Good morning, and welcome to Otis' Fourth Quarter 2023 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 Michael Rednor, Vice President of Investor Relations. Michael, you may begin.

Thank you, Krista. Welcome to Otis' fourth quarter 2023 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 non-recurring 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. Now, 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 delivered a strong fourth quarter to cap of strong full year performance. We enter 2024 with confidence in our service driven business model, remaining focused on our strategic pillars, including deliver modernization value, which we added as our fifth strategic imperative last year, while driving operational excellence. We achieved these results with the hard work of our colleagues around the globe. So I want to thank each of you for your hard work, commitment to our customers and demonstration of our Otis absolutes. Starting on Slide 3, we achieved full year organic sales growth in all regions with total Otis organic sales growth of 5.6% driven by service, which grew 7.7%. We grew our industry leading maintenance portfolio by a record high of 4.2% for the year, and it now stands at about 2.3 million units, a new milestone for our company. We delivered strong low-teens adjusted EPS growth for the year, including mid-teens growth in the fourth quarter. Modernization orders were up 16.8% for the year, including low-teens growth in the fourth quarter. Our modernization backlog is up 15%. New equipment orders in Q4 increased 2.9%, and our new equipment backlog increased 2% for 2023. In 2023, we achieved approximately 50 basis points of new equipment share gain. Heading into 2024, as our backlogs have continued to grow, we have good visibility on our new equipment sales, despite the uncertain macro environment, and we expect strong sales growth in our modernization business. We generated approximately $1.5 billion in adjusted free cash flow, allowing us to return approximately $1.35 billion of cash to shareholders through dividends and share repurchases. Additionally, earlier in 2023, we began executing initiatives related to our customer-centric…

Thank you, Judy. Starting with segment sales performance on Slide 6. Otis fourth quarter, new equipment sales were $1.5 billion with organic sales roughly flat driven by high-single-digit growth in Asia Pacific, offsetting mid-single-digit declines in China. Americas and EMEA were up low-single-digits and roughly flat respectively. For service, we delivered another strong quarter of organic sales growth at 6.8% with strong performance across all lines of business and regions. Maintenance and repair sales were up 6.8%, and Mod sales were up 7%, including the third consecutive quarter of double-digit growth in Asia. For the full year, new equipment sales were $5.8 billion, and organic sales grew 2.6% with solid growth in all regions outside of China. New equipment pricing was up low-single-digits globally with Asia Pacific up low-single-digits, the Americas up mid-single-digits, and EMEA high-single-digits. Although the pricing environment in China remains challenging, we remain price cost neutral in the region from a continued focus on price discipline and material productivity. Service sales were $8.4 billion with 7.7% organic growth and all lines of business showing high-single-digit growth, including another year of outstanding performance and repair marking a three year CAGR in the low-teens. Maintenance pricing, excluding the impact of mix in churn, came in about as expected up roughly four points for the year. Turning to segment operating profit performance on Slide 7. Starting with new equipment, we delivered our best margin expansion for the year in the fourth quarter, up 120 basis points. Adjusted operating profit excluding $3 million of Forex headwind was up $20 million as strong productivity, pricing and commodity tailwinds were partially offset by unfavorable regional and product mix, alongside higher SG&A expense. Turning to Service. Fourth quarter adjusted operating profit, excluding $13 million of Forex tailwind was up $33 million as higher volumes,…

Starting on Slide 9 with the market outlook. In the Americas market in 2023, the market was down low-teens as double-digit decline in North America was partially offset by low-single-digit growth in Latin America. In EMEA, Western and Central Europe were the primary drivers, leading to a market that was down high-single-digits. In Asia, the market was down mid-single-digits, with a solid year in Asia Pacific, up low-single-digits but the performance masked by the downturn in China, which we estimate was down just north of 10%. In 2024, the global new equipment market is expected to be down low to mid-single-digits in units with markets in the Americas and EMEA down low-single-digits and markets in Asia down low to mid-single-digits driven by China. While new equipment market dynamics remain fluid, the long-term fundamentals of the industry are well supported by the service-driven growth model. In 2024, the global installed base is expected to grow at a similar rate to that of 2023 at around mid-single-digits and reach approximately 22.5 million units. In the Americas and EMEA, we expect low-single-digit growth. And in Asia, we're expecting mid-single-digit growth driven by China. Overall, we expect service to be the growth driver for the industry, and we expect the same for our business. With this as the industry backdrop, for Otis, we expect net sales of $14.5 billion to $14.8 billion, growing 3% to 5% organically or 2% to 4% at actual currency. Adjusted operating profit is expected to be between $2.4 billion and $2.45 billion, up $125 million to $175 million at actual currency or $150 million to $190 million, excluding foreign exchange headwinds. We expect adjusted EPS in the range of $3.80 to $3.90, up 7% to 10% or nearly $0.25 at the midpoint versus the prior year. Finally, we expect adjusted free cash flow of approximately $1.6 billion. With our commitment to a disciplined capital allocation strategy, we expect to repurchase approximately $800 million in shares in 2024, as we look to grow our dividend payout and pursue our typical $50 million to $100 million of bolt-on M&A. With that, let me hand it back to Anurag to outline the 2024 segment outlook in more detail.

