Good morning, and welcome to Otis’ Fourth Quarter 2022 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 Michael Rednor, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Norma. Welcome to Otis’ fourth quarter 2022 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President; and Anurag Maheshwari, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. 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’ 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 Judy.

Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. We’re pleased that we ended the year with a strong fourth quarter and solid full year performance in a year characterized by a variety of macro headwinds. We entered 2023 with good momentum as we continue to execute our four strategic pillars: sustaining new equipment growth, accelerating service portfolio growth, advancing digitalization, while focusing and empowering our organization. I’m proud of our colleagues around the globe who delivered these results demonstrating the strategic resiliency of our company as we continue to grow and perform in 2022. Starting on Slide 3. We continue to perform well in New Equipment Orders, growing 7% for the full year. In the quarter, orders grew 4%, with particularly strong performance in EMEA and continued solid performance in Asia-Pacific. China orders returned to growth with mid-single-digit performance in the quarter. Orders in the Americas were down 4% in the quarter, although the business had a very strong 2022 overall, with orders up almost 18%. Our New Equipment adjusted backlog at constant currency is up 11% heading into 2023, giving us solid multiyear visibility to grow sales. Organic sales increased 2.5%, driven by service, which grew 6%. We grew our industry-leading maintenance portfolio by 4.1%. It now stands at 2.2 million units, a new milestone for our company. We delivered 7.5% adjusted EPS growth despite $156 million in foreign exchange-related headwinds. We generated $1.45 billion in free cash flow, allowing us to return $1.3 billion of cash to shareholders through dividends and share repurchases. We continue to win many exciting projects based on our innovation, ability to deliver and the trust customers have in us. For example, in the Americas, Otis was selected to provide our Compass destination dispatch…

Thank you, Judy, and good morning, everyone. Starting with fourth quarter results on Slide 6. For the fourth quarter, reported sales of $3.4 billion were down 3.6%. Organic sales grew for the ninth consecutive quarter and growth accelerated to 6%, our best performance of the year with mid-single-digit growth in new equipment and high-single-digit growth in service. Adjusted operating profit excluding a $49 million Forex headwind increased $39 million with constant currency growth in both segments. Strong service performance, especially on volume and price was partially offset by commodities in mixed headwinds and new equipment as well as higher corporate cost. Adjusted SG&A expense for the quarter and the year improved 80 basis points as a percentage of sales, as we remain vigilant on structural cost reduction and cost containment to help mitigate the macro headwinds we have faced. At the same time, we are committed to growing the business and R&D and strategic investment as a percent of sales remain about flat. Adjusted EPS grew 4% or $0.03 in the quarter driven by operational growth of $0.07. This strong operational growth alongside the accretion from Zardoya and $850 million of share repurchases more than offset the $0.08 headwind from Forex. While the fourth quarter free cash flow conversion was strong at 145%, our full year free cash flow came in at $1.45 billion or 115% of net income lighter than we had anticipated as we built $65 million of inventory to mitigate supply chain challenges and support backlog conversion going into 2023. Moving to new equipment performance on Slide 7. Otis new equipment orders in the quarter increased 4% with EMEA and Asia-Pacific up high single digits and China orders returning to growth of mid-single digits, which more than offset a modest decline in the Americas. Overall with better…

Thank you. [Operator Instructions] Our first question comes from Julian Mitchell from Barclays. Your line is now open.

Hi. Good morning, and thanks very much. First off, I suppose I just wanted to dig in a little bit more into the assumptions for how you see the China market starting out the year in terms of orders after a very good Q4 performance? And maybe just homing a little bit more on the commentary around some of those headwinds in Q1. Should we still expect EPS to be up kind of sequentially in the first quarter?

