Q4 2021 Otis Worldwide Corp Earnings Call

January 31, 2022

Good morning, and welcome to the Otis as first quarter 2021 earnings Conference call. This call is being carried live on the Internet and recorded for replay.

Presentation materials are available for download from Otis as website at Www Dot Otis Dot com.

Now I'll turn it over to Michael <unk> Senior director of Investor Relations.

Thank you Katherine and welcome to <unk> fourth quarter 2021 earnings conference call on the call with me today are Judy marks President and Chief Executive Officer, and Robert <unk> 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 nonrecurring items. The company will also refer to adjusted results were adjustments were made as though 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.

So remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties <unk> SEC filings, including our Form 10-K and quarterly reports on 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 <unk>.

Great.

Thank you Mike and thank you everyone for joining us we hope everyone listening is safe and well we delivered a strong close to an excellent year. Despite ongoing macro challenges. These results are a testament to the strength of our strategy and the dedication of our colleagues to execute and deliver results for our customers.

And shareholders, we achieved broad based organic sales growth grew adjusted operating profit for the third year in a row.

Delivered 19% adjusted EPS growth and generated $1 6 billion and free cash flow, while introducing new innovative solutions for our customers and passengers we've.

We remained committed to shareholder value creation, and strategically deploy capital completing $450 million in debt repayment distributing over $390 million in dividends after raising the dividend, 20% versus the prior year and repurchasing $725 million of Otis shares.

Given the strength of our balance sheet, we also announced our tender offer for the remaining interest in our joy at Otis and accretive transaction for Otis.

New equipment orders were up seven 3% in the fourth quarter and up 13, 2% for the year with broad based growth in Asia Pacific. We received an order for nearly 280 units supporting Taiwan Tao Yang International airports, New terminal three building and concourse.

This includes 92 escalators 60, moving walkways and more than 120 Gen. Two elevators equipped with reach and drive technology that will support the terminal smart and Green design.

In November we received an order for Soyars landing in Miami, Florida. This project extends a decade long relationship with the developer and Otis will install over 'twenty elevator and escalator units. Additionally, Concord Pacific one of the largest developers in Canada has selected <unk> to support its king landing project in Toronto onto.

Terry.

Extending our nearly decade long relationship we will provide more than a dozen elevators for this mixed use high rise.

These orders demonstrate the power of long lasting relationships and our continued investments and providing innovative solutions for our customers are.

Our strong orders momentum throughout the year led to approximately 115 basis points of new equipment share gain on top of 60 basis points in the prior year.

In addition to executing on our financial priorities, we remain committed to advancing our ESG initiatives. Our Gen 360 next generation digitally native elevator platform was awarded two environmental product declarations.

This platform is positioned to revolutionize our customer and passenger experience, while providing energy efficiency benefits that helped to reduce the impact on our plan.

Gen 360 joins our existing suite of energy efficient products, such as the reach and drive which can distribute power back into a building.

Also in China, We received several awards that recognize our team's achievements and leadership innovation and sustainability, including recognition as a 2022 top employer by the top employers Institute.

And finally last week <unk> was recognized for the second year in a row as the best place to work for LGBTQ equality by the Human Rights campaign. This award demonstrates our leadership in creating an inclusive culture, where all voices feel safe welcomed and hurt <unk>.

Now moving to slide four.

This year, we grew our industry, leading maintenance portfolio by 3% our best portfolio growth rate in over a decade. This accelerated maintenance portfolio growth is a key part of our long term strategy.

Equally important is the digital connectivity of units in our service portfolio and this year, we deployed approximately 100000 in Otis one units.

<unk> total portfolio connectivity to about one third of our approximately $2 1 million units under our service.

Over the medium term, we plan to increase connectivity to approximately 60% of units up from roughly 25% at the end of 2020.

Our operational initiatives also progressed as we rationalize adjusted SG&A expense down 40 basis points as a percentage of sales and reduce the adjusted effective tax rate by 190 basis points. This represents significant progress in right sizing our costs and optimizing our tax structure as an independent.

And company.

I am pleased with our performance in our second year as an independent company as we delivered strong financial results and advanced our ESG initiatives you can expect to hear more in the coming months with the publishing of our first ESG report.

Now turning to slide five and starting with the 2022 industry outlook.

While market dynamics remain fluid the industry's long term fundamentals are solid.

We're encouraged by the strong recovery experienced during 2021 and have confidence this momentum will continue into 2022 in many regions.

The new equipment market is expected to be up mid to high single digits in the Americas.

No single digits in EMEA and down mid to high single digits in Asia, driven by uncertainty in China, where we expect the market to be down 5% to 10%.

While the China, new equipment market faces headwinds this will not detract from solid growth in the service installed base were approximately 1 million units are added each year to the global base.

Mid single digit growth rate annually.

Industry installed base in the Americas, and EMEA are expected to grow low single digits and in Asia, We're expecting high single digit growth driven by China.

Service is the foundation of our business and we expect to grow our service units by more than 3% in 2022 and to eclipse $2 2 million units under maintenance remaining the largest service portfolio in the industry.

Here's our 2022 financial outlook.

For the year, we expect organic sales growth of two and a half to four 5%.

Net sales will be in a range of $14 four to $14 7 billion up 1% to 3% accounting for FX headwinds.

Adjusted operating profit is expected to be in a range of $2 24 to $2 4 billion to $2 $3 billion up $95 million to $165 million, excluding the expected impacts from foreign exchange at actual currency adjusted operating profit is expected to be up 50 to 100.

$20 million.

Adjusted EPS is expected in a range of $3 20 to $3 30.

Up 6% to 10% versus the prior year and 24 cents at the midpoint.

Lastly, we expect free cash flow to be robust at about $1 $6 billion or approximately 115% to 120% conversion of GAAP net income.

We remain highly disciplined in our capital allocation strategy committed to meeting the needs of all stakeholders through dividends debt Paydown bolt on M&A and share repurchases. Once we complete our deleveraging plans associated with the acquisition of the remainder of our do it.

With that I'll turn it over to rule to walk through our 2021 results and 2022 outlook in more detail.

Thank you Judy and good morning, everyone, starting with fourth quarter results on slide six.

Net sales were up two 2% to $3 6 billion.

Organic sales grew for the fifth consecutive quarter and were up two 8% with growth in both segments.

Adjusted operating profit was up $11 million and up $21 million at constant currency as higher volume productivity in both segments and favorable service pricing was partially offset by commodity inflation and the absence of temporary cost actions taken in the prior year to alleviate the impact of course.

2019.

Fourth quarter, adjusted EPS was up nine 1% or <unk>, driven by <unk> of operating profit growth and <unk> from a lower adjusted tax rate.

Benefit from share repurchases done earlier in the year and reduced interest expense from the repayment of debt contributed the balance.

Adjusted EPS was <unk> <unk> ahead of the prior outlook, including be favorably from better than expected operating profit growth and tax rates that ended at the low end of prior expectations.

Moving to slide seven new equipment orders were up seven 3% at constant currency orders momentum remained strong in Asia up mid single digits, including the seventh consecutive quarter of growth in China.

Orders were up high teens in the Americas and awards, which proceed order booking were up mid single digit in North America signaling continued recovery in the booking trends heading into 'twenty two.

EMEA was flat versus the prior year as mid single digit growth in Europe was offset by decline in the middle East.

From a tough compare on major orders.

Total volumes in the quarter also continued to show signs of robust demand globally up double digits driven by strength in China.

Total company backlog increased 1% and 3% at constant currency with growth in all regions, including approximately 5% growth in Asia.

Booked margin in the quarter was down slightly more than half a point from a decline in the Americas, partially due to customer mix, but the year over year trends in the region showed substantial improvement from Q3.

This was partially offset by almost a point of improvement in booked margins in Asia with EMEA being about flat.

Overall, our pricing on new orders was slightly better than our prior expectations.

The backlog margin trend adjusted for mix was about flat sequentially and down about a point versus the prior year.

Full year, new equipment orders were up 13, 2% with growth in all regions with the Americas up 14%, EMEA up 4% and Asia up 17% with high teens growth in China.

In the fourth quarter, new equipment organic sales were up one 2% from growth in Asia up approximately 12%, including mid teens growth in China growth in Asia was partially offset by decline in the Americas and EMEA driven by tough compares from strong recovery.

From COVID-19 in the fourth quarter of the prior year.

Adjusted operating profit was down $7 million.

Commodity inflation of $35 million that was in line with our prod expectations was largely mitigated by installation productivity and favorable performance on project.

Service segment results on slide eight.

Maintenance portfolio was up 3% from broad based improvements in retention recapture and conversion rates.

Conversion rate in 2021 was up three points globally and up five points in China to 45%.

This improvement in conversion contributed to high teens portfolio growth in China for the second consecutive quarter. In addition, our retention rate in 2021 continued to improve and is now above 94%.

Modernization orders returned to growth in the quarter and were up 18, 3% at constant currency with growth in EMEA and the Americas.

Overall modernization backlog was up 6% at constant currency.

Service organic sales grew for the fourth consecutive quarter up 4% with growth in all lines of business.

