half to six 5% with organic sales growth of 2% to 4%.
Adjusted operating profit is expected to be up $125 million to $175 million and adjusted EPS is expected in a range of $2 67 to $2 77 up 6% to 10% versus prior year and 20 cents at the midpoint.
Lastly, we expect free cash flow to be robust in a range of $1 3 billion to $1 $4 billion with conversion of approximately 120% of GAAP net income.
We will remain disciplined on our capital deployment and are well positioned to start share repurchases following $150 million of debt repayment that was already completed in January.
The foundation, we built this year as an independent company along with the expected recovery in our end markets gives us confidence that our strategy is working for our customers and shareholders are operating leverage our global footprint. Our successful innovation program, our capital management and strong balance sheet.
And our industry, leading colleagues give me full confidence we can deliver on our outlook. This year and many years beyond with that I'll turn it over to rule to walk through our results in 'twenty 'twenty one outlook in more detail.
Thank you Judy and good morning, everyone, starting with fourth quarter results on slide six.
Net sales returned to growth in the quarter and were up 4.2% creep on $5 billion.
Organic sales were up one 3% driven by a strong recovery in the new equipment business, partially offset by the expected decline in the service segment.
Adjusted operating profit was up approximately 8% or $36 million and up $19 million at constant currency as higher new equipment volume and strong material and service productivity was partially offset by the impact of lower sales volume unfavorable price mix.
And field inefficiencies in the new equipment business.
Our focus on execution grew 50 basis points of margin expansion in the quarter.
Fourth quarter, adjusted EPS was up 40% on 19th.
Driven by five cents of operating profit growth and 11 from a lower adjusted tax rate.
As Judy mentioned earlier. These results were 10 cents ahead of prior outlook driven by better than expected growth in the new equipment business increased benefit from material productivity and a slightly better service pricing environment.
Moving to slide seven new equipment orders were down three 5% at constant currency as strong order intake in EMEA and Asia, driven by China that was up double digits was more than offset by a 21% decline in the Americas due to a tough compare and weakness in the northeast and.
Larger metropolitan areas in the Western region of the United States.
Awards, which typically precede order booking by a couple of months with stable in the quarter in North America.
Net book margin adjusted for mix was down 50 basis points in the quarter and backlog was up 2% at constant currency driven by growth in the Americas, Europe, and China with overall backlog margin down slightly versus the prior year.
New equipment organic sales were up four 8% with Americas, and EMEA up about 18% and 5% respectively, driven by strong backlog conversion.
This growth was partially offset by a decline in Asia.
At constant currency adjusted operating profit was up $7 million in the segment and margin expanded 20 basis points as higher volume and strong material productivity more than offset incremental investments in China due to another agent and distributor channel unfavorable price mix and inefficiencies.
Service segment results on slide eight.
The number of units under maintenance contracts increased by 2% and modernization orders were up four 9% at constant currency.
Double digit growth in Asia, driven by the mandated regulatory upgrades insider markets was partially offset by lower order intake in the Americas and EMEA.
Service organic sales were down one 4% in the fourth quarter with contractual maintain its demand up slightly while discretionary repair and modernization projects were pushed out.
However, we were encouraged by the repair business improving sequentially over the prior period with a lower year over year rate of decline compared to the second and the third quarter.
Adjusted operating profit margin expanded 70 basis points and profit grew $8 million at constant currency a strong contribution from productivity was partially offset by the impact from lower volume.
The service pricing environment, excluding the impact of price concessions was modestly favorable.
Overall full year results on slide nine reflect solid performance with $52 million of adjusted operating profit growth at constant currency and 70 basis points of margin expansion.
Despite organic sales being down two 1%.
The service business was particularly resilient.
<unk> adjusted operating profit at constant currency by $55 million and margin by 100 basis points, notwithstanding a slight decline in organic sales.
As our focus on productivity initiatives continued to yield results with maintenance hours per unit down close to 6% versus 2019.
Despite this environment, we are pleased with the operational progress we made in new equipment business.
Operating profit was down $45 million at constant currency on 4% organic sales decline with decremental margins more or less in line with our contribution margin.
We achieved the goal of 3% on material cost savings in 2020, partially.
Partially offsetting the headwinds from COVID-19 pandemic that resulted in lower volume the associated under absorption of costs field inefficiencies and higher bad debt expense.