Well, good morning, Julian. It’s Judy. Let me start with what we’re seeing really on the ground. I would tell you that the Chinese economy is in a state of recovery now. We were really pleased with our team’s performance in the fourth quarter, again, with orders being up in new equipment in what was a challenging quarter with all the lockdowns. It’s a fluid situation on the ground between liquidity and the COVID-related absenteeism as we come back from the Chinese New Year. We’re going to watch that closely. But 2022 came in where we expected on the market down about 15%. We shared, we think that was about down 10% in Q4 and came in where we thought between 540,000 and 550,000 units. Obviously, Q4 saw some abrupt changes with COVID between the lockdowns and then the lifting, which led to the outbreaks. And what we’re monitoring is the liquidity easing, which we’re seeing and where the consumer sentiment and confidence is in terms of the property market. So as we go through the first few quarters of 2023, first of all, we’re very encouraged by the government policy and actions to date. We are expecting a better second half. We have a harder compare in the first half based on what was happening in China, first half of 2022. But we did see an up infrastructure market that was the only segment that was up in 2022 in a 15% down market, and we did very well there. Perry and the team just executed really well. Tier 1 and 2 in China were the least negatively impacted by the down market. And again, you know our strategy there has been very focused on agents and distributors on key accounts and we’ve executed that. So I’ll leave it with, I’m feeling good about the health of our business in China. In a down market in 2022, we did well, we were down mid-single digits versus a down 15% market and in a down 5% to 10% market, we expect to do well as well. So we gained share last year. Our strategy will enable us to do that, and we’re going in with backlog. I’ll let Anurag talk to the EPS question.

Great. Thanks, Judy. Yes, so Julian, just on the quarter one, let me start with the segments first. From a service perspective, we expect to see performance in line with the full year guidance. The swing factor could be repair, modernization or some mix, but overall we aren’t seeing anything major to call out and expect kind of mid-single digit growth and margin expansion. It may be not close to 50 basis points regarding for the year, but still be good at expansion as we ran through the year. The new equipment is a segment that we do expect some weakness from both a sales and a margin perspective. Specifically compared to last year, China as a tough compare as the COVID impact didn’t really start until the second quarter. And while we – as Judy mentioned, we do expect better performance in China as we go through the course of the year. We aren’t expecting it to happen until the second half of the year. In Americas, the team performed very well in the fourth quarter. But there is still some supply chain inefficiencies and labor shortages, which I expected to clear up in the second or third quarter. So overall, we expect sales on the new equipment side to be down quarter-over-quarter and year-over-year, and margins to be above flattish with where we ended up in the fourth quarter. Now kind of going to the other line items, starting with corporate expenses. Last year, the first half was light because of all the cost containment we did. So it is going to – the run rate is going to pick up very similar to what we saw in the fourth quarter. So there could be a couple of pennies of headwinds over there. And then on the FX side, we’ve said about at the midpoint $55 million of FX headwind and a bulk of it will come in the first quarter because last year at this point in time, the euro was $1.15, the renminbi was $6.35. So though the currencies have improved, there is still a significant headwind. So majority of our FX headwind will come in the first quarter. So putting it all together, we do expect EPS to be down a couple of pennies. As you know, the Forex any new equipment corporate will kind of offset the good performance in service and the Zardoya accretion. So net-net down a couple of pennies and sequentially also could be down $0.01 or $0.02.

That’s extremely helpful. Thanks very much.

Thank you. One moment for our next question. Our next question comes from Steve Tusa with JPMorgan. Your line is now open. Steve, your line is now open. Mr. Tusa, are you on mute?

Norma, let’s go to the next question. Thank you.

Thank you. One moment for our next question. Our next question comes from Nick Housden with RBC Capital Markets. Your line is now open.

Yes. Hi, everyone. Thanks for taking my question. I’ll just ask one. Looking at the outlook and maintenance, in particular, you’re guiding for up 4.5% to 6.5% organic. I’m just thinking, units are increasing over 4% and you seem pretty competent in being able to maintain that kind of level. Pricing is already at 3% and is probably going up as you enforce the escalation clauses and you kind of hinted that in the slide. So 4% volumes, 3% pricing, am I wrong to think that a 5.5% midpoint in the guidance looks a little bit conservative? And is it to do with maybe pricing being a bit more competitive in Asia Pacific, where a lot of the new units are going into? Thanks.