Tenants and repair grew four 3% with continued robust recovery and repair and low single digit growth in the contractual maintenance sales.

Modernization sales were up two 2%.

Slightly below our expectations due to continued supply chain challenges.

Service adjusted operating profit was up $20 million with 50 basis points of margin expansion, the eighth consecutive quarter of margin improvement.

Profit growth was driven by higher volume favorable pricing and mix, partially offset by higher cost from the absence of COVID-19 cost containment actions taken in the prior year.

Service portfolio pricing was up more than 1%, mainly due to price increases in Americas and EMEA.

Moving to slide nine.

Overall for the full year, we carried the momentum from 2020 into 2021 and gained 115 basis points of new equipment share gain accelerated the rate of maintenance portfolio growth organic.

Organic sales were up almost 9% with new equipment and service up $15, five and four 1% respectively.

This sales growth our focus on execution and FX tailwind resulted in $272 million of adjusted operating profit growth.

New equipment operating profit was up $105 million versus the prior year at constant currency driven by higher volume and installation productivity that was more than double what we achieved in 2020.

This combined with our ongoing focus on material productivity more than offset the unfavorable price mix and headwinds from commodity price increases of approximately $90 million.

Margins in this segment expanded 100 basis points more than offsetting the decline in 2020 and are now above 2019 levels.

Service adjusted operating profit was up $104 million versus the prior year at constant currency, driven by higher volume productivity initiatives and favorable pricing that more than offset return of cost in the business to support higher activity.

Service margins expanded 30 basis points building on the expansion in 2020 and are now 140 basis points above 2019 levels.

Corporate segment costs were about flat for the year. Despite the step up in public company expenses from disciplined cost management.

Adjusted EPS was up 19% for the year from operating profit increase and a reduction of the tax rate that was down 190 basis points for the year.

Adjusted EPS was up about 35% from 2019 for a two year CAGR of 16% substantially ahead of our prior medium term growth expectation.

We generated close to $1 6 billion and free cash flow from earnings growth and a rigorous focus on working capital.

Working capital is now down more than 50% from 2019 levels.

As we look forward to 2022 on slide 10, we expect service industry growth rates to be consistent with 2021 across all regions.

New equipment end markets to show solid growth outside of China.

This combined with higher starting new equipment backlog strength of the maintenance portfolio and our relentless focus on operational excellence gives.

<unk> gives us the confidence to improve across all key metrics in 2022.

With organic sales up two 5% to four 5% and overall margin expansion of approximately 30 basis points.

We expect sales operating profit and margins to improve in both segments at the midpoint.

Adjusted EPS is expected to be in a range of $3 20.

To $3 30.

Up 8% or 24 at the midpoint.

We expect free cash flow of approximately $1 6 billion.

Between 115, and 120% of GAAP net income.

This free cash flow outlook reflects the strong earnings growth expectation, partially offset by an approximately $55 million headwind from a one time tax related payments that was previously expected in 2021 and $20 million and incremental capital expenditures to support digital connectivity.

The initiatives.

Our capital deployment plans remain on track and we have already repaid $400 million of debt in January with the remaining deleveraging expected to be completed in the first half once our target leverage metrics are met we plan to recommence share repurchases.

Taking a closer look at our organic sales outlook on slide 11.

The new equipment business is projected to be up 0.5% to 3% supported by the backlog that was up 3% at constant currency in 2021.

Americas organic sales growth is expected to be up low single digits.

EMEA up mid single digits.

Asia is expected to be up or down slightly with mid to high single digit growth in Asia Pacific.

China is expected to be flat to down low single digits as growth from higher starting backlog is offset by decline in the book and ship business.

Service segment growth is broad based and is expected to be up in all regions with maintenance and repair up 4% to 6% benefiting from a 3% higher starting portfolio.

Favorable service pricing environment, and continued recovery and repair.

Modernization is expected to be up 4% to 6% from 6% higher starting backlog and easing of 2021 supply chain challenges.

Overall organic sales are expected to be up two five to four 5% building on the approximately 9% organic growth in 2021.

Switching to EPS bridge on slide 12.

We expect EPS growth of 6% to 10% with operating profit growth of $95 million to $165 million at constant currency.

Contributing 16 to 27 to the EPS growth.

Operating profit will benefit from increased volume in both segments.

Service pricing tailwind and continued savings from material installation and service productivity initiatives.

This will be partially offset by commodity headwinds of approximately $90 million.

Foreign exchange translation is expected to be 7% EPS headwind, mainly from the strengthening of the euro and the yen against the U S dollar.

Noncontrolling interest expense from increased profit in China, and other jv's will reduce EPS by 2% to four.

FX translation impact and increase in Noncontrolling interest expenses are mostly offset by accretion from the <unk> transaction.

We now have more visibility into the approval process and are increasingly optimistic and the timing of the delisting and expect the transaction to be about 10 cents accretive in 2022.

Lastly, we expect to reduce our adjusted tax rate by an additional 50 to 100 basis points this year, adding 2% to <unk> to the EPS.

This outlook the presence fourth consecutive year of strong earnings growth as we continue to build on strong execution mitigate the macro challenges leverage the investments that we have made and benefit from a continued end market recovery.

And with that I'll request Catherine Please open the line for questions.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Withdraw your question press the pound key.

Our first question comes from Jeff Sprague with vertical research your line is open.

Thank you and good morning, everyone.

Good morning, Jeff Good morning.

It's helpful to start just first on the Americas, It looks like Youre guiding Otis below your view of the market could you just explain what's going on there I assume its backlog conversion, but some color would be interesting.

Yes, Jeff Let me, let me take that so we're doing a low single digit guide in the Americas.

Really strong performance this year in the Americas up, 14% and orders roughly and up 14% and sales. So we are capitalizing on the market as it's growing in the indices are all looking really positive both multifamily nonresidential, whether it's dodge or Abi everything's looking good really heading into 'twenty two.

Our guide really reflects project timing on several major projects that don't drive revenue until very late in 'twenty, two it's going to help us in 'twenty three for these large projects, but it really does drive the majority of the Americas Guide.

And Judy a role maybe you could just give us a little color on the complexion of the sequential patterns here this year.

I would imagine China starts weaker and good stronger, but would love to hear your view on that.

In terms of price coming through the backlog.

Counteracting the commodities headwinds how does that play out anything.

Anything you would share on how to think about.

The jumping off point and how we start here in Q1.

Yes, absolutely.

Jeff we expect to start the year strong and service growth compares are easier I mean, if you go back to Q1 of last year Q1 was our.

Lowest organic growth quarter in 2021 compares are easier on service.

And our Q1 growth should be more or less consistent with our full year guidance some headwinds from cost coming back since we were still dealing with the pandemic last year, but overall it should be a really really strong quarter on service.

Given the tough organic growth compares.

New equipment in the first half with 25% growth last year in the first half of 2021, new equipment growth will be stronger in the second half and also commodity headwinds would predominantly be a first half phenomenon. So the first half of 2022.

New equipment could look like Q4 of 2021 on a year over year basis.

But sequentially, we do expect Q1 of 'twenty, two will be stronger than Q4 of 'twenty one.

And on both profit and margin and then Q2 will show improvement over Q1. So we expect continued sequential improvement in our new equipment business.

The FX headwind will also be a first half issue keep in mind Euro was about $1 20 in the first half of 'twenty, one and is now trading at 111 112 level. The guide for the year is 112 so.

This headwind in the first half and as we go into the second half on FX. The compares get much easier. So if you put all of this together we faced some pressure on new equipment organic growth commodities, some FX headwinds, but the first half.

Profit growth in service segment should more or less offset that and we expect to grow profit kind of in line with our revenue growth in the first half and EPL EPS will improve year over year as well.

Great appreciate it thank you.

Thank you Jeff.

Yeah.

Thank you. Our next question comes from Miguel <unk> with BNP Paribas. Your line is open.

Hi, good morning, everyone.

Two questions. If I may the first one again on your guidance for new equipment sales in 2022, you're saying.

In Asia up or down slightly.

Then.

If I look at your orders <unk> had seven consecutive quarters of positive growth.

And over 2021 gross has been above mid teens call. It mid teens order growth in Asia.

So can you tell us can you help us understand where the lead times are developers that are finding it more difficult to pay at delivery or the lead times that they've.

Got them longer.

'twenty two.

Okay.

Yes.

Judy I don't it's not really a lead time issue.

We enter the year and with our backlog and our China, It's really a China discussion here, our China backlog is up entering 'twenty, two and that really supports about two thirds of our backlog occurs in that next year. So we're coming in with about two thirds of the China back.

<unk> and the remaining third is book and ship. It. It's the bookend shift where I think we're trying to be prudent not really watching the trends understanding whether it's soe developers or private developers what's happening. So we feel we feel that that is what's going to really drive our 'twenty two performance in China.

Which gets blended into our Asia number orders are really strong, but how that converts and especially the book and ship that is about a third of our volume in any given year globally.

