Otis Worldwide Corporation

Good morning and welcome to OTIS's first quarter 2020 earnings conference call. This call is being carried live on the internet and recorded for replay. Presentation materials are available for download from OTIS website at www.otis.com. I'll now turn the call over to Stacey Lacheski, Vice President of FP&A and Investor Relations.

Thank you, Angela. Good morning to everyone. Welcome to OTIS's first quarter 2020 earnings call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Raul Guy, Executive Vice President and Chief Financial Officer. Please note, except for otherwise noted, the company will speak to results from continuing operations, excluding restructuring and other significant items. The company will also refer to adjusted results where 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. We also remind listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties. OTIS's SEC filings, including its registration statements on Form 10 and Form S3 and its Form 10Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Judy.

Thank you, Stacey, and good morning, everyone. We hope that everyone listening across all of our stakeholders is safe and well. We're glad that you could join us today on Otis's first earnings call post-spin, another important milestone for us in this new era as an independent company. Before I discuss our first quarter results and Otis's outlook, let me share some insights into our people, our business, our management through this crisis, and more importantly, our commitment to our long-term strategy and values. Employee health and safety, a core value, is first and paramount to us. I am proud of our 69,000 colleagues who are supporting our customers and the riding public during these unprecedented times. Elevator maintenance and repair was deemed an essential service in most countries and cities, and we continue to service the largest global maintenance portfolio, including elevators in hospitals, critical infrastructure, and residential buildings. And we're doing this while prioritizing and paying utmost attention to ensure the health and safety of our workforce around the world, allowing many employees to work from home, and providing the proper PPE and guidelines for safe and hygienic working conditions for our colleagues in the field and our manufacturing operations. Early in Q1, we made critical decisions to ensure business continuity, and this helped us navigate the COVID-19 impacts, first in China and then in countries throughout the world. Today, all 14 of our principal factories are open. Our supply chain team has done an excellent job locally and globally in minimizing disruptions to our factories and our field sites while meeting customer demands. Our decision to airship critical parts early during this outbreak has enabled us to protect the supply chain, and we're confident that Otis factories around the world are ready to manufacture at full capacity as soon as job site demand resumes and businesses start to return to normal. During this time, we've extended support to our vendors where necessary, providing advances to limit supply disruptions. Let's discuss the new equipment segment by region. China has seen substantial recovery within the quarter. At this point, China factories have returned to full capacity, and access to China new equipment job sites is returning at varying pace by city to pre-COVID levels. In Asia Pacific, We're installing new equipment in several areas, including Japan, Korea, and Hong Kong, while the currently hardest-hit areas are India and certain countries in Southeast Asia, where our access to job sites is limited and there are labor shortages due to government-imposed measures. North America and EMEA continue to experience job site closures in certain areas and cities that are preventing the installation of new equipment, and we are monitoring the situation closely as job sites reopen. Moving to service, as I mentioned earlier, elevator maintenance and repair was deemed essential in most areas, allowing Otis' service professionals to provide critical maintenance for our customers. Maintenance and repair made up 80% of Otis' services sales in 2019, and our maintenance business remains resilient while we are experiencing some pressure on our repair business where buildings are shut down. Our field professionals continue to support round-the-clock service at hospitals across the globe. In North America and EMEA, we have seen a greater need to support a few limited customers within the hardest-hit verticals with delayed payment terms and concessions during building closures. We will continue to strengthen our long-term customer relationships. Modernization, the other 20% of our service business, is expected to see impacts from COVID-19 as discretionary projects are put on hold, especially in North America and Europe. However, some code-driven and technologically required modernizations are driving activity in Asia Pacific and other regions. Across our business, we have responded with cost containment actions to address the evolving situation and associated sales declines. Our China team was focused on immediate actions, which did minimize the first quarter financial impact. Cost containment actions already underway include a global hiring freeze, reduction in travel and other discretionary costs, merit and salary deferrals, reducing executive pay, and furloughs in certain locations. These are difficult but necessary actions, and our team continues to assess and adjust to address the evolving situation. This crisis has also shown us that our OTIS absolutes, safety, ethics, and quality, drive our commitment to each other, our customers, our passengers, our investors, and to the communities where we live and work. In multiple countries across the world, we use 3D printing technology to manufacture face shields for use by our teams and by frontline workers in hospitals. In Wuhan, beyond providing uninterrupted elevator maintenance, we donated elevator cab air purifiers to several hospitals. And lastly, we pledged to match employee contributions to COVID-19 relief funds, and our colleagues continue to volunteer local communities in many ways. As the world reopens, we will continue to innovate and lead our industry. We're leveraging technology to allow smartphones to interact with elevators for remote floor selection and providing disinfectants and fans to assist in a cleaner environment and services for elevators and escalators. We're working closely with many customers who've requested elevator adaptations as their buildings reopen and people return to work locations, and we will do all of this while investing for the long term. Now let me turn to our first quarter results on slide four. As you've seen from our earnings release yesterday, the first quarter was a solid start for Otis in spite of the initial COVID-19 outbreak in China and the subsequent global spread. On April 3rd, we successfully separated from United Technologies, returning to our roots as an independent company while exemplifying various elements of Otis's culture are innovation, empowerment, and collaboration. Over 200 IT systems were replicated, more than 600 procurement and IT contracts re-signed, and almost 500 processes cut over. We created several new departments, including tax, treasury, and investor relations, and executed nearly 50 facility moves in 18 countries. I'd be remiss if I didn't once again thank our team for this historic undertaking. rising to the occasion and setting us off on the right foot as an independent Otis. In terms of liquidity, we had approximately $1.4 billion of cash at the time of separation and have an undrawn $1.5 billion revolver, which serves as a backstop to our commercial paper program. During the first quarter, we placed over $6 billion of debt at favorable rates. That led to a $30 million reduction in interest expense from our initial expectations. We announced a Q2 dividend yesterday of 20 cents per share and plan to return $260 million to shareholders through dividends in the balance of the year. Q1 results continued the strong operational momentum that you saw during 2019. New equipment orders increased 5.6% at constant currency, excluding China, with double-digit growth in the Americas and mid-single-digit growth in the MEA. Organic sales declined slightly, excluding China, where top-line growth was significantly impacted by the COVID-19 outbreak. Adjusted operating profit increased $17 million, and we achieved margin expansion in both the new equipment and service segments, with 120 basis points of margin expansion overall. Free cash flow conversion was 73%, including the impact of spin-related tax prepayments. I'm pleased with these strong first quarter results despite the impact from COVID-19. However, we are not immune from the broader economic impact as this pandemic spreads across the globe. With this in mind, we are updating our 2020 outlook. We now expect organic sales to be down 3% to 7%, reflecting recovery beginning in early Q3 at the high end and a delayed second half recovery at the low end. Adjusted operating profit is expected to decline $25 to $175 million at constant currency, reflecting volume declines partially offset by cost containment actions I previously described. We expect adjusted net income to be in the range of $840 to $940 million. This net income outlook reflects the reduction in interest expense and a one-point adjusted tax rate improvement from our expectations in February. And lastly, we expect free cash flow conversion to remain strong between 110 and 120% of net income. With that, I'll turn it over to Rahul to walk through our results and outlook in more detail.