Let me – Nick, good afternoon. Let me answer the pricing question and then I’ll let Anurag take you through the walk. Listen, we’ve been pleased like-for-like pricing similar to Q3 was up 3 points in Q4 and was very solid as predicted. Mature markets globally is where we saw really strong service pricing, mid-single-digit gains in the Americas, low single-digit in EMEA and Asia Pacific. And as Anurag said in his comments, kind of we’ve got this – the margin drivers are really less on price and more on productivity, volume and density in China. But we think 2023, like-for-like should be better than that 3%. And that’s really driven by the inflationary clauses we have in the majority of our contracts – service contracts, especially in Western Europe and in North America. The Western Europe clauses are backward looking, so they will reflect 2022 inflation indices. And we are signing those contracts right now, a lot of them in the first quarter. So next quarter we’ll be able to – to be able to share how we’re performing on that. But pricing’s healthy, team deserves a lot of credit. We pivoted from being a discount kind of service pricing company for many years to being able to gain price, especially where it was appropriate and justified.

Yes. And just to add to that in terms of the growth for 2023. So yes, you’re right that our growth at the midpoint is very similar to where it is in 2022, but the pieces are a little bit different. The portfolio growth as you put together 4% and what Judy spoke about the pricing, you add 3%, then you adjust for churn and mix, we should be up about 6% for 2023, which is higher than where we were in 2022. Repair is as I mentioned in my prepared comments, over the past two or three years we’ve been running at a 10% CAGR on the Repair business coming out of COVID. Now, typically the Repair business will outgrow the Maintenance business because as we continue on our strategy on new repair packages, increasing penetration. But this year there’ll be – just be a little bit of a catch up from what happened in the past two to three years. And then going forward, it should outpace the Maintenance business. So that’s why we’re saying low to mid-single digit. And modernization is pretty – it’s around 7-ish percent at the midpoint. So those are the pieces which get us to 5.5%. Now, clearly, if pricing is a little bit better, repair comes in better, and the modernization book and ship there could be a little bit more over there. But right now we feel well calibrated at the midpoint of the guidance.

Okay, great. That’s very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from Gautam Khanna with Cowen. Your line is now open.

Hi guys. This is actually Jack on for Gautam today. Thanks for the question.

Hi, Jack.

Hi, there. Just a quick question kind of just on your perspective on the end market demand kind of back to Judy’s comments on the first question. Just kind of what you’re seeing in the field today maybe by geography and then by end market maybe kind of parsing resi versus commercial or infrastructure? Just anything there would be helpful. And then just if you’re seeing any with the slowing global macro backdrop here, if you’re kind of seeing any municipalities or other customers sort of defer projects or kind of what you’re seeing in 2023 so far?

Sure. Jack, let me try and respond to both parts. Let me start with new equipment because I’ll break this into new equipment and service, and I’ll actually start with Asia Pacific where the market overall and we’re really expecting solid growth due to urbanization and infrastructure growth in Korea, in Southeast Asia and in India. And we’re not seeing any slowing in that part of the world. It’s really accelerating and expectations should be for solid growth. For 2023 in the Americas, we think it’s going to be a little worse than the market was in 2022. 2022 is an incredibly strong market. First half stronger than second half, but as we saw a really strong market and we’re still seeing the Dodge Momentum Index rising on construction, but the Architects Billing Index for the past three months has been under 50, including December at 47.5. So we’re watching that carefully. In EMEA, we think flattish. We’re balancing potential headwinds, but I’ll tell you, we have seen Europe become far more resilient in terms of the demand including the residential market in Europe is really strong despite all the challenges consumers are facing. And the Middle East is growing. Middle East, although it’s a smaller part of our EMEA has bounced back nicely so that end market’s going to grow as well. The good news in China, it’s going to be better year-on-year than last year. Second half looks better. Again, segment down, we’re predicting 5% to 10% in 2023, down a little more on the first half, and then we expect to see acceleration through the second half. So, we look at that as we shared in the 2023 outlook slide. And we’re prepared for that because we’ve got this great backlog at 11% on new equipment. When…

Thanks, Judy. Yes, that’s really helpful. And then just one quick one for Anurag, really quickly just on price cost assumptions in 2023 and sort of the backlog margin converting here. Just kind of what your assumptions are snapping the line on seeing raw material sort of roll over here in 2023? Kind of just high level, how you’re kind of thinking about price cost in 2023? Thanks.