But especially in China as our watch item for next year. So let me just put a couple of numbers on this Michael just to add to what Judy said. So if you start with our Asia backlog that he said is up five and within that Asia Asia Pac backlog is up high single digit in China as Judy said is up call it 3% and and just to reiterate what we know whole point about 60 to 65.

Percent of our India business is driven by backlog.

China backlog was up 3% and Thats two thirds of our revenue that should drive about 2% growth in the China business.

And if the entire book and ship is flat right. So that's the way to think about it now our guidance for China is that China will be down it would be flat to down 3%. So despite the overall higher starting backlog, which implies the ear book and ship to be down between 5% to 10% right on the remaining that one 3rd% to 40% of the revenue and that.

Largely in line with what Judy commented on the prepared remarks on the China market now there's a chart in the appendix that has a 2021 orders in China versus the market and our orders outgrew the market by call. It two X and if we can replicate that performance in 'twenty two that would be an upside to this outlook, but it's early in the year and the <unk>.

China market is very fluid. So we are just being very appropriately prudent at this stage in our guidance.

That's great. Thank you.

And then my second question, just coming back to your margin guidance and specifically for new equipment.

Could you give us more color on the trajectory is going to be perhaps a second half weighted profit year for new installation.

Yes, I think Thats, what I said kind of in response to Jeff's question on new equipment, absolutely I mean, the commodity headwinds be calling for about $90 million. Most of that is going to be in the first half we have some commodity headwind kind of dialed into the second half just given the volatility that was there last year, but if the commodity headwinds.

The commodity prices continue to go the way they going commodity could be a little bit less of a headwind, but right now we've kind of dialed in $19 million and again, that's given the fact that the growth is going to be a little slower in the first half versus the second half commodity headwinds being largely first half issue, we do expect our.

New equipment margins to be slightly challenged in the first half and then with improvement in the second half will be up and overall as I said to Jeff's question. We do expect that profit growth will be in line with our revenue growth in the first half right. So we don't expect margins to shrink in the first half of the year.

Because of the service growth rate. Thanks.

Correct, Yeah got it and.

And then just one last question on your capital allocation strategy.

Suspended the share buyback because you're not focusing on deleveraging post the acquisition I'm sorry go ahead.

If I am correct.

It would still imply a below two times net debt to EBITDA for next year for 2022 can you remind us the normalized level that youre seeing the business.

Thanks.

So we'll be about.

We are not getting below two by the end of the year I think we're getting to two one by the end of the year. So but again I think we are we feel very very comfortable with our debt levels. We are up to $500 million of deleveraging. We've already done 400, you've got 100 to go and depending on when we can repatriate the cash back to the U S and.

And we will start our share buyback. So that's what we've guided to is the fact that we will recommence share buyback once.

Debt repayment is complete so that's on track and so once we get a little bit more clarity on the repatriation of cash will provide additional guidance on share buyback for the year.

Thank you very much.

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning.

Maybe just wanted to circle back apologies to China, new equipment revenues for a second so I think you'd said Rahul that those would be down.

Flat to down low single digits in 2022.

From a.

Sort of the revenue.

Standpoint.

Just wanted to understand sort of.

Again, just how youre thinking about that sort of first half and second half.

And how you'd expect your orders in China, new equipment to trends going through this year, just trying to understand that sort of relationship between the orders booked in China and then when they are sort of being billed in the P&L.

Yeah, So Julien good morning, and just to clarify what I said earlier maybe.

We expect our China revenue, new equipment revenue to be down to.

To be flat to down 3%. So that's that's our revenue growth expectation on the new equipment side for China, So flat to down <unk> be going in with a higher starting backlog and that backlog is up about 3%. So that should support what my comment was that that should if the book and ship business for the year is flat year over year that will drive about a two person.

Rent growth considering the backlog is about two thirds of the revenue now if our guide is flat to down three that would imply that the book and ship business is down kind of call it 5% to 10 right.

The higher end or the low end of the guidance, which is kind of in line with the overall market is what we are seeing now again just to repeat what I said earlier. We are have you have done a lot better in China on orders.

In 2021, and we had almost a two X the level of market growth. So that we have not factored that in into into this guidance. So hopefully if we can do a little bit better on the orders and then the market that should drive some upside in terms of the first half second half lift in the market is going to be a little bit softer in the first half again part of that is just the compares.

Because the market was very very strong in the first half it was up about 16% through the first nine months of the year ended about and was about flat for the fourth quarter for the market is definitely stronger than the first half last year. So that should drive some tougher compares into 'twenty, two and I think our order trends are obviously going to mid of that a little bit Yeah. Let me just add two things Julien.

If you context that the segments about 650000 for new equipment in China, even if that down 5% to 10% happens in this segment.

The 10% level, we're back to 2020 levels for the China segment. So it's still healthy where gain we've gained share over the last two years in China. The teams performing incredibly well, we actually had record record unit orders in 2021, So we've got momentum with us, but we're trying to be prudent to watch some of the vol.

<unk> that's happening.

Thanks, very much and then maybe just.

And step back from the quarterly moving parts too.

Two years ago at the Investor Day, you talked about.

20 to 30 basis points of sort of annual operating margin expansion medium term.

Definitely on track with that you're up 30 bps last year, you're guiding this year up 30 bps.

Well.

And I suppose in the round and sort of.

Should we think about 2021 and 2022 in aggregate being sort of fair.

Typically when we're looking at the sales trends understanding you've got some price cost noise, but you've also had higher sales growth and guided medium term so maybe they offset each other.

Just trying to understand sort of any big leavers.

Good or bad on the margins beyond this year when you think about the medium term or it's kind of steady as she goes on these years of fairly representative in total.

Yes, I think Julian it's it's an interesting compare when we think about kind of 2020 being at resiliency cost management time during the pandemic 21, being a recovery year and then 'twenty two we believe growth will happen, but it will be a lower rate in 'twenty, one which is really it was at a much higher base.

The big difference in 'twenty, two and we're not going to release, our medium term outlook till investor day on the 15th the big difference in 'twenty two as we are kind of back to our core service growth, 4% to 6% growth, which is supported by the portfolio growing 3% and as you saw on our guy that is obviously.

It was 80% of our profit that's where we're going to have 50 basis points of margin expansion in the service segment, So new equipment, a little more up and down over over the different years, but service is what continues to sustain us in drive us and where we have productivity in both but thats really what youre going to see a little bit of a preview to.

Investor Day.

And keep in mind, Julien, we grew 50 basis 30 basis points of margin in 'twenty, one after absorbing 50 basis points of mix headwinds because new equipment grew much faster.

After in service right, So that's where it is.

Adjusted for mix margins without kind of 80 basis points in the year. So definitely we are tracking to that 30 basis points.

That we guided at Investor day.

Great. Thank you.

Thank you. Our next question comes from Stephen Tusa with Jpmorgan. Your line is open.

Thank you.

Hello, Good morning, Steve, Yes, we got you.

I'm sorry.

Kind of on the road a little bit here.

Just I guess, it's simple way to ask the question would be what what do you guys think is going to be potentially kind of the toughest orders comp in 2022 for China.

Should we be kind of ready for for any given quarter, just based on where the level is today and what the comps are.

For something that is down double digit at any given point for you guys, specifically and then as a follow up to that.

At what level of orders would you need to see this year given your solid backlog tab.

Do you have confidence that you can grow China or at least hold it flat in 2023.

Yes, the quarterly order trends it is hard to predict the guide by just nature of the orders our orders are lumpy right.

When maintenance seats go on mute.

So the orders are lumpy, so it's hard to call out any given quarter, but clearly as we said earlier.

The orders grew really strongly throughout <unk>.

Page in the backup that kind of.

But has the China orders. So if you go back and look at kind of our overall, China was up kind of to add can obviously with stronger growth.

Much stronger growth in the first half in Q4 was still up year over year not as strongly in the first half, but we still outgrow the market even in for the fourth quarter. So the compares to the first half are definitely stronger, but as you as you project forward and you think about okay, what do we need to drive sustainable growth.

<unk> is one factor and.

That's clearly important but keep in mind the rest of our business is growing is in very very solid growth market. So if you'd look at Americas EMEA.

Asia Pac and that is about two thirds of our new equipment business. So that obviously is in very strong growth market. So that should help as we go beyond.

And that as we go beyond 2022, so that's kind of one.

And then obviously the second part about this is that.

The point that Judy made earlier on the Americas backlog that should help with 23 as well because some of the orders that we had not shipping in 'twenty two those should ship in 'twenty three so that should help 'twenty three as well. So overall, we feel confident that we can continue to drive new equipment up kind of in that low single digit.

Growth range, which was kind of in line with our medium term expectations. So that as we standby that and I think obviously more to come on Investor Day, and then obviously.

To make a point further with service growing kind of 4% to 6% this year and at a very sustainable level that should continue to drive the profit growth into 'twenty three yes. The other thing Steve we're seeing and we'll share that you see this in our guide for service for 'twenty, two but it's going to keep growing as the modernization business. So we show that at 4%.

6% for 'twenty, two but we're going in with a 6% backlog there great orders performance in the fourth quarter, especially in Europe , and the Americas, where the bulk of that is so that's going to continue on into 'twenty three as well.