Starting on Slide 10 for the new equipment outlook. We have good line of sight for new equipment sales due to our backlog coverage, which extends out to over a year of sales. This, in combination with the share gain initiatives and incremental pricing actions we have taken over the past few years’ position us relatively well for 2024. As a result, we anticipate new equipment organic sales to be flattish with Americas and EMEA up low-single-digits and Asia Pacific up mid-single-digits with mid-single-digit declines in China. We expect new equipment profit margin to be flat to up 10 basis points with roughly steady volume and tailwinds from pricing, productivity, commodities and the benefits from uplift offset by unfavorable regional and project mix alongside higher SG&A expense. Driving strong material and installation productivity and faster backlog conversion will remain a priority with the goal to again outperform our targets. Turning to Slide 11 for the service outlook. Starting with sales. We expect another solid year in service and anticipate organic sales growth of 6% to 7%. Maintenance and repair organic sales are expected to be up 5.5% to 6.5%, driven by the significant additions to our maintenance portfolio and approximately 1 point of net pricing after adjusting for mix and churn. Mid-single-digit repair growth will also contribute through both our traditional and digital channels, although at a more moderate pace than what we saw in '23. For modernization, we anticipate organic sales growth of about 8% as we execute on a solid backlog, which similar to new equipment, extends out over a year and ended the year up in the mid-teens. Our strategy of standardizing products and driving more supply chain and factory optimization will enable us to accelerate sales growth above the 7% achieved in '23. This also has…

[Operator Instructions] Your first question comes from the line of Nigel Coe from Wolfe Research.

So a solid outlook for 2024, I think you mentioned Anurag, 1% price for new equipment. I know we've had some weakness in China. So just wondering if there's any sort of significant SKUs across the geographies that you called out there. And maybe again, excuse me if I missed it, but what would you expect the service pricing this year?

Let me clarify, the 1% that I spoke in my prepared comments was on maintenance pricing. So what we'll see is we'll see adjusted for mix and churn. So we'll see about 3% on a like-to-like basis and just for that. On the new equipment side, clearly, we've seen good price increases in '23 in America, EMEA and AP. Some of that will continue over in '24 new equipment. But China does have price pressure as we saw in '23, but it's a deflationary economy, so we expect it to be price cost neutral.

Okay. But no evidence of pricing deflation outside of China?

No, Nigel, none at all.

And then just on the uplift savings. Obviously, we're starting to see those coming through in '24. Where do these land mainly this year? I mean, what would you say more new equipment or services? And I'm just curious if we're seeing any kind of upward trajectory on the modernization margins? I know that's an initiative that you're focused on. Just wondering if we're going to see some of that coming through in '24?

Yes, Nigel, let me talk to the uplift in '23. We pretty much saw it across the board, again, early days but pretty pleased with the savings we've seen and more importantly, the trajectory of where we're going with the process work with the organizational model and really changing how we work to be more customer focused. Anurag, I'll let you touch on Mod margins.

Yes. On the Mod margins, as we said a few months ago that we expect it to be at par with new equipment in a few months and then started going up, and we see that trajectory pretty good. We'll give a little bit more color on the Investor Day in a couple of weeks, but that is on the right trend. And for the uplift savings, I think the cadence, what I outlined in the prepared comments, 70% in service, and the rest between new equipment and corporate, that should be for this year as well. So we're going to exit the year $80 million and in year of $40 million with similar cadence across that.

Your next question comes from the line of Guatam Khanna from TD Cowen.

I was wondering if you could quantify the net savings from uplift and how we should think about that this year and next this year?

The $40 million is net savings, which is flowing through to the P&L or uplift, right? So if you look at in 2024, we are going to grow our operating profit at constant currency by approximately $170 million. About $140 million of that is price cost. The price is what Nigel asked me earlier, a little bit from the service side, from the new equipment side. We're still seeing commodity tailwinds, a little bit a little bit lighter than '23, but that's obviously positive. So the -- and the uplift is contributing $40 million to that, right? So if you add all of that together, we're getting our price cost of about $140 million, and the rest is coming from volume, net of mix. So the $40 million of uplift is 100% net flow through to the P&L.