Okay, great. Thanks for the question. So price cost is positive in 2023. I mean, you can see it from the margin expansion as well that’s happening at the midpoint. So in pricing, if you look at this year, I mean, after flattish first half, we started seeing pricing going up 3% in the back half. And our backlog is actually up – our backlog margins are up over 100 basis points. And what we have assumed for next year is about 50 basis points of pricing coming through into the P&L, which is roughly about $30-ish million. And the reason it’s 50 basis points not what we have right now is it takes a while for the backlog to convert into revenue, and some of that will come into later years, but still are price positive. On commodities, we do expect about a $20 million to $30 million tailwind. If we look back over the past two years, we faced about $180 million of commodity headwind. Slightly more than $100 million came from Americas and China, and the rest came from Europe and Asia. In Americas and China, of the $100 million on headwind, we’re seeing about $30 million, $40 million of that come back as prices of steel have started coming down. And though we are 50% locked, we still see some of it coming down over years. So clearly, that is very positive. It is actually in EMEA and in Asia-Pacific where we’re not seeing the tailwinds right now. In Europe, if you look at guide rails, it set up 85% from where it was two years ago. So clearly, there is some headwind over there. And in Asia, we buy a lot from Tier 2 suppliers, and that’s not yet come down as well. But overall, we see about a $20 million, $30 million tailwind on commodities. So net-net between price and commodities, it’s positive.

Thank you.

Thank you. One moment for our next question. And our next question comes from Nigel Coe with Wolfe Research. Your line is now open.

Thanks. Good morning, everyone. Thanks for the question. Just wanted to monitor some of the puts and take on margins. And I think you called out mix impacts in New Equipment. So just maybe just double-click on that and just to clarify what sort of the mixed headwinds are. But my real question is really on the investments, I mean you continue to invest. I think it’s been very successful on the recaptures and retention initiatives. But maybe just talk about the focus for investment spend going forward?

Let me start with the investment spend, and then I’ll have Anurag talk to the mix. Yes, we are – I think you’ve seen, Nigel, since we became independent, we’ve been obviously focused on our business, focused on our markets, and we’ve been extremely focused on investments in our strategy that will yield in terms of innovation. So we’ve done – we’ve continued our investments in our service business, both in making our incredible field professionals more productive and that’s yielded the apps that they’ve been using continue to show incredible promise. Our Tune app is up in terms of usage, 70%. In terms of in the field, we’ve got a lot of our service parts being ordered. And our sales – our field professionals using the upgrade app are also being part of our extended sales force and selling repairs. So all that’s working well but the linchpin of our strategy is Otis ONE. It’s being connected. It’s having that predictive, transparent information available in our ecosystem. And we continued on our investment strategy for Otis ONE, again, where we define on the service side where we’re going to install these to get the best yield for both productivity and customer stickiness. So what we’re seeing, we did deploy well over 100,000 units again this year on our trajectory to 60% coverage of what’s becoming a larger portfolio, 2.2 million this year. We said we’ll be over 2.5 million units by 2026 in our medium term, and that 60% should be off that two point – that higher number. That’s where we’re heading. And we’re seeing the results of that. We’re seeing it on the productivity side, where our running on arrivals are down. And we’re seeing that also on the customer stickiness side in two ways. One is…