Got it and then just one last one for you I mean your guidance how much of the year over year is driven by.

Like some of the more <unk> specific initiatives around productivity.

<unk> been banking hitting on for the last couple of years since <unk> since coming public.

Yes, one of them.

Steve I mean, if you look at kind of.

If you look at our profit guide.

It's largely a largely a volume story, but we have commodity headwinds of 19 million that were largely offsetting through.

Through our productivity initiatives on the new equipment side.

Overall on the pricing side, a new equipment or the margin drag that we have from backlog margins being down is being offset by India pricing improvement so that that helps.

But we offset the commodity headwinds by productivity actions on both materials and installation and on the service side. We didn't we're not talking about wage inflation headwinds into our guide because the productivity that we're driving in the service side is offsetting that and service profit is driven by volume and pricing right, which which was up.

1% last year and is obviously trending in our favor yeah and on the service pricing I'll, just amplify a little I mean really good performance in Europe , which is where one of our $2 1 million units are and the Americas. So those two make up the bulk of the portfolio. We got we got a point in 'twenty, one we're expecting that much in 'twenty.

Two on price and Steve will now most of that in the first quarter because thats when most of our renewals happen.

Great. Thank you.

Thanks, Steve.

Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is open.

Hi, good morning.

Good morning.

Hi, maybe.

Maybe just a couple of quick clarifications for me I just wanted to make sure.

Comparing things apples to apples here, but can you remind us what you're exactly forecasting on that industry, new equipment growth slide there on on slide five is that a.

A unit number does that include price just would love to get a little more clarity on that yet.

Yes, that's a unit number thats the easiest way for us to make a global compare.

Gotcha, Great Thats, what I thought okay.

And then maybe just on.

Really strong share gains this year 115 on top of the 60, you said there we can see that chart in China, where you're outgrowing the market can.

Can you give us a little bit more color on.

On where some of the other.

Market share gains are coming from broad based or any geographies you'd call out.

Yeah, it's broad base, John , especially this year we've seen.

We've seen Asia Pacific.

Specially in the mature markets, but in India, which is really starting has come back strongly as a large segment.

We've seen that come back very nicely in 'twenty, one in terms of share gain and but it's broad based.

I would tell you that Europe , obviously lots of different countries, but western Europe , we did well and.

Again, I'd call out some of the ones in Asia Pac ex China, China has done incredibly well.

Great.

You're taking my questions I'll pass it along thank you.

Thank you. Our next question comes from Cai von <unk> with Cowen Your line is open.

Yes, thanks, so much and good results.

Thank you you broke out I guess, China risk 10 customers, 2% to 3% of China sales.

<unk>.

What is the risk if they've crossed two to three red lines, but basically they stopped paying that that morphs into a bad debt risk.

Yes, no. It's a good question kind of meaningful look at our overall, China business, we have done really well I mean, our cash flow in China was very strong opening order was well above 2020 levels.

We've been in a lot of that is working capital I mean receivables are up kind of call it less than 10% on 25% revenue growth in China. So.

Our China business did really really well on cash management, but.

Having said all of that obviously the situation needs to be managed very carefully and we're dealing with on a customer by customer basis as the chart in the back he is only 2% of our customers in China that are in the Orange are the redline category or other credit risk and we've tightened the terms where the situation is warranted, but we don't feel we need to make any wholesale changes there and if you look on a.

Company overall for 2020 , one our bad debt expense in 'twenty, one was actually lower than our bad debt expense in 2020, despite 9% higher revenue. So we manage the situation well and we will definitely keep an eye out for 'twenty two yes. The only other thing I'd add is when we look at a broad based group of developers in.

<unk>, China, we do a significant amount of business in our key accounts with the <unk> and the state owned property developers, who really have stronger financing advantages they are gaining more share.

And as Earl said, we're managing this our China team is managing this on a on a daily basis with a lot of discipline and rigor. So yeah. We're pleased with our bad debt. How we ended 21 as he said, but we're also understanding and watching closely where the market's going and when needed. We are moving to all cash prepayments to protect.

Our own balance sheet.

Thank you and the second question. So you mentioned that.

Installed 100, 100000, Otis one units last year, what is the plan for this year and basically as you install more units. So I think you've made the point.

Because you have a bigger share of the overall service population of the world. Your takeaway opportunity is greater than others talk to us a little bit about what youre seeing in terms of service takeaways too.

Yes. So we did a 100000 2020, we added another 100000 2021, it will be comparable in 'twenty, two as we get to that 60% coverage level on the medium term.

And there's good reason for that some of it is in our portfolio. Our service portfolio is not all <unk> units and we focused we started this by focusing on Otis controllers, where we had the most knowledge and the best technical solution. We're now expanding that but theres also some some old controllers out there as many of you know.

Some very old elevators that don't make sense to connect so we think we're on a good good.

<unk> because what it's doing.

Kai as it's driving that stickiness that we work with customers. So, it's giving us more productivity, but it's giving our customers real value to be able to see the heartbeat of their elevator and their Otis one app to understand if it's if it's <unk>.

Running or not whether they are on site or not and so we think it's really helped our retention rates, which now is we're offsetting these remarks are over 94%, which is leading in the industry and it's also helping our conversion rates because last year. We entered in 'twenty. One we introduced our Gen III.

Portfolio across the globe and Gen 360 in certain countries in Europe , and those all come pre populated when we ship them with Otis one out of our factories now depending on where you are in the world to certain factories. So it's already leaving the factory with Otis one installed so our.

<unk> are actually seeing the benefit of this during the warranty period and Thats, especially in China are helping us with the portfolio growth and the conversion that Rahul talked about which is now at 45% for the year. So we've moved up five points in China on our conversion rate and that's the stickiness we are getting every.

Where in the world anytime we're more connected with our customers, we get that that stickiness, which will again have that compounding effort of growing our portfolio. So great productivity for us, which supports our margin drop throughs in our incrementals, especially on volume in service. This year, that's driving that 50 basis points of margin.

Expansion, but most importantly, it's getting that loyalty and stickiness.

Thank you.

Thank you. Our next question comes from Nick Kaufman with RBC capital markets. Your line is open.

Yes, hi, everyone. Thank you for taking my question.

You mentioned that you grew at double the market rate in China in 2021, which is a really impressive result, I'm just wondering what the main drivers of this actually.

And just how sustainable it is I mean was it a case of just picking some low hanging fruit or is this something that we can expect to continue for a few years.

Hey, Nick it's.

Absolutely and the execution of the strategy that we put in place just before and at spin for our growth in China, We expanded our agents and distributors to give us greater sales coverage and reach we're now at 2200 and for those of you who are kind of keeping count by quarter, that's because we're pruning the ones that arent.

Not performing as well, but we think we're at a really good place we've had growth in the quarter in tier one and tier two cities actually we've seen it all year in China.

As well as as we present infrastructure and growth in the industrial segments in the fourth quarter, which is really strong. So we grew sales coverage.

That's one piece. The second is we continue to increase our focus on key accounts and those key accounts.

A national provider and they want to keep us for service, that's helping with our conversion rates and our retention rates and a lot of those key accounts are state owned enterprises I know people don't typically think that way, but it is important as we watch what's happening in development in China right now that we keep that balance between <unk>.

NSO.

So we've been able to do that and then we've just really enhanced.

Our relationships we've continued to innovate we brought <unk> to market in China first in the middle of last year, and we were able to sell in the thousands.

There and we expect Gen III actually globally to be about 20% of our shipped units here in 2022.

So.

A combination of coverage.

<unk> on key cut key accounts, especially in tier one and tier two cities because we were under share there and then and then bringing innovation and new product to market and that's been that's been the strategy. Our teams executing and we expect continued share growth regardless of if there are headwinds or or some.

Fluid situations.

Thanks, that's very clear.

And just kind of following on from that so obviously, you're taking share in China, which is great and are you taking it from the other global Oems or is it more some of the local players who are losing out here.

Yes, that's hard to say exact having we will have others report as well, what we really know well is.

How the market grew in how we grew against that that data is published we have some external agencies that kind of track that so we know our performance well.

As other companies reported and there'll be a little bit more clarity on that but it's hard to say exactly where the share gain is coming from same with service. It's just hard to say.

Okay. Thank you very much.

Thank you. Our next question comes from Joel spun Spungen with Bamberg. Your line is open.

Good morning.

I just wanted to be helpful.

Something I think you mentioned in your prepared remarks around pricing I think.

You said that you can.

So in the quarter it came out.

You'd be expecting particularly if you could maybe just elaborate a little bit.

On maybe why that was.

And if you have any sort of thoughts or remarks about sort of pricing.

Why does the wider industry that would also be helpful.

Yes my comment.

It was with regard to new equipment pricing and it was marginally better than what we had expected Asia. We ended the quarter to the booking timeframe is short we saw meaningful improvement on our booked margin trends both versus last year, and we saw sequential improvement versus the last quarter as well so that is where a lot of improvement in the quarter.