Cost containment efforts were also a large contributor to profit growth and full year adjusted SG&A expense was down close to $40 million versus prior year.
At the same time, we maintained investments in R&D and other strategic project at one 6% of sales, which was about flat versus the prior year.
Full year adjusted EPS was up 12, 5% or 28 cents whats the prior year.
Driven by seven tenths from strong operating performance and 15 cents on the progress, we're making on reducing our adjusted tax rate.
370 basis points to 31, 4%.
Net interest was also favorable by six cents, reflecting the benefit of $350 million of debt repayment and $500 million of refinancings during the year.
This EPS performance is not only better than the outlook provided in October but also better than the pre COVID-19 outlook provided in February on our Investor day, and gaps a successful first year as a public company.
As we look forward to 2021 on slide 10, we feel confident of growth across all key metrics.
Given the higher starting new equipment backlog resiliency of the maintenance business in 2020, normalizing job site and building access levels and our focus on operational excellence.
Service Callbacks are proxy for repair volume is also showing continued sequential improvement.
Even though the rate of improvement slowed in Q4 due to the resurgence of COVID-19 pandemic, we do expect year over year compares to unfavorable in the second quarter of 2021.
These encouraging trends combined with the strong foundation, we built in 2020 gives us confidence to grow overall organic sales of 2% to 4% with adjusted operating profit by 125 $175 million with 30 to 40 basis points of margin expansion.
We expect sales operating profit and margins to improve in both segments.
Adjusted EPS is expected to be in a range of $2 67 to $2 77.
Up 8% or 20 cents at the midpoint.
This year over year increase is driven by strong operating profit outlook and a 90 basis point reduction in the adjusted tax rate to 29, 5% on.
Actually offset by $12 million increase in interest cost on the full year impact of debt placed on spin.
We expect free cash flow in a range of $1 <unk> $1 $4 billion with conversion at approximately 120% of GAAP net income.
This reflects the strong earnings growth outlook, partially offset by incremental interest and non recurring tax related payments in 2021.
Given our strong working capital performance in 2020, a reduction of more than $90 million or close to 25% from 2019 year end balances with holding working capital flat in 2021 at the midpoint of our outlook.
On capital deployment plans remain on track and we have completed the previously disclosed $500 million of debt repayment with a $150 million payment in January and expect share repurchases of $300 million in 2021.
Ear ahead of the original schedule at spin.
Taking a further look at the organic sales outlook on slide 11.
The new equipment business is projected to be up between two 5% driven by accelerated conversion on the backlog that was up 2% in 2020 and the expected return to growth in the market.
We expect broad based recovery with all three regions returning to growth in 2021.
Americas up low to mid single digits, EMEA up low single digits and Asia up mid single digits driven by growth in China.
In the service segment, we expect maintenance and repair sales to be up 2% to 4% with maintaining sales growing from a stable base and recovery in discretionary repairs that will accelerate post Q1.
Modernization sales should be up low to mid single digits with Asia Pacific maintaining the growth momentum from an effective go to market strategy to tap into the demand created by the regulatory requirements and other regions returning to growth.
As they convert the higher year end backlog.
Overall, the sales growth of two 4% represents a solid turnaround after a difficult 2020 with growth across all regions and all lines of business.
Switching to operating profit on slide 12.
We expect operating profit to be up $125 million to $175 million and up $75 million to $125 million at constant currency.
Selecting the benefit of volume returning to pre Covid levels and continued strong contribution from material and service productivity.
To offset the headwinds from pricing in the new equipment market.
Increases in commodity prices.
GAAP op and maintenance expenses and incremental standalone costs in the first half of the year.
This outlook represents the third consecutive year of strong earnings growth as we continue to execute the basics deal with the challenges leverage the investments we have made in the business and benefit from a market recovery.
And with that I'll request, Justin Please open the line for questions.
And thank you.
And as a reminder, we ask that you. Please limit yourself to one question to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster and once again that is star one if you'd like to ask a question.
And our first question comes from Jeff Sprague from vertical research. Your line is now open.
Thank you and good morning, everybody.
On Jeff.
Good morning, I'm wondering if you could just elaborate a little bit more on.
I guess, it's kind of a multifaceted question, but all of this is somewhat interrelated.
The topics of unfavorable price mix in some of the pressure you might be seeing on the OE equipment side.
And how that dovetails with your productivity efforts to offset that.