Yes. Thanks. So as you can see, on the investment side, we’ll continue to invest and still grow our margins. Last year, we grew about 30 basis points, this year we’re guiding for 2030. And we’ll look for productivity other ways to kind of offset that. On the mix, it’s two, it’s regional and product or project mix. On the regional mix, as you are aware that China New Equipment is a higher margin market for us. And even last year in 2022, the other markets did a little bit better than China. But if you look at 2023, we are guiding for China to be flat, whereas Americas-EMEA to be up mid-single-digit and Asia mid to high single-digit. So that adds a little bit of a regional mix impact. But the more bigger mix impact is coming from project mix. And over the past two or three years, and as you’ve seen us making announcements on, we won a lot of major projects, part of our share growth strategy has obviously been on the volume as well as looking at different verticals, be it infrastructure, others to grow our major projects. And the more major projects are, they definitely come in with very good maintenance business, very high stickiness, very good margin, but they are lower margin than the volume business. So there’s a little bit of that impact, a healthy backlog that we have of 11% as we go into 2023 and beyond.

Makes sense. Thanks for the detail. I guess that was my two questions. But I just want to ask a question on – you called out 800,000 connected elevators today. How much of those Otis ONE connectivity? I want to say about half, but clarify that.

Yes, I think that’s accurate, about half.

Yes, great, thanks Judy.

You bet.

Thank you. One moment for our next question. And our next question comes from the line of Steve Tusa with JPMorgan. Your line is now open.

Hey, good morning.

Hey, Steve.

I think you called me. I was – we got some other calls going on this morning, so you overlap. Sorry about that. Can we just get a little bit more info on like attrition or retention? Maybe a little more precision around how much that may have improved year-over-year. Obviously, 1% is a lot. So there’s some nuance there. Maybe just a little more precision on that, from the 94%.

Yes. We’ve got – there’s a chart in the back. And Steve, we’ve shared that we – our focus is having a net positive net churn between retention and recaptures. Retention, they’re the most important units to us. We get them at the highest margin, and that’s where we want to start that individual customer relationship that we hope last decades into modernization and then into it, just for decades. So it’s at 94%. It’s about aligned with last – with 2021. I’d say it’s pretty close in terms of retention and recapture though, it was up. And you can see that slightly, but it was up healthy, and that was really driven by a few items. Two, I’ll call out. One is our sales specialization where we actually have recapture sales reps that, that is all they do. And they focus on the density and capturing the best of the optimal units for Otis because we have to go in at a lower price than we would at a normal conversion, but we want to make sure that they are accretive. So the recapture specialists really – we saw them hit their stride as we went through 2022. And the second is Otis ONE. And the capital investment, we continue to make at the data level on connected units and on offering that when we do go recapture that really makes a difference to our customers. I’ve personally been involved in a few of those sales calls to win some portfolios back. And it really makes a difference. We can show them the visibility they have, their dashboard they’re going to have and the whole ecosystem we offer. And so those two combined have really helped, and that’s really – that’s been our strategy, and it’s what we’re going to continue doing.

And then just on the attrition in China. I know it’s a growing part of the installed base, but any trends there worth calling out?

I think it’s pretty consistent with 2021 is what I would say. We didn’t see huge anomalies. Obviously, it’s – our portfolio in China, our service portfolio, I think we’ve shared is a little over 325,000 units. And that’s grown. It’s our sixth straight quarter of mid to high single-digit portfolio growth in China. And so we’re continuing, recapture, did well there. So we’re continuing to monitor that. But our team – our service teams in China are continuing against six straight quarters, and we expect – because of the growth in that segment, we expect that to be in the teens again for 2023.

Great, thanks a lot.

Thank you. [Operator Instructions] And our next question comes from Miguel Borrega with Exane BNP Paribas. Your line is now open.

Hi, good morning, everyone. I’ve got a couple of questions. The first one on your margin for New Equipment in China, I know that you don’t disclose this, but can you give us some color on how this has evolved over the years? How does your margin compare today versus, for example, pre-COVID levels? And at the moment, what is the direction of travel for margins on new orders? And then maybe longer term, can you give us a sense why margins in China were keeping much more profitable than, for example, Europe or the U.S.? Thank you.