Came from EMEA was largely flat over last year Americas margins were down year over year part of that was mix and the orders. We did not expect any improvement in America. So Q1 of next year, given the court to the order cycle.

But we did see sequential improvement from Q3 to Q4 and the year over year trends and Thats encouraging and we expect additional improvements as we go into Q1 of 'twenty two.

So that is where that was the overall flavor on the booked margin trends and then service pricing as you said that that was up about a point in the quarter, largely driven by Americas, and EMEA and Joel the only place really we're seeing that the intense competition is really in the infrastructure segment and we get to see that more because most of those are public bids.

But those are the volume infrastructure that people are looking at both in Europe and in Asia, and that's really where we're seeing kind of the more competitive pricing.

We haven't seen any of the pricing in China to where it went after 2015 with precipitous drops haven't seen any of that yet its competitive as you would expect but really mainly seeing it in the infrastructure segment.

Okay. That's helpful. Thank you very much if I can just ask one more thing which is just with regards to the.

The comments that you made on the slide deck back about China pricing.

It looks like the Chinese market in Q4, being a little bit better.

Then perhaps you'd expected.

Im just trying to marry that with the with.

With your with your remarks about about the outlook for China, which it's it feels like I think you were previously Q3 talking about a flattish market China in 'twenty two.

Was it down mid to high single digit.

How do we reconcile those two things.

Actually seeing maybe some of your early indications, but it's in China going into this year theres already been some weakening in terms of the level of activity.

Allowing obviously equip harder comparison.

Yes, so what we aim for China keep China market was stronger than what we had anticipated all for 'twenty. One we started the year in 2001 thinking the market is going to be up kind of mid single digits. It was up 10% doesn't always saying even going into Q4.

Part of the market will be down, but it ended up being flat. So the market continued to surprise us on the on the upside.

So.

So and if you look at some of the underlying trends in the China market.

The fluid space under construction was up 5% in 'twenty, one above 8% above 2019, the real estate investment was up in the year as well in 2021, so that was up about 4% and historically these trends have a high degree of correlation, but where the weakness comes from Joel is if you look at the new stops they were down about.

At 11% in 2021, so that is there so.

Real estate investment is up floor space under construction is up but the bookings starts are lower and that is where I think as guided you don't have the facts flake and thats, what everything that we're reading.

And the market is the market could be down so I think we're guiding to 5% to 10% down obviously that that is still a fluid situation.

We are seeing the support from Goldman starting to kick in both from the central government and from the local governments central government in formal mortgage loosening.

Some flexibility around the Tweed Redline policy increase in money supply. So you know all of those things that are happening and even with the local governments that rely on land sales for a big portion of the budgets. We are seeing some support from them as well. So we kind of seeing a mixed picture, but I think it's good to say, it's down 5% to 10 calibrate our revenue Accordingly, and then if it is better.

Sure.

That's a lot better situation to be and then be surprised on the downside.

Alright, Thank you very much.

Thank you and that's all the time, we have for questions I would like to turn the call back to Ms. Judy marks for closing remarks.

Thank you Catherine so to summarize 2021 was an excellent year for Otis we executed on our four strategic pillars introduced innovative new products made good progress on our ESG initiatives and demonstrated the strength of our capital management strategy. Our colleagues made all of this possible delivering.

For our customers passengers and communities globally a.

The fundamentals of Otis and our industry remains strong and we are well positioned to deliver on our 2022 financial outlook, including high single digit EPS growth and approximately $1 6 billion and free cash flow. We look forward to speaking with you at our Investor day on February 15th to share more about our strategy.

And medium term growth outlook. Thank you for joining us today stay safe and well.

This concludes today's conference call.

Thank you for participating you may now disconnect everyone have a great day.

Okay.

Yes.

Sure.

[music].

Sure.

[music].

Yes.

[music].

Okay.

[music].

Sure.

Anymore.

[music].

Yes.

[music].

Yes.

[music].

Okay.

[music].

Good morning, and welcome to the oldest is fourth quarter 2021 earnings Conference call. This call is being carried live on the Internet and recorded for replay.

Presentation materials are available for download from Otis as website at Www Dot oldest dot com.

Now I'll turn it over to Michael Redner Senior director of Investor Relations.

Thank you Katherine and welcome to Otis fourth quarter 2021 earnings conference call on the call with me today are Judy marks President and Chief Executive Officer, and Rob <unk> Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted the company will speak to results from continuing operations excluding.

Great.

And shareholders, we achieved broad based organic sales growth grew adjusted operating profit for the third year in a row.

Delivered 19% adjusted EPS growth and generated $1 $6 billion in free cash flow, while introducing new innovative solutions for our customers and passengers we've.

We remained committed to shareholder value creation, and strategically deployed capital completing $450 million in debt repayment distributing over $390 million in dividends after raising the dividend, 20% versus the prior year and repurchasing $725 million of Otis shares.

Given the strength of our balance sheet, we also announced our tender offer for the remaining interest in our joy at Otis and accretive transaction for Otis.

Includes 92, escalators 60, moving walkways and more than 120 Gen. Two elevators equipped with re Gen drive technology that will support the terminal smart and Green design.

In November we received an order for Soyars landing in Miami, Florida. This project extends a decade long relationship with the developer and notice will install over 'twenty elevator and escalator units. Additionally, Concord Pacific one of the largest developers in Canada has selected <unk> to support its king landing project in Toronto onto.

Terrio, extending our nearly decade long relationship will provide more than a dozen elevators for this mixed use high rise.

These orders demonstrate the power of long lasting relationships and our continued investments and providing innovative solutions for our customers are.

Our strong orders momentum throughout the year led to approximately 115 basis points of new equipment share gains on top of 60 basis points in the prior year.

This platform is positioned to revolutionize our customer and passenger experience, while providing energy efficiency benefits that helped to reduce the impact on our planet.

Gen 360 joins our existing suite of energy efficient products, such as the reach and drive which can distribute power back into a building.

Now moving to slide four.

Equally important is the digital connectivity of units in our service portfolio and this year, we deployed approximately 100000 Otis one units.

<unk> total portfolio connectivity to about one third of our approximately $2 1 million units under our service.

Over the medium term, we plan to increase connectivity to approximately 60% of units up from roughly 25% at the end of 2020.

Our operational initiatives also progressed as we rationalize adjusted SG&A expense down 40 basis points as a percentage of sales and reduced the adjusted effective tax rate by 190 basis points. This represents.

Sent significant progress in right sizing, our costs and optimizing our tax structure as an independent company.

Now turning to slide five and starting with the 2022 industry outlook.

While market dynamics remain fluid the industry's long term fundamentals are solid.

We're encouraged by the strong recovery experienced during 2021 and have confidence this momentum will continue into 2022 in many regions.

The new equipment market is expected to be up mid to high single digits in the Americas low single digits in EMEA and down mid to high single digits in Asia, driven by uncertainty in China, where we expect the market to be down 5% to 10%.

While the China, new equipment market faces headwinds this will not detract from solid growth in the service installed base were approximately 1 million units are added each year to the global base of mid single digit growth rate annually.

Industry installed base in the Americas, and EMEA are expected to grow low single digits and in Asia, We're expecting high single digit growth driven by China.

Here's our 2022 financial outlook.

For the year, we expect organic sales growth of two five to four 5%.

Net sales will be in a range of $14 four to $14 7 billion up 1% to 3% accounting for FX headwinds.

$20 million.

Adjusted EPS is expected in a range of $3 20 to $3 30.

Up 6% to 10% versus prior year and 24 cents at the midpoint.

Lastly, we expect free cash flow to be robust at about $1 6 billion or approximately 115% to 120% conversion of GAAP net income.

We remain highly disciplined in our capital allocation strategy committed to meeting the needs of all stakeholders through dividends debt Paydown bolt on M&A and share repurchases. Once we complete our deleveraging plan associated with the acquisition of the remainder of our Doyle with that I'll turn it over to rule to walk through our 2021 result.

And 2022 outlook in more detail.

Thank you Judy and good morning, everyone, starting with fourth quarter results on slide six.

Net sales were up two 2% to $3 6 billion.

Organic sales grew for the fifth consecutive quarter and were up two 8% with growth in both segments.

2019.

Fourth quarter, adjusted EPS was up nine 1% or <unk>, driven by <unk> of operating profit growth and <unk> from a lower adjusted tax rate.

Benefit from share repurchases done earlier in the year and reduced interest expense from the repayment of debt contributed the balance.

Adjusted EPS was <unk> <unk> ahead of the prior outlook, including the favorability from better than expected operating profit growth and tax rates that ended at the low end of private expectations.

EMEA was flat versus the prior year as mid single digit growth in Europe was offset by decline in the middle East.

From a tough compare on major orders.

Total volumes in the quarter also continued to show signs of robust demand globally up double digits driven by strength in China.

Total company backlog increased 1% and 3% at constant currency with growth in all regions, including approximately 5% growth in Asia.

This was partially offset by almost a point of improvement in booked margins in Asia with EMEA being about flat.

Overall, our pricing on new orders was slightly better than our prior expectations.

The backlog margin trend.

Adjusted for mix was about flat sequentially and down about a point versus the prior year.