Sure.
Morning, Jeff So we've seen earnings momentum going into 2021 with earnings up close to $50 million in the second half of 2020, and we are projecting to continue on this momentum into 'twenty. One. So if you look at the new equipment segment due to a couple of drivers that are driving the growth in 'twenty one on the lending side.
The biggest piece of that as the segment returns to growth in 'twenty, one after a challenging 2020.
Between our hospitals and organic sales growth at the midpoint and the dropped who will get from that is is a strong contributor to earnings growth along with strong material productivity. We still think we can deliver the 3% material cost productivity.
After absorbing the impact from commodity headwinds and this along with the restructuring actions that we took last year will help us offset the incremental standalone cost headwind from some of the actions that we took on some of these short term actions that we took last year to protect the earnings and any adverse pricing debt that may materialize, I mean, the pricing was more or less.
Stable I mean, we were down slightly on the backlog. So we expect some headwinds on pricing, but we obviously are building that into our into our guidance. So the key here is that being able to grow margins on the new equipment side. Despite the commodity headwinds increase in standalone cost temporary costs coming back and the pricing pressures.
This has been a key part of our strategy we've been talking about it since our first earnings call back in April last year that we understand the challenges we are facing and we have these operational excellence programs that we're working on whether its backlog acceleration or material productivity due to deal with anything that may arise. So we feel good about where we stood jet so territory right now let me.
Let me just add one thing Jeff it's when we stood up at Investor Day, I think you heard or hold on I. Both set a target to end 'twenty at a higher backlog and to go into 'twenty, one with a higher backlog than we entered 'twenty and that was something we've reiterated at every earnings call and with this 2% and improved backlog conversion, we really think that's going to make a dip.
And new equipment in terms of driving the revenue and then we'll get the flow.
Defaulter.
And maybe just one kind of related follow on it have you found debt.
Your.
Actual realized margin is consistently coming in above kind of the booked margin at the time of order and how that how did that play actually through the year and in the quarter.
Yeah, no it's coming in.
No our our operational excellence not only.
<unk> is based on what we do in the factory, but also it's equally important what we do in the field and we track that very very closely Jeff every month every quarter. We get reports from every country around the world and are delivered margin consistently is above our booked margin so that and that will be that we'll continue to push that.
And along with pushing material productivity in the field as well so the booked the delivered margin is higher than our book margin.
Great. Thanks, a lot guys appreciate it.
And thank you and our next question comes from Nigel Coe from Wolfe Research. Your line is now open.
Thanks, Good morning, everyone.
Just wanted to I mean.
Yes.
I think Thats a big question is about the orders.
No.
<unk>, 4% backlog up 2% versus day.
Sales outlook.
Net of $2 five central equipments now you've clearly got some very easy comp.
In 'twenty one.
But what do you expect to be put in backlog.
Ship.
From that backlog to achieve maybe the high end of that range.
Are you expecting orders to accelerate through the year just any color in terms of the forward look would be helpful as well.
Yeah, So I mean, Nigel good morning, it's Judy left some.
There's a few questions in there we do expect orders to accelerate I think we've share that two thirds of our book that we will execute on in 'twenty. One is in backlog. The rest is kind of book and Bill type business for us across the board, both new equipment and service. So we do it.
Expect it to accelerate and we will be using 21 to fill that 'twenty two backlog. So that we go in strong and keep this momentum going.
On any quarter basis aren't really the best determinant.
Do go up and down theres different levels in different regions.
But we did have you know we do have we were down three 5% at constant on the new equipment side I would point out our modernization orders were up almost 5% so that business, which we see as a growing growing opportunity for us as well even with all the discretion that's been happen.
And modernization are modernization orders are up.
The other way Nigel just to add to that is that you can almost look at the to the guide of 2% to 5% EBITDA backlog up on the new equipment revenue with.
Our backlog up 2% you can almost look on that as a floor right because that's what we're starting with and then you Judy mentioned about the acceleration of backlog, we demonstrated that in the fourth quarter of 2020 guidance substantially higher organic revenue than where our starting backlog was at the beginning of the quarter. So that shows the steps that we're taking to accelerate.
Backlog conversion is happening and will continue that into 2021, and then obviously the markets are coming back and that is what Judy was talking about we expect share the data that if you're expecting growth across the world with Asia up mid single digits. So that helps the growth as well, but you start with the 2% add on the backlog conversion and then I'll add on the.
