Otis Worldwide Corporation

Good morning, and welcome to OTIS Fourth Quarter 2020 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from OTIS website at www.otis.com. I'll now turn it over to Stacey Licheski, Vice President of FP&A and Investor Relations.

Thank you, Justin, and good morning, everyone. Welcome to Otis' fourth quarter 2020 earnings conference call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Rahul Ghai, Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant one-time non-recurring 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 our Form 10-K, upcoming annual report on Form 10-K, and quarterly reports on the Form 10-Q provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Judy. Thank you, Stacey, and good morning, everyone.

Thank you for joining us, and we hope that everyone listening is safe and well. I'm pleased we've delivered a strong quarter and a solid year. Despite the challenging environment, our 2020 results demonstrate the resiliency of our business and the benefits of becoming an independent Otis. We grew adjusted earnings for the second year in a row, generated $1.3 billion of free cash flow, expanded our product and service offerings, and remained agile to support our customers as the pandemic evolved. We expanded adjusted margins by 70 basis points in 2020. following eight years without margin expansion as a segment of UTC, demonstrating the benefits of our independence. I could not be prouder of our 69,000 Otis colleagues who rose to the unique challenges presented throughout the year and never wavered in their commitment to provide essential services to our customers. And we did this while staying true to who we are, recognizing the challenges within our communities, and allowing our Otis absolutes to keep each other safe, and guide our actions and behaviors toward a more equitable future. For the full year, organic sales were down 2.1%. At constant currency, adjusted operating profit was up $52 million, a $17 million improvement from the midpoint of our prior outlook. Margin expanded 70 basis points, reflecting the strong performance in the service segment throughout the year. Adjusted EPS was $2.52, up 28 cents, or 12.5% versus the prior year, and a 10-cent improvement from our prior outlook. Now turning to page four. In our new equipment segment, we grew share by 60 basis points, with growth in all major regions. We proudly marked the 20th anniversary of our Gen 2 platform and hit a major milestone. surpassing more than 1 million Gen 2 units delivered to date. We continue to innovate, introducing new solutions for customers. For example, in India and other developing markets, we introduced the Gen 2 Prime, a low-cost entry-level elevator. And in China, we began shipping new equipment units enabled with our IoT platform, Otis One. This year, we'll expand this offering to include shipping IoT-enabled units in the U.S., Asia Pacific, and EMEA, And we continue to pilot Gen360, our next-generation digitally native elevator that brings the advantages of connectivity into a new, more compact platform. We anticipate formally launching this transformational solution in the EMEA region later this year. We enhanced our sales force's ability to address the market by increasing sales coverage mid-single digits, including adding more than 850 agents and distributors in China, and implemented tools to improve efficiency on the back end. Today, more than 85% of our business is on a common CRM system, and we continue to find new ways to reach customers in this dynamic and more digitally enabled environment. Service is the core of our business. In 2020, we added to our industry-leading maintenance portfolio by approximately 2% with growth in all major regions, including high single-digit growth in China. This growing portfolio, which accelerates our recurring revenue business model, along with cost containment actions and productivity initiatives, allowed us to grow earnings. This resulted in adjusted margin expansion in all four quarters and 110 basis points of expansion for the year. I'm pleased with our progress made on IoT deployment. We added approximately 100,000 OTIS 1 units as planned, bringing us to approximately 540,000 connected units. Over the medium term, we plan to accelerate portfolio connectivity to approximately 60% of units, up from the roughly 25% currently connected, creating value for our customers and productivity benefits for Otis. This year, organic modernization sales were flat globally as we faced project delays in some regions due to COVID-19. However, modernization demand in Asia Pacific was particularly strong, with orders up approximately 30% and sales up double digits, driven largely by regulatory demand. Our operational initiatives generated favorable outcomes. We're very focused on material and service productivity to offset headwinds from labor inflation and commodities. Approximately 70% of our service cost base is labor, and approximately 70% of our new equipment cost base is materials. We have material productivity initiatives to more than offset any potential impacts from raw materials. And in 2020, we achieved our goal of 3% material cost savings, helping to offset some of the volume headwinds in new equipment. The early actions taken by our supply chain team, leveraging our scale, rationalizing spend, and taking cost out of products provided the protection and assurance, even during COVID, that we would deliver on commitments made to customers. Our focus on cost containment extended to adjusted SG&A, where we reduced expenses by $38 million versus the prior year while expanding our sales coverage. As noted, we generated $1.3 billion in free cash flow with conversion of 143 percent, exceeding our prior outlook by $150 million. We channeled our strong cash generation into our capital allocation strategy, including bolt-on acquisitions to increase our scale and density, $350 million to repay debt ahead of our original schedule, and returned approximately $260 million to shareholders through dividends in the last three quarters of the year. We made significant progress on our tax structure throughout the year, reducing our adjusted tax rate by 370 basis points versus the prior year, and 260 basis points better than investor day expectations. We expect over the medium term to bring our adjusted tax rate to a range of 25% to 28%. And as a final comment to 2020, and amid promising news of vaccine approvals and distribution plans, the three-month study using scientific data and analysis on elevator airflow, sponsored by Otis and led by a Purdue University professor and indoor air quality expert, concluded that elevators have significant air exchange by design and required by code, and a short elevator ride has a risk of exposure level less than that of outdoor dining. Turning to slide five and starting with the industry's outlook. While market dynamics remain fluid, the industry's long-term fundamentals remain solid. We are encouraged by the pace of recovery and signs of wider availability of COVID-19 vaccines. The industry's new equipment segment is expected to return to growth in all regions, with mid-single-digit growth in Asia, low single-digit growth in EMEA, and slight growth in the Americas. The recovery in new equipment will continue to feed the global install base and present future service opportunities. The core of our business is based on our service model, and the service market itself is expected to grow about 1 million units per year globally, industry-wide. Industry install base in the Americas is expected to grow low single digits. EMEA, where roughly 50% of the OTIS maintenance portfolio sits, is expected to grow low single digits. And in Asia, we're expecting mid-single digit growth driven by China. At OTIS, we are confident in the momentum we built in 2020 and our ability to execute on our long-term strategy. Looking specifically at our 2021 OTIS outlook, for the year, We expect sales growth of 4.5% to 6.5%, with organic sales growth of 2% to 4%. Adjusted operating profit is expected to be up $125 to $175 million, and adjusted EPS is expected in a range of $2.67 to $2.77, up 6% to 10% versus prior year, and 20 cents at the midpoint. Lastly, we expect free cash flow to be robust, in a range of $1.3 billion to $1.4 billion with conversion of approximately 120% of GAAP net income. We will remain disciplined in our capital deployment and are well-positioned to start share repurchases following $150 million of debt repayment that was already completed in January. The foundation we built this year as an independent company, along with the expected recovery in our end markets, gives us confidence that our strategy is working for our customers and shareholders. Our operating leverage, our global footprint, our successful innovation program, our capital management and strong balance sheet, and our industry-leading colleagues give me full confidence we can deliver on our outlook this year and many years beyond. With that, I'll turn it over to Raul to walk through our results in 2021 Outlook in more detail.