Full year, new equipment orders were up 13, 2% with growth in all regions with the Americas up 14%, EMEA up 4% and Asia up 17% with high teens growth in China.

<unk> from COVID-19 in the fourth quarter of the prior year.

Adjusted operating profit was down $7 million commodity inflation of $35 million that was in line with our profit expectations was largely mitigated by installation productivity and favorable performance on projects.

Service segment results on slide eight.

Maintaining this portfolio was up 3% from broad based improvements in retention recapture and conversion rates conversion.

Conversion rate in 2021 was up three points globally and up five points in China to 45%.

Modernization orders returned to growth in the quarter and were up 18, 3% at constant currency with growth in EMEA and the Americas.

Overall modernization backlog was up 6% at constant currency.

Service organic sales grew for the fourth consecutive quarter up 4% with growth in all lines of business.

Maintenance and repair grew four 3% with continued robust recovery and repair and low single digit growth in the contractual maintenance sales.

Modernization sales were up two 2% slightly.

Slightly below our expectations due to continued supply chain challenges.

Service adjusted operating profit was up $20 million with 50 basis points of margin expansion, the eighth consecutive quarter of margin improvement.

Profit growth was driven by higher volume favorable pricing and mix, partially offset by higher cost from the absence of COVID-19 cost containment actions taken in the prior year.

Service portfolio pricing was up more than 1%, mainly due to price increases in Americas and EMEA.

Moving to slide nine overall.

Overall for the full year, we carried the momentum from 2020 into 2021 and gained 115 basis points of new equipment share gain.

Accelerated the rate of maintenance portfolio growth organic.

Organic sales were up almost 9% with new equipment and service up $15, five and four 1% respectively.

This sales growth our focus on execution and FX tailwind resulted in $272 million of adjusted operating profit growth.

New equipment operating profit was up $105 million versus the prior year at constant currency driven by higher volume and installation productivity that was more than double what we achieved in 2020.

This combined with our ongoing focus on material productivity more than offset the unfavorable price mix and headwinds from commodity price increases of approximately $90 million.

Margins in the segment expanded 100 basis points more than offsetting the decline in 2020 and are now above 2019 levels.

Service margins expanded 30 basis points building on the expansion in 2020 and are now 140 basis points above 2019 levels.

Corporate segment costs were about flat for the year. Despite the step up in public company expenses from disciplined cost management.

Adjusted EPS was up 19% for the year from operating profit increase and a reduction in the tax rate that was down 190 basis points for the year.

Adjusted EPS was up about 35% from 2019 for a two year CAGR of 16% substantially ahead of our prior medium term growth expectation.

We generated close to $1 6 billion and free cash flow from earnings growth and a rigorous focus on working capital.

Working capital is now down more than 50% from 2019 levels.

As we look forward to 2022 on slide 10, we expect service industry growth rates to be consistent with 2021 across all regions and new equipment end markets to show solid growth outside of China.

This combined with higher starting new equipment backlog strength of the maintenance portfolio and our relentless focus on operational excellence.

US the confidence to improve across all key metrics in 2022 with organic sales up two 5% to four 5% and overall margin expansion of approximately 30 basis points.

We expect sales operating profit and margins to improve in both segments at the midpoint.

Adjusted EPS is expected to be in a range of $3 20.

To $3 30.

Up 8% or 24 at the midpoint.

We expect free cash flow of approximately $1 6 billion.

Between 115, and 120% of GAAP net income.

This free cash flow outlook reflects the strong earnings growth expectation, partially offset by an approximately $55 million headwind from a onetime tax related payments that was previously expected in 2021 and $20 million and incremental capital expenditures.

Support digital connectivity initiatives.

Taking a closer look at our organic sales outlook on slide 11.

The new equipment business is projected to be up 0.5% to 3% supported by the backlog that was up 3% at constant currency in 2021.

Americas organic sales growth is expected to be up low single digits.

EMEA up mid single digits.

Asia is expected to be up or down slightly with mid to high single digit growth in Asia Pacific.

China is expected to be flat to down low single digits as growth from higher starting backlog is offset by decline in the book and ship business.

Service segment growth is broad based and is expected to be up in all regions with maintenance and repair up 4% to 6% benefiting from a 3% higher starting portfolio.

Favorable service pricing environment, and a continued recovery and repair.

Modernization is expected to be up 4% to 6% from 6% higher starting backlog and easing of 2021 supply chain challenges.

Overall organic sales are expected to be up two 5% to four 5% building on the approximately 9% organic growth in 2021.

Switching to EPS bridge on slide 12.

We expect EPS growth of 6% to 10% with operating profit growth of $95 million to $165 million at constant currency.

Contributing 16 to 2007 to the EPS growth.

Operating profit will benefit from increased volume in both segments.

Service pricing tailwind and continued savings from material installation and service productivity initiatives.

This will be partially offset the commodity headwinds of approximately $90 million.

Foreign exchange translation is expected to be a 7% EPS headwind, mainly from the strengthening of the euro and the yen against the U S dollar.

Noncontrolling interest expense from increased profit in China, and other jv's will reduce EPS by 2% to four.

FX translation impact and increase in Noncontrolling interest expenses are mostly offset by accretion from the <unk> transaction.

We now have more visibility into the approval process and are increasingly optimistic and the timing of the delisting and expect the transaction to be about 10 cents accretive in 2022.

Lastly, we expect to reduce our adjusted tax rate by an additional 50 to 100 basis points. This year, adding two to three for the EPS.

And with that I'll request Catherine Please open the line for questions.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key.

Our first question comes from Jeff Sprague with vertical research your line is open.

Thank you and good morning, everyone.

Morning, Jeff Good morning.

Yes, Jeff Let me, let me take that so we're doing a low single digit guide in the Americas.

Really strong performance this year in the Americas up, 14% and orders roughly and up 14% of sales. So we are capitalizing on the market as it's growing in the indices are all looking really positive both multifamily nonresidential, whether it's dodge or Abi everything's looking good really heading into 'twenty two.

And Judy a role maybe you could just give us a little color on the complexion of the sequential patterns here this year.

I would imagine China's starts weaker and gets stronger but would love to hear your view on that.

In terms of price coming through the backlog.

Counteracting the commodities headwinds how does that play out anything.

Anything you could share on how to think about.

The jumping off point and how we start here in Q1.

Yes, absolutely.

Jeff we expect to start the year strong and service growth compares are easier I mean, if you go back to Q1 of last year Q1 was our lowest organic growth quarter. In 2021 compares are easier on service.

Given the tough organic growth compares.

On new equipment in the first half with 25% growth last year in the first half of 2021, new equipment growth will be stronger in the second half and also commodity headwinds will predominantly be a first half phenomenon. So the first half of 2022.

New equipment could look like Q4 of 2021 on a year over year basis.

But sequentially, we do expect Q1 of 'twenty, two will be stronger than Q4 of 'twenty one.

And on both profit and margin and then Q2 will show improvement over Q1. So we expect continued sequential improvement in our new equipment business.

The FX headwind will also be a first half issue keep in mind Euro was about $1 20 in the first half of 'twenty, one and is now trading at 111 112 levels. Our guide for the year is 112 so.

Profit growth in service segment should more or less offset that and we expect to grow profit kind of in line with our revenue growth in the first half and Epo EPS will improve year over year as well.

Great appreciate it thank you.

Thank you Jeff.

Yeah.

Thank you. Our next question comes from Miguel <unk> with BNP Paribas. Your line is open.

Hi, good morning, everyone.

Two questions. If I may the first one again on your guidance for new equipment sales in 2022, you're saying.

In Asia up or down slightly.

Then.

If I look at your orders <unk> had seven consecutive quarters of positive growth.

And over 2021 gross has been above mid teens call. It mid teens order growth in Asia.

So can you tell us can you help us understand where the lead times are developers that are finally get more difficult.

To pay a delivery or the lead times that they've.

Cotton longer into 2022.

Okay.

Yes.

Judy I don't it's not really a lead time issue.

<unk> and the remaining third is book and ship, it's the booking shift where I think we're trying to be prudent not really watching the trends understanding whether its soe developers or private developers what's happening. So we feel we feel that that is what's going to really drive our 'twenty two performance in China.

Which gets blended into our Asia number orders are really strong, but how that converts and especially the book and ship that is about a third of our volume in any given year globally, but especially in China as a watch item for next year. So let me just put a couple of numbers on this Michael just to add to what Judy said, So if you start with the Asia backlog.

That we said is up five and within that Asia Asia Pac backlog is up high single digit in China as Judy said is up call it 3% and and just to reiterate what we know whole point about 60% to 65% of our India business is driven by backlog. So for China backlog is up 3% and Thats two thirds of our revenue.

That should drive about 2% growth in the China business.

And if the entire book and ship is flat right so that.

That's the way to think about it now our guidance for China is that China would be down is would be flat to down 3%. So despite the overall higher starting backlog, which implies the ear book and ship to be down between 5% to 10% right on the remaining that one 3rd% to 40% of the revenue and that's largely in line with what Judy.