Okay. I think there were three questions over there. So let me start with the China New Equipment margin. We don’t disclose margin by regions. If you look at China New Equipment, it is slightly higher. It’s a good margin business for us. Importantly, if you look at even last year with all the volume decline, the commodities headwinds that we faced, we were still able to mitigate a significant amount of that through productivity. So the margins of the New Equipment business have actually held quite strong because of the productivity business. And even this year, where we are guiding to our margins to be, we’re almost back to 2021 levels. Despite volume being flattish or slightly down, China volume being down 10% and going through a commodity headwinds of about $150 million, $180 million. So clearly, the margins are trending in the right direction. And all I would say is that we’re quite happy with the way we’ve been able to mitigate some of the headwinds to get to where we are right now. Yes. So that’s on the first question regarding where our New Equipment margins are. Backlog is trending up. The backlog margin is trending up. We’ve had price increases over the past couple of quarters. If you look at where we’re exiting this year, in 2021, our backlog margin declined by one point, we are above one point right now. And – where commodities are and where our pricing and new orders and new proposals are going in, that backlog margin should kind of inch up as we move along through the course of the year. We, again, don’t give specific guidance on where it would be, but it’s encouraging to see the price kind of sticking in the market over there. Yes. And sorry, what was the third question? I couldn’t quite get the question completely. If you could just repeat that, Miguel.

Well, just give us a sense on the spread between margins in China and the Rest of the World. Why shouldn’t we see some kind of conversion trending down to more like Europe or the U.S.?

Yes, it’s still accretive for us in terms of the margins over there when we keep driving productivity. So it will – the strategy that we’re kind of embarking upon the digitalization of productivity, we should see the margins kind of inching up. I mean net-net, on the service side, we’re seeing 50 basis points margin expansion this year, which is on the high end of a medium-term guidance. And obviously, margins will differ by region, by country. But with all the tools we are doing and we see margin expansion across all the regions.

Thank you. And then just one last question on free cash flow conversion, I wanted to get your views, not only on 2023, but also a little bit further away. Where do you see this normalizing? Because 2021 was 128%; 2022, 115%, and now you guide between 105% and 115%. Is this basically China contributing less to working capital? And do you see that improving in 2023 with more financing to real estate developers? Maybe if we can get some of your color what’s going on, on the ground in China today? Do you see any improvements there? Thank you very much.

Yes. So let me take back, actually, our working capital in China collection is progressing quite well. If you look at this 2022, we finished about 115% of net income, which was quite good. We had a very strong fourth quarter. We came in a little bit lighter was because of the inventory that we built up to make sure that we can support our backlog as we get into 2023. Between receivables and payables, we are pretty much there. So it was more of the inventory build out. Now what we’re guiding at the midpoint for 2023 is 110% of net income. It’s essentially driven by earnings growth with a little bit of a modest offset from capital expenditure as we’re embarking on our Otis ONE strategy. So that takes us to 110% net income. And as we move forward, we should grow our cash with earnings. And that’s what we’ve kind of guided towards. And you should see that normalizing around the 110-ish percent level.

Yes. And Miguel, I’ll just let me wrap on that. But I mean this is – that was our medium-term guide that we gave at the Investor Day in February of last year, and that’s what – we beat it in 2022, and we’re staying consistent right now with our guide with the Investor Day. Thank you.

And I’m currently showing no further questions at this time. I’d like to hand the conference back over to Ms. Marks for any closing remarks.

Well, thank you, Norma. Our success in 2022, our third year in a row of performing for all stakeholders, demonstrates the strategic resiliency of our business and provides us with confidence as we begin a new year. Supported by strong industry dynamics, we remain committed to our strategic pillars in order to deliver for our customers, shareholders, valued communities and the riding public. We set significant goals for the year ahead, and we look forward to sharing our 2023 success with you. Please stay safe and well. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.