And then to your earlier comment on China and the new equipment market, it doesn't sound like you're talking about price erosion due to competition per se, but rather is there some other reason for -- is it just lower cost across all the competitors, if you could just expand on what's going on in new equipment pricing?

Sure. So really, it's a very competitive market. We'll start there. And the market remains weak. We've called it north of 10% in terms of what we saw this year. And we're going to be very focused on continued productivity savings. But in a deflationary environment, we're seeing the costs come down, too. And that's really what's helping. The commodity costs are coming down, and it gives us this price cost neutral ability. Now listen, every day in China, we're on new equipment, we're balancing the quality of the orders the volume we're taking in and what that's contributing to our backlog margin. And we are in a market that's down 10% in this quarter, Sally and the team did a great job. We were down 5% in terms of orders. And so we did gain share and we've gained share now consistently for several years. So we're managing that carefully, but I will tell you, our China business, when you look at it as a whole, our China business contributed significantly this year, and their profit for the year was up year-over-year. When you look all in because what we've done is we've really executed our strategy well on new equipment with key accounts with our sales coverage but just as importantly, Gautam, we focused on pivoting more and growing our service business. Our service sales have grown mid-teen CAGRs. And we -- service now accounts for 25% of our China sales, which is up from mid-teens a few years ago. And we had 20% growth in both units and value in service in this last quarter, and that's the trend we've been on. So it's about balance in new equipment. But it's a growing service and long story.

[Operator Instructions] Your next question comes from the line of Julian Mitchell from Barclays.

I just wanted to clarify perhaps on the new equipment outlook. You've got the Slide 9, I think, the market down in every region and globally for the year. How are you thinking about the backlog trending sort of as we move through the year? Because I guess, last year, you had the backlog up new equipment, even with the orders down. So you had a sort of a book-to-bill, I guess, over 1x in '23 in new equipment. So just trying to understand in 2024, how are we thinking about the sort of backlog progression there and the implied book-to-bill?

Yes. So the backlog itself, Julian, is obviously, we're going in with 2%. We really couldn't be more pleased with how especially Americas and EMEA really drove strong new equipment orders in the fourth quarter. Americas was up 6%, EMEA was up 11%. So everyone is going in with backlog strength with the exception of China backlog is down mid-single-digits as we go into to '24. But it's that strong backlog that's giving us that line of sight in the majority of our regions that gives us the confidence that we can -- between that and new equipment share gain of 50 basis points that we're going to sustain that gives us the confidence. Anurag, I'll let you take them through kind of how the year transpires.

Yes. Thanks, Judy. Yes. So as you said, Julian, our book-to-bill was more than 1x in ‘23. We expect that to be similar in '24 because orders are quite higher than our new equipment revenue. So as we go through the course of the year, we do expect to finish even if we perform in line with our market outlook and don't even increase share, we should end the year at a backlog flattish to be slightly higher. Clearly, the comps are tough for us in the first quarter in terms of new equipment orders, but then they get easier for us in the second and third quarter. So you will see a little bit of generation quarter-by-quarter, but we are confident that given this market outlook, if it stays the way we should remain in the year with a flattish or slightly higher backlog.

And then maybe just 1 for Judy on particularly sort of North America and EMEA, how you're seeing that market right now in terms of sort of verticals and how customers are behaving in new equipment? Are you seeing particular weakness in office versus multifamily? Are you seeing projects being delayed or it sort of existing projects are going ahead on plan and it's the new projects that maybe it's just taking longer for customers to sign-off. Any sort of color on that North America and Europe, please?

Sure, Julien. Let me start with North America. And as I said, our team is out there and it goes back to these long-term customer relationships that really enable the orders book to be up in the backlog to be up. But for context, the new equipment market segment in units in North America finished last year, the lowest since the GFC. And yet, we still we gain share, we delivered and we increased pricing. So our team is performing very well there. When we look at the segments themselves, none of the segments are strong in North America. Multifamily is the weakest due to several years of outpaced growth. If I had to rank order them, infrastructure is the best, and we've had really good success with major projects. We're going to continue to grow there. But all of the segments -- none of them are strong in North America. And so this is going to be a year where the benefit to Otis and why we're going to be successful is we invested in the low-rise market. We introduced our Gen3 Core product and 80% of the North American market is 2 to 6 stories. And that market, we're still seeing active bids. We've seen a great pipeline for Gen3 Core and that gives us the encouragement between the backlog and the orders we're seeing to know that we can -- it's a mid-single-digit backlog in North America. So -- and that gives us a good 12, 18 plus months line of sight for next year's revenue. In Europe, South Europe remains strong, led by Spain, we're seeing sustained activity. Central Northern Europe is weak. And again, there, infrastructure tends to lead residential is a little better in Europe than it is in North America by far. But again, we -- what we see on the ground, whether it's the German economy or any of the other locations is looks to us like '24 looks like '23 in terms of the segments in Europe.