Commented on the prepared remarks on the China market now there's a chart in the appendix that has a 2021 orders in China versus the market and our orders outgrew the market by call. It two X and if we can replicate that performance in 'twenty two that would be an upside to this outlook, but it's early in the year and the China market is very fluid. So we are just being very.

Appropriately prudent at this stage in our guidance.

That's great. Thank you.

And then my second question is just coming back to your margin guidance, specifically for new equipment.

Could you give us more color on the trajectory is going to be perhaps a second half weighted profit here for new installation.

Yes, I think that's what I said kind of in response to Jeff's question on new equipment, absolutely I mean, the commodity headwinds be calling for about $90 million. Most of that is going to be in the first half we have some commodity headwind kind of dialed into the second half just given the volatility that was there last year, but if the commodity headwinds.

New equipment margins to be slightly challenged in the first half and then with improvement in the second half of that yet.

Overall as I said to Jeff's question, we do expect that profit growth will be in line with our revenue growth in the first half right. So we don't expect margins to shrink in the first half of the year.

Because of the service growth rate.

Correct, Yeah got it and.

And then just one last question on your capital allocation strategy.

Suspended the share buyback because youre not focusing on deleveraging post the acquisition of Sabadell Ya.

If I'm correct.

It would still imply below two times net debt to EBITDA for next year for 2022 can you remind us the normalized level that youre seeing the business operating from.

So we'll be about.

We are not getting below two by the end of the year I think we're getting to $2. One by the end of the year. So but again I think we are we feel very very comfortable with our debt levels. We are of the $500 million of deleveraging. We've already done 400, we've got 100 to go and depending on when we can repatriate the cash back to the U S and.

And we will start our share buyback. So that's what we've guided to is the fact that we will recommence share buyback once.

Our debt repayment is complete so that's on track and so once we get a little bit more clarity on the repatriation of cash will provide additional guidance on share buyback for the year.

Thank you very much.

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning.

Maybe just wanted to circle back apologies to China, new equipment revenues for a second so I think you'd said Rahul that those would be down.

Flat to down low single digits in 2022.

From a.

Sort of a revenue.

Standpoint.

Just wanted to understand sort of.

Again, just how you're thinking about that sort of first half and second half.

And how you would expect your orders in China, new equipment to trends going through this year, just trying to understand that sort of relationship between the orders booked in China, and then when they're sort of being billed in the P&L.

Yeah, So Julien good morning, and just to clarify what I said earlier maybe.

We expect our China revenue new equipment revenue to be down.

To be flat to down 3%. So that's the that's our revenue growth expectations on the new equipment side for China, So flat to down <unk> be going in with a higher starting backlog and that backlog is up about 3%. So that should support what my comment was that that should if the book and ship business for the year is flat year over year that will drive about a $2.

Rent growth considering the backlog is about two thirds of the revenue now if our guide is flat to down three that would imply that the book and ship business is down kind of call. It 5% to 10 right at the higher end or the low end of the guidance, which is kind of in line with the overall market is what we are seeing now again just to repeat what I said earlier.

We are have you have done a lot better in China on orders.

In 2021, and we had almost a two X the level of market growth. So that we have not factored that in into into this guidance. So hopefully if we can do a little bit better in orders in the market that should drive some upside in terms of the first half second half lift in the market is going to be a little bit softer in the first half again part of that is just the compares.

Because the market was very very strong in the first half it was up about 16% through the first nine months of the year ended about and was about flat for the fourth quarter. So the market is definitely stronger than the first half last year. So that should drive some tougher compares into 'twenty, two and I think our order trends are obviously going to mid of that a little bit Yeah. Let me just add two things Julien.

You context that the segments about 650000 for new equipment in China, even if that down 5% to 10% happens in this segment.

10% level, we're back to 2020 levels for the China segment. So it's still healthy where gain we've gained share over the last two years in China. The teams performing incredibly well, we actually had record record unit orders in 2021, So we've got momentum with us, but we're trying to be prudent to watch some of the.

<unk> that's happening.

Thanks, very much and then maybe just.

And step back from the quarterly moving parts to.

Two years ago at the Investor Day, you talked about.

20 to 30 basis points of sort of annual operating margin expansion medium term.

Definitely on track with that you're up 30 bps last year, you're guiding this year up 30 bps.

Well.

And I suppose in the round and sort of.

Should we think about 2021 and 2022 in aggregate being sort of.

Fairly typical when we're looking at the sales trends understand you've got some price cost noise, but you've also had higher sales growth than you'd guided medium term, so maybe they offset each other.

Just trying to understand sort of any big leave is.

Good or bad on the margins beyond this year when you think about the medium term or it's kind of steady as she goes in these years of fairly representative in total.

80% of our profit, that's where we're going to have 50 basis points of margin expansion in the service segment, So new equipment, a little more up and down over over the different years, but service is what continues to sustain us in drive us and where we have productivity in dose, but that youre going to see a little bit of a preview to.

Investor Day.

And keep in mind, Julien, we grew 50 basis 30 basis points of margin in 'twenty, one after absorbing 50 basis points of mix headwinds because new equipment grew much faster faster than service right. So that's where so adjusted for mix margins were up 80 basis points in the year. So.

We are tracking to that 30 basis points.

We guided at Investor day.

Great. Thank you.

Thank you. Our next question comes from Stephen Tusa with Jpmorgan. Your line is open.

Thank you.

Hello, Good morning, Steve, Yes, we got you great sorry.

Kind of on the road a little bit here.

Just I guess, a simple way to ask the question would be what what do you guys think is going to be potentially kind of the toughest orders comp.

In 2022 for China.

Should we be kind of ready for for any given quarter, just based on where the level is today and what the comps are for something that is down double digit at any given point for you guys, specifically and then as a follow up to that and.

And what level of orders would you need to see this year given your solid backlog.

Confidence that you can grow China or at least hold it flat in 2023.

Yes, the quarterly order trends it is hard to predict the guide by just nature of the orders our orders are lumpy right.

Right.

We have maintenance fees go mute.

So the orders are lumpy, so it's hard to call out any given quarter, but clearly as we said earlier.

The orders grew really strongly to Ireland.

Page in the backup that kind of.

But has the China orders. So if you go back and look at kind of our overall, China was up kind of two <unk> and obviously with the stronger growth.

A much stronger growth in the first half in Q4 was still up year over year not as strongly in the first half, but we still outgrew the market even in for the fourth quarter. So the compares to the first half are definitely stronger, but as you as you project forward and you think about okay, what do we need to drive sustainable growth.

China is one factor and <unk>.

That's clearly important but keep in mind the rest of our business is growing it is in very very solid growth market. So if you'd look at Americas, EMEA and Asia Pac and that is about two thirds of our new equipment business. So that obviously is in very strong growth market. So that should help as we go beyond.

And that as we go beyond 2022, so that's kind of one.

And then obviously the second part about this is that.

The point that Judy made earlier on the Americas backlog that should help with 23 as well because some of the orders that we are not shipping in 'twenty two those should ship in 'twenty three so that should help 'twenty three as well. So overall, we feel confident that we can continue to drive new equipment up kind of in that low single digit.

Growth range, which was kind of in line with our medium term expectations. So that as we standby that and I think obviously more to come on Investor Day, and then obviously.

Got it and then just one last one for you I mean your guidance how much of the year over year is driven by.

Like some of the more Otis specific initiatives around productivity.

<unk> been banking hitting on for the last couple of years since we since coming public.

Yes, one of them.

Steve I mean, if you look at kind of.

If you look at our profit guide.

It's largely a largely a volume story, but we have commodity headwinds of 19 million that were largely offsetting through.

Through our productivity initiatives on the new equipment side.

Overall on the pricing side, a new equipment or the margin drag that we have from backlog margins being down is being offset by India pricing improvement so that that helps.

Two on price and Steve will know most of that in the first quarter because thats when most of our renewals happen.

Great. Thank you.

Thanks, Steve.

Thank you. Our next question comes from John Walsh with Credit Suisse. Your line is open.

Hi, good morning.

Good morning.

Hi, maybe.

Maybe just a couple of quick clarifications for me I just wanted to make sure.

Comparing things apples to apples here, but can you remind us what you're exactly forecasting on that industry, new equipment growth slide there on on slide five is that.

A kind of a unit number does that include price just would love to get a little more clarity on that yet.

Yes, that's a unit number thats the easiest way for us to make a global compare.

Gotcha, great that's what I thought okay.

And then maybe just on.

Really strong share gains this year of 115 on top of the 60, you said there we can see that chart in China, where you're outgrowing the market.

Can you give us a little bit more color.

On where some of the other.

Share gains are coming from broad based or any geographies you'd call out.

Yeah, It's broad base, John , especially this year, we have seen.

We've seen Asia Pacific.

Especially in the mature markets, but in India, which is really starting has come back strongly as a large segment.

We've seen that come back very nicely in 'twenty, one in terms of share gain.

And but it's broad based.

I would tell you that Europe , obviously lots of different countries, but western Europe , we did well and.

Again, I would call out some of the ones in Asia Pac ex China, China's done incredibly well.