Market recovery that gets us to the 2% to 5% range.
Thanks for the detail later that thanks.
And thank you.
And our next question comes from Steve Tusa from Jpmorgan. Your line is now open.
Hi, good morning.
Hey, Steve.
Just to be clear I think the organic.
The backlog was influenced a bit by Forex to write the organic backlog is actually up a little more than that.
Yes, absolutely Steve the at constant currency, the backlog is up 2%, which is what which.
Which is what we're talking to but at actual FX, we benefited from backlog conversion, that's having on up about 6% got it.
Reported numbers reported numbers right. Okay got it I must have missed that and got that wrong.
Just on the services growth is there anything in there that's reading through from what Youre doing specifically around.
The technology or is it kind of too early for that to show up in the services growth rate.
For <unk>, Yeah, I think you know I think we're starting to see the benefits of the Iot Otis one investment, we're clearly seeing the benefits the productivity benefits of all the apps.
Debt, our field professionals have and are being able to put in play in but Otis one we're starting to see that we deployed just about 100000 new units in Otis one primarily in China, EMEA and in North America, and there's real demand pull for that from our field professionals. It's.
Really giving them that advance that advanced look that ability to be able to fix things remote and to really bring down are.
Our our callbacks.
This year and we're also now pre positioning our Otis one on our units that we're shipping from the factory. It's already started in China, we're adding the U S EMEA and Asia Pacific That'll take some time to work its way through obviously the warranty period.
Year or so in those places, but we believe in it we're seeing the early returns and we're seeing the productivity gains and our customers are able to really have that access for really operational knowledge, whether they're on site or not is my elevator working am I getting more uptime and we think that's just going to buy more stickiness and that's you know that's the.
Whole thesis of our connected.
Connected strategy.
And just one last one just on China.
Pretty decent orders number can you maybe just clarify.
What what types of differences you guys may have an exposure versus your kind of.
More visible publically traded peers.
Within China, They may comments, all the time, but sometimes it's tough.
Tough to read directly through from what Theyre, saying so.
What's your outlook on China, and maybe how many you would be different than those guys and I'll leave it at that thanks sure. Let me just kind of look back at China for 'twenty, you know as we started at Investor Day, We thought it was going to be a flat segment. The new equipment segment really had mid single digit growth and we held our own to slightly up we also had high single digit growth on our portfolio.
China, which is key as that becomes a large market for us for the install base, where we gained share on the order side, Steve was really in the office commercial and infrastructure markets in China as we really look at the back half of the year and we're seeing that kind of roll through in January as well.
Our high rise business continues to perform well and you know we made a lot of investments in China. Since we became independent and this whole expansion significant expansion 850 agents and distributors that.
That are helping us GAAP garner more key accounts, which then have a higher conversion rate. It's really last year was a great investment year for us in China to build the foundation, we had strong results as the market came back.
And we expect strong results as that market grows and we expand to outgrow the market, we expect to outgrow the market this year on 'twenty one.
And Steve just to add to that.
We continue to do really really well on but tier three to tier six cities I mean that has been a bread and butter you've done well over the last five six years. There. We've continued to gain share in those markets and those markets was slightly slow to recover on the tier one markets and that's where we need to do the work as <unk> previously discussed that's hardware.
Of our publicly traded peers have a slightly stronger share, but I think the agents and distributors that we've added this year with that we are confident we will do better next year or in 'twenty one.
And those tier one markets as well, but our success in 2020 wasn't that your tier three to tier six cities.
And thank you.
And our next question comes from Cai von <unk> from Cowen.
Your line is now open.
Yes. Thank you very much nice results. So your maintenance units were up 2% in the fourth quarter was my recollection is they were up 1% in the third can you comment how much of that is organic versus acquisition and maybe trends outside of China.
The 2% was a full year number Cai so that's a full year number. So I think that's where we ended up ended the year end.
The growth that we saw in the quarter was all organic there was you know I don't think Theres any acquisition what speaking about so it was all organic.
Uh huh.
Am I correct I think you published that the third quarter. The units were up 1%. So if 2% is for the full year.
What was the fourth quarter.
So it depends on where it just depends on you should the way you should look at it is where do we ended Q3 last year versus Q3 of 2019, but you know, it's an year over year growth, but for or the like this is a Q4, it's a balance sheet number right. That's the way to think about it. So it's in in Q4 of 2020 at the end of 2020, we ended up.
