Michael Rednor:

Thank you, Sarah. Welcome to Otis' second quarter 2024 earnings conference call. On the call with me today are Judy Marks, Anurag Maheshwari, and Cristina Mendez. 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.

Anurag Maheshwari:

Thank you, Judy. Starting with Q2 segment sales performance on Slide 6. Total organic sales were down 1% in the quarter, driven by new equipment, which was down 9% compared to the prior year. APAC grew approximately 10%, driven by strong performances in Southeast Asia and India, while the Americas grew low-single digits. EMEA experienced a low-single digit decline due to continued weakness in Central Europe, while China declined double-digits, largely due to the deterioration in market conditions. New Equipment pricing was strong outside of China, up low to mid-single digits. China remains under intense price pressure. And although pricing in China was down year-over-year, it came in approximately flat sequentially, while the cost environment remains deflationary. Service sales were $2.2 billion with organic sales growth of 5.1%, marking over three years of mid-single digit or greater growth in every quarter. We grew in all regions and all lines of business, including approximately 5% in maintenance and repair as a result of strong portfolio growth, solid repair volumes and maintenance pricing, which was up 3.5 points excluding the impact of mix and churn. Driven by continued double-digit growth in Asia-Pacific, MOD organic sales increased about 6% in the quarter and 8% in the first half. Turning to Q2 segment operating performance on Slide 7. New Equipment operating profit of $110 million was down $6 million at constant currency, mainly due to the impacts of lower volume and mix headwinds. Pricing outside of China, productivity, including benefits from uplift and commodity tailwinds largely offset the volume and mix impacts netting to improved margins of 30 basis points to 7.7%, ahead of our expectation. Service operating profit of $538 million increased $51 million at constant currency as drop through on higher volume, favorable pricing and productivity, including benefits from uplift more than offset annual wage inflation. This led to margin expansion of 110 basis points in the quarter. Our focus on cost control, alongside the ramp of uplift initiatives drove lower SG&A absolute dollars, while improving our adjusted SG&A as a percent of sales by 30 basis points year-over-year. For the first half, despite an inflationary environment, our SG&A dollars reduced by approximately $30 million and improved by 30 basis points as a percent of sales. We are very pleased with our progress and uplift across the three levers we've outlined with benefits ramping quicker than anticipated. Our streamlined functional structure is yielding productivity benefits while allowing us to leverage our global scale to drive cost savings, especially with our digital technology operations and other indirect spend. With solid Service performance and while navigating a challenging New Equipment environment, we expanded overall operating profit margins by 110 basis points and grew adjusted EPS $0.14 or 15%. Shifting to cash. Despite lower New Equipment orders, we generated $353 million of free cash flow in the second quarter and we expect to largely reverse the working capital build by year end. Overall, we had a very strong first half performance overcoming weakness in the China market. We grew organic sales 1.2%, led by performance in the Americas, EMEA and Asia Pacific, which were up mid-single digits as well as strength in our Service segment. This growth in conjunction with good traction on uplift, productivity, pricing and commodity tailwinds helped us expand margins by 100 basis points and grow EPS 13% positioning us well for the second half. Let me now turn it back to Judy to discuss our 2024 outlook.

Anurag Maheshwari:

Thank you, Judy. Taking a more detailed look at our outlook and starting with sales on Slide 10. We now expect total organic sales to be up 1% to 3%. Overall, New Equipment organic sales are now expected to be down mid-single digits from market driven decline in China, which we now expect to be down approximately 20%. The outlook for the Americas, EMEA and Asia-Pacific remains unchanged, up mid-single digits combined. Service organic sales are anticipated to grow 6% to 7%, in line with prior guidance. This includes maintenance and repair within a range of 5.5% to 6.5% and for modernization, we anticipate growth of 8% to 9% and solid orders momentum and an expanding backlog provide good line of sight to achieve approximately 10% growth in the second half. Turning to Slide 11. At constant currency, operating profit should grow $160 million to $190 million, unchanged versus prior expectations with improving contributions from service and productivity, including Uplift offsetting New Equipment volume and mix headwinds. In Service, we now expect operating profit margin to expand approximately 75 basis points, an increase of 25 basis point versus the prior guide, driven by solid volumes and even better productivity. For New Equipment, despite the weakness in China, operating profit margin is expected to be roughly flat versus the prior year, a change versus our prior estimate of flat to