Great.

You're taking my questions I'll pass it along thank you.

Thank you. Our next question comes from Cai von <unk> with Cowen Your line is open.

Yes, thanks, so much and good results.

So thank you for you broke out I guess, the China risk 10 customers, 2% to 3% of China sales.

But.

What is the risk if they've crossed two to three red lines, but basically they stopped paying more.

Morphs into a bad debt risk.

Yes, no. It's a good question Cai and I mean, if you look at our overall, China business, we have done really well.

Cash flow in China was very strong opening order was well above 2020 levels.

We've been in a lot of that is working capital and receivables are up kind of call it less than 10% on.

On 25% revenue growth in China, So China business did really really well on cash management.

Having said all of that obviously the situation needs to be managed very carefully and we're dealing with on a customer by customer basis as the chart in the back he is only 2% of our customers in China that are in the orange or the Red line got degree or other credit risk and we've tightened the terms where the situation is warranted, but we don't feel we need to make any wholesale changes there and if you look on a <unk>.

Company overall for 2021, our bad debt expense in 'twenty, one was actually lower than our bad debt expense in 2020, despite 9% higher revenue. So we manage the situation well and we will definitely keep an eye out for 'twenty two yes. The only other thing I'd add is when we look at a broad based group of developers in.

And as Earl said, we're managing this our China team is managing this on a on a daily basis with a lot of discipline and rigor. So yes, we're pleased with our bad debt. How we ended 2001 as he said.

But we're also understanding and watching closely where the market's going and when needed. We are moving to all cash prepayments to protect our own balance sheet.

Thank you and the second question. So you mentioned that.

Installed 100, 100000, Otis one units last year, what is the plan for this year and basically as you install more units I think you've made the point.

Because you have a bigger share of the overall service population of the world.

Your takeaway opportunity is greater than others talk to us a little bit about what youre seeing in terms of foodservice takeaways too.

Yes. So we did 100000 2020, we added another 100000 2021, it will be comparable in 'twenty, two as we get to that 60% coverage level in the medium term and there's good reason for that some of it is in our portfolio. Our service portfolio is not all <unk> units and we've.

Focused we started this by focusing on Otis controllers, where we had the most knowledge and the best technical solution. We're now expanding that but theres also some some old controllers out there as many of you know in some very old elevators that don't make sense to connect so we think we're on a good path because what it is.

Doing chi.

As it's driving that stickiness that we work with customers. So, it's giving us more productivity, but it's giving our customers real value to be able to see the heartbeat of their elevator and their Otis one app to understand if it's if it's running or not whether they are on site or not and so we think it's really helped our returns.

When rates, which now as Rahul said in his remarks, our over 94%, which is leading in the industry.

And it's also helping our conversion rates because last year, we entered in 'twenty. One we introduced our gen III portfolio across the globe and Gen 360 in certain countries in Europe .

And those all come pre populated when we ship them with Otis one out of our factories now depending on where you are in the world to certain factories.

It's already leaving the factory with Otis one installed so our customers are actually seeing the benefit of this during the warranty period and Thats, especially in China are helping us with the.

Portfolio growth and the conversion that Rahul talked about which is now at 45% for the year. So we've moved up five points in China on our conversion rate and that's the stickiness, we are getting everywhere in the world anytime were more connected with our customers, we get that that stickiness, which will again have that compounding effort of <unk>.

Growing our portfolio, so great productivity for us, which supports our margin drop throughs in our incrementals, especially on volume in service. This year, that's driving the 50 basis points of margin expansion, but most importantly, it's getting that loyalty and stickiness.

Thank you.

Yeah.

Thank you. Our next question comes from Nick Kaufman with RBC capital markets. Your line is open.

Yes, hi, everyone. Thank you for taking my question.

You mentioned that you grew at double the market rate in China in 2021, which is a really impressive result, I'm just wondering what the main drivers of this actually.

And just how sustainable it is I mean was it a case of just picking some low hanging fruit or is this something that we can expect to continue for a few years.

Hey, Nick it's.

Why arent performing as well, but we think we're at a really good place we've had growth in the quarter in tier one and tier two cities actually we've seen it all year in China.

As well as as we present infrastructure and growth in the industrial segments in the fourth quarter, which was really strong. So we grew sales coverage.

That's one piece. The second is we continue to increase our focus on key accounts and those key accounts want a national provider and they want to keep us for service, that's helping with our conversion rates and our retention rates and a lot of those key accounts are state owned enterprises I know people do.

Typically think that way, but it is important as we watch what's happening in development in China right now that we keep that balance between private and NSO.

So we've been able to do that and then we've just really enhanced.

Our relationships we've continued to innovate we brought <unk> to market in China first in the middle of last year, and we were able to sell in the thousands.

There and we expect Gen three actually globally to be about 20% of our shipped units here in 2022.

So.

Combination of coverage.

Focus on key cut key accounts, especially in tier one and tier two cities because we were under share there and then and then bringing innovation and new product to market and that's been that's been the strategy. Our teams executing and we expect continued share growth regardless of if there are headwinds or or some.

Fluid situations.

Thanks, that's very clear.

And just kind of following on from that so obviously youre taking share in China, which is great are you taking it from the other global Oems or is it more some of the local players who are losing out here.

Yes, that's hard to say exactly.

We will have others report as well as what we really know well is.

How the market grew in how we grew against that those that data is published we have some external agencies that kind of track that so we know our performance well.

I think as other companies have reported and there will be a little bit more clarity on that but it's hard to say exactly where the share gain is coming from same with service. It's just hard to say.

Okay. Thank you very much.

Thank you. Our next question comes from Joel spun Spungen with Bamberg. Your line is open.

Good morning.

I just wanted to be helpful.

Something I think you mentioned in your prepared remarks around pricing I think you said.

Said that you thought.

In the quarter it came out.

<unk>.

<unk> I was wondering if you could maybe just elaborate a little bit on that maybe.

Why that was.

And if you have any sort of thoughts or remarks about sort of pricing.

Why the wider industry that would also be helpful.

Yes my comment.

Was that with regard to new equipment pricing and it was marginally better than what we had expected Asia. We ended the quarter to the booking timeframe is short we saw meaningful improvement on our booked margin trends both versus last year, and we saw sequential improvement versus the last quarter as well so that is where a lot of improvement in the quarter.

Came from EMEA was largely flat over last year Americas margins were down year over year part of that was mix in the orders. We did not expect any improvement in America. So Q1 of next year, given the quarter to the Otto cycle.

But we did see sequential improvement from Q3 to Q4 and the year over year trends and Thats encouraging and we expect additional improvements as we go into Q1 of 'twenty two.

But those are the volume infrastructure that people are looking at both in Europe and in Asia, and that's really where we're seeing kind of the more competitive pricing.

Not that we haven't seen any of the pricing in China to where it went after 2015 with precipitous drops.

Not seen any of that yet its competitive as you would expect but really mainly seeing in the infrastructure segment.

Okay. That's helpful. Thank you very much if I can just.

I'll ask one more thing, which is just with regards to.

The comments that you made on the slide deck at the back about China pricing.

It looks like the Chinese market in Q4, being a little bit better.

Perhaps you'd expected.

Im just trying to marry that with.

With your with your remarks about about the outlook for China, which is it feels like I think you were previously Q3 talking about a flattish market, China 22 that you announced.

Was it down mid to high single digit.

How do we reconcile those two things.

Really seeing maybe some of your early indications, but it's a bit too.

China going into this year.

<unk> seen some weakening in terms of the level of activity, allowing obviously harder comparison.

Yes, so what we for China keep China market was stronger than what we had anticipated all for 'twenty. One we started the year in 2001 thinking the market is going to be up mid single digits. It was up 10% doesn't always saying even going into Q4, we thought the market would be down but it ended up being flat to the market.

Continued to surprise us on the on the upside.

So.

So and if you look at some of the underlying trends in the China market.

<unk>, 11% in 2021, so that is where so.

The real estate investment is up floor space under construction is up but the booking starts are lower and that is where I think as guided at the fact flake and thats what everything that we're reading.

And the market is the market could be down so I think we're guiding to 5% to 10% down obviously that that is still a fluid situation.

We are seeing the support from Goldman starting to kick in both from the central government and from the local governments central government in formal mortgage loosening.

Some flexibility around the three Red line policy increase in money supply. So you know all of those things that are happening and even with the local governments that rely on land sales for a big portion of their budgets. We are seeing some support from them as well. So we kind of seeing a mixed picture, but I think it is good to say, it's down 5% and calibrate our revenue Accordingly, and then if it's better.

Sure.

That's a lot better situation to be and then be surprised on the downside.

Alright, Thank you very much.

Thank you and Thats all the time, we have for questions I would like to turn the call back to Ms. Judy marks for closing remarks.

For our customers passengers and communities globally.

And medium term growth outlook. Thank you for joining us today stay safe and well.

This concludes today's conference call.

Thank you for participating you may now disconnect everyone have a great day.

Q4 2021 Otis Worldwide Corp Earnings Call

Request a DemoDemo

OTIS

Otis Worldwide

Earnings