2% higher units versus where we ended at <unk>.
Ed in 2019.
Terrific and then on the raw material front refresh my memory is it.
The percentage of raw materials, the absolute number of raw material purchases what percent of stainless steel costain lists basically what it top something like close to 20%.
Since the middle of a quarter.
Yeah. So on commodity spend guy is about total commodity spend is about $300 million out of which about 80% is steel and you're right. If you look at kind of what we're seeing right now for 'twenty, one steels about about 7% to 8% maybe high a little higher in Q1, right now and the fall was little bit lower sort of average that out about seven.
8% so the way we're thinking about the commodity issue for next year is it was a tailwind in 2020, it's for 'twenty. One it is a headwind given where the steel prices sit today and.
On the spreadsheet math would suggest hey that could be at least $20 million plus headwind for us, but the other part that is simultaneously happened is that both euro and the renminbi have appreciated against the dollar and the buy in local currency eaten in in both Europe and China. So we should be able to offset bottled it's a commodity.
The increase by just appreciation of the local currency. So that's one piece of it the second pieces that we're working really really hard on material productivity to offset the commodity headwinds I think that's what Judy said earlier and we starting 'twenty one in a much much better position than we did in 2020, given the cadence that we gained last year and a carryover.
If it from the projects that we started midyear in 2020 is higher than where we were at this point last year. So we still think we can deliver 3% to material productivity after absorbing the commodity headwinds and grow on new equipment margins, which is what I said earlier in response to Jeff's question. The other piece.
To the extent that dollar weaknesses, causing the commodity headwinds. We are also seeing the $50 million FX gain on our you don't want on earnings overall, so it's in a different line of the P&L, but you know.
Some of the commodity weakness is because of appreciation on the deputation on the dollar but regained that on the overall, earning site. So a little bit of a trade off but overall it is an issue, but it's built into our guidance and we feel we can get to triples and material productivity and grow on new equipment margins in 'twenty one.
Thank you very much.
And thank you.
And our next question comes from Julian Mitchell from Barclays. Your line is now open.
Hi, good morning.
Good morning, maybe.
Just a couple of clarifications really one was around the free cash flow outlook, there isn't a lot of growth dialed into that guide.
Despite a reasonable adjusted earnings increase.
Just wanted any sort of split day around working capital versus Capex, and if you've seen any change in working capital.
Perhaps on some of your customers.
Fairly squeezed and on a very quick clarification, just non controlling interest I think it was was lower.
Year on year, so just trying to understand that.
Yeah. So let me let me start with cash and then we can talk about the minority JV payments. So if you look at our cash.
Really strong your last year.
We ended up.
$150 million better than what we had guided on a net income came in better working capital was really good and as I said in my prepared remarks, we reduced working capital and $19 million, which is a quarter for working capital, which was a fantastic performance given what you what you hear overall.
And as we look at 'twenty one the biggest driver is improvement in earnings or Julian as you referenced but there are two issues that we are trying to deal with next year. One is just the timing of the interest payments. So you can just the waiver the interest payments landed we do have an extra interest payment in 'twenty, one, which we did not have in 2020, given the timing on when we raise.
Debt. The other issue is that we do need to make a tax related payment or an old.
Tax matter that we inherited from UTC. So we built that into our guidance as well that matter is still ongoing but we built that into into our guidance on.
As I said in my prepared remarks, we have not built any working capital improvement into our guidance at this point, we'll obviously keep working at the midpoint of our guidance because when we will keep working but we'll keep working that hard but our plan.
At this point doesn't contemplate that.
On 135 billion for 'twenty, one is a solid number it's 120% of GAAP net income and a substantially.
Substantially higher than where we expected 'twenty one to be on on Investor day. So we think it's a it's a solid start to the year on NCI for 2020, not not any one single driver. It was a combination of weighted things a couple of moving here there and then FX a little bit of a headwind as well so I wouldn't read too much into where we ended on NCI.
For 2020.
Great. Thank you.
Okay.
And thank you and our net.
Question comes from John Walsh from Credit Suisse. Your line is now open.
Hi, good morning.
Good morning, John.
So.
It was great.
To hear and it sounds like Theres, a lot of excitement around the new products and rolling them out across the different geographies.