Your next question comes from the line of Miguel Borrega from BNP Paribas Exane.

The first one, just on China, the market -- the competitive environment in China. Obviously, as I said, the market remains weak. But do you sense increased pricing pressure over the last quarter or so, one of your peers reported strong market share gains in Q4. So just wanted to get your views on anything incremental to what we've seen so far?

Sure. Listen, Miguel, performance can vary in any given quarter based on compares, but I'd like to take a step back and overall, for '23, we believe we gained share in China with the market down north of 10% and us coming in, again, down about 5% or actually even low-single-digits when you look for the year, but let me try and give you some additional color here. First, we did perform better in the first half of the year versus the second half but we always manage volume and share versus profitability. And we manage those dials appropriately while maintaining momentum on our share growth. Our order value declined mid-single-digits, and we've spoken all year about the deflation that's impacted the market, but we've been able to offset the price decline with better productivity. And when you look at our strategy in China, we've added the agents and distributors. It's given us the geographic and vertical coverage and we've continued to innovate and invest in our products. We've brought multiple products to the market in China. We've upgraded our escalator offering, our OH8000, and we brought Gen360 to the market in China over the past year. And that will yield for us and give us an advantage this year because of the technology because of our -- again, our reach in terms of our sales channel. Overall, we've increased our bookings in China by nearly 20% since pre-spin, while over the market over that same multiyear period is down 10% to 15%. So our strategy is working, our team is out there every day focused. We are -- our backlog, while it's down mid-single-digits, the quality of our backlog, the profitability of our backlog, we're not sacrificing for volume.

And then my second question, if you can talk a little bit about modernization. You mentioned backlog is up 15%. What is driving that growth exactly? And how should we think about it from here, 2024 and 2025? And then on the margin of modernization, you mentioned that par with new equipment, I think one of your peers stated that margins are even higher than maintenance. Where do you think the different slides? And would you see those margins in modernization growing ahead of the other segments for you in the next few years?

Yes. So I'll comment a little on -- let me talk about the market and a little bit on the margins because the margins vary by region in terms of modernization margins. But the mod market is up nicely in all regions. And the majority of that is just driven by the refurbishment required due to the aging equipment that's out based on construction cycles from 20-plus years ago. We're just in a natural growth cycle now where you're going to see year-over-year additional Mod. Really pleased with the backlog up. This was our sixth consecutive quarter of orders up over 10%. Asia Pacific really was the standout again with Korea. But we have a great mod product in China and our China orders, albeit on a small base because it's a little bit of a younger installed base is growing significantly double-digit. And Americas and EMEA, as I said in my prepared comments, really had a strong major project contribution in Mod orders in the fourth quarter, and we expect that to continue. Again, in terms of margins, as Anurag shared, we will surpass new equipment margins shortly. But when you look in different geographies, there are different Mod margins. The market is a combination, again, of aging and safety regulations and demand creation. And I'm really proud of our team because when a part goes obsolete our team is out there. Our sales teams out there, our mechanics are out there. They're ensuring our customers know what they need to keep their elevators, not just current, but to prepare them for the future. I'm really encouraged by modernization. We've organized around it. We've set up this as a fifth strategic imperative, we have Mod kits because we are going to industrialize how we do Mods. So it will look more like new equipment coming out of a factory, and that's what's going to drive the margin expansion.

Yes. Just to add to that, Miguel, I mean I can't speak about the others, but for us, we're clearly seeing the trajectory on margins pick up. And there's no reason why it should be much higher than equipment. And as we standardize our products, optimize the supply chain, do better on the go-to-market strategy, we see that inching up. And as I said, we'll talk more about it in the next couple of weeks. But clearly, the margin should be outpaced new equipment margins.

We have no further questions in our queue at this time. I will now turn the call back over to Judy Marks for closing remarks.

Thank you, Krista. 2023 proved to be another strong year for Otis as we focused on our strategic imperatives to drive value for all stakeholders. We head into 2024 supported by the strength of our service-driven customer-centric business model and remain excited to share our 2024 successes with all of you. We look forward to you joining us at our Investor Day at the New York Stock Exchange on February 15. Please stay safe and well. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.