I guess one of the questions I had is as you roll these new products across U S E MAA, China APAC.
Do you believe that these new products are.
Head of where your other kind of public competitors are.
These to get you to be in line, because you've talked about making these investments or do you think that there is still some other folks that might still be leading even with these new products I'm just trying to understand.
On the competitive dynamics, there with a lot of these new launches if youre kind of leaping ahead or if this is to kind of get back in line with where some of the market already is.
Yeah, John it's a little of both and we've increased our R&D investment 60% since 2015.
And we've may actually we've done really well our patents have gone up four times since that same period.
And our new product releases since 2018 or up 250%. So we've made a conscious effort to really reinvigorate the innovation engine and the DNA in this company. So some of that is is a little bit of catch up but others like our Gen 360 is going to be an incredibly new digitally.
<unk> with an electronic safety first in the industry that code authorities have to approve it is going to revolutionize really how people are gracefully handled when there's an issue on the elevator and the elevator has to actually stop it's gonna gracefully bring them down to an actual landing floor so that.
Customers and more importantly passengers arent.
In trapped.
You know at any length of time, so you know our destination dispatch product.
Is is we believe is industry, leading we've released accomplished 360 product that gives us even more capability and we found customers are really very interested in what that whole destination product because its touch free and we've always talked about the safety of our products. Now we also talk about the health offerings of our products and our team.
<unk> moved very rapidly during the Covid era to generate new products, whether it be gesture or whether it be our our apps are E call App that allows you to either via Bluetooth or other connectivity to use your phone.
And then you know we've tried not just to hit the high end with a gen 360 in terms of complexity and features. We've also tried as we've talked about our gen. Two prime to find a nice stable affordable.
On entrant, that's that'll be a workhorse for us in India in the Middle East and Africa and other emerging markets. So we're trying to hit that whole span on the service side when we rolled out Otis one we made a conscious decision.
To roll it out.
As a productivity enabler first and we think we're going to drive one point of productivity with Otis one and we're going to keep adding units to do that the reason we did that in the strategy. We did that debt. We took was a density based approach.
There is not value as much value. If you just sprinkle sensors or Iot units across the globe. So we did a very focused density based route based attempt and focus to be able to actually yield that productivity.
And that will that will grow and productivity, but it will also grow in terms of customer value and retention for us and it provides a foundation for us to add services.
So a little bit of catch up no argument based on some prior years lack of investments pre 2015, but I think we've really accelerated low within the mechanical the digital the electronic and most importantly, the passenger experience.
Thank you for that answer and then just as a follow up.
Looking at the Americas orders growth and I know any one quarter cash.
Isn't maybe necessarily the best.
Data point and they need to be looked at probably over a four quarter period, but can you remind us what your what your order to ship.
Is right now in the Americas, because I'm just.
Trying to figure out you know elevators typically lead in how to kind of roll through these negative orders we've seen in the Americas through the model and I think you also talked about awards being kind of stable I didn't know if that was a.
Americas comment or a total portfolio comment thank you.
Yes, no John so the typical I would say the the order to the ship time on elevators. It's about 12 months in North America. That's what we've said before so that's where we are the comment on the awards, which typically proceed orders by a couple of months debt.
And they were stable in the quarter that was a north America comment, but if you look at Americas overall, John I think the markets are kind of uncertain right I mean be seeing as Judy mentioned in our prepared remarks, we've seen good growth in Asia, We know kind of feel good about the mid single digit growth. There. If you look at EMEA, we feel good about the low single digit amount.
<unk> remained challenging and the market was down mid teens last year. So obviously, we did better than better than the market.
And but and if look at the Dodge momentum index that just don't strongly positive in in in December for the first time in several months. So that's an initial sign of recovery.
Since COVID-19, but if you look at the architectural billings index, that's still under 50, but now the inquiries have been positive for four months right. So kind of mixed signals and if you look at the range of guidance that we're giving you know that that part of that debt range is driven by the Americas growth outlook. So that's a contributor to that but you know overall.
I think you don't want to discuss a nice earlier, we feel good about all of the steps that you've taken in terms of improving our sales coverage at all kind of seven points in China 10 points overall, new product introductions are proposals were up 7% last year. So that obviously is another good sign that we can keep building on this momentum that we have and.
On the share gains that we've enjoyed we can keep building on that but the medical market is uncertain, but that's what we built into our guidance.
Great. Thank you.
And thank you.
And our next question comes from Carter Copeland from lives Research. Your line is now open.
Hey, Thanks, and good morning, everybody.
Got it.
I Wonder if could you speak specifically to conversion rates I think at one point in time you talked about.
Given those sort of once a year and even if you can't give us the exact number just.
Some of the regional trends.
Data any color on that on just how you finished the year in terms of conversion.
Yeah, Let me, let me start and I'll I'll give you more of some regional flavor and then and then Rahul can can add we saw strong conversion growth in uptick in China, which is the most encouraging for us.
Because that's obviously the largest.
At over 50% of the segment, that's our largest opportunity base to grow our service portfolio and the service portfolio.
You know as I mentioned, we had high single digit growth in there. So we saw nice conversion and our retention rate went up in China as well as did our recapture rate on units. We wanted to get back. So all three metrics that helped drive net recovery for us.
In China were positive and we think that's a comment that's the strategy playing out everything we've told you about our enhanced.
Enhanced customer stickiness Iot more more key accounts, which have higher conversion rates closer to the 80% range or infrastructure, which also has higher conversion rates.
With that pivot in our strategy in China, that's where we're seeing that accelerate or what do you want to comment on the aetna and the macro level, yes. The overall conversion kind of hung EBITDA at about 60 ish percent cotter, so not not a lot of change to the overall conversions do we said on China was up about a point and a half so that was good good momentum and the other on the other thing is that retention rate for us which is.
Very very critical was at 94% in 2020 versus 93% in 2019, so that that ticked up as well so that's good.
So good good momentum in the service business, obviously, you saw that come through the results as well yeah on the other thing I'll just comment on Carter just you know from a service pricing what we saw if you. If you hold your concessions often they still exist and we believe there is still going to happen in 'twenty, one and the early 'twenty one in the hospitality.
Parts of the business and retail Oh, our surface pricing held well.
As we finish 'twenty, so not only you know where are we getting the conversions and.
And keeping the retention we were getting we were holding price if not slightly up.
So based on those trends, presumably you expect your service portfolio growth to accelerate in 'twenty, one versus 'twenty I would assume.
Yes.
Okay.
Alright, Thank you very much.
Thanks, Adam Thank you and again, ladies and gentlemen, if you have a question that is star one again, if you'd like to ask a question that is star one and we have a follow up question from Nigel Coe from Wolfe Research. Your line is now open.
Alright, thanks for the follow up I appreciate it.
Just wondering if you can maybe just size that.
Net tax number you've got out into your into your forecast.
And then maybe just clarify the $20 million on raw material.
So I would like to delve into your into your budget is that the kind of the growth impact, though is that net of productivity.
Next movement is that just the pure.
Increase in spot prices.
No 20 million is just the commodity piece, we think we can we will offset that nigel with the triples and material productivity and we will deliver 3% net productivity after absorbing the $20 million headwind. So that's just the commodity piece on on the tax payments.
Kind of in tens of millions Nigel so it's a big number it's not us on number.
It's a tax matters. So we will we will continued deal flow that again, no P&L impact. The P&L is all accrued it is basically a cash outflow for us in 2021.
That's like a separation type number does that clear up the separation matters more or less.
At this point.
There will be a few.
Dax Mattos that'll continue we had this all total tax if you guys remember from you guys who've been following UTC for lung and that will continue for few years, but that's not a year over year change Nigel and that's in the $15 million to $20 million of cash outflow every year. So that's not a big number but this is one of the biggest issue that we have remaining from our separation.
Okay. Thanks very much.
And thank you.
And now I would like to turn the call back over to Judy marks for closing remarks.
Thank you Justin to summarize we delivered a strong close to a solid first year as an independent company I am pleased with the performance we delivered against a challenging economic backdrop.
Nearly a year ago, we held our Investor day at the New York Stock Exchange share with you the strength of our portfolio, our long term strategy to deliver growth and profitability our track record of execution and our commitment towards disciplined capital allocation all to drive shareholder value, we laid a strong foundation and the targets set out for.
<unk> 'twenty 'twenty, one reflect the resiliency of our business model and the strength of our long term strategy. Our fundamentals remained strong we're well positioned to continue driving value for our customers for our colleagues and our shareholders.
I hope you all stay safe and well and thank you for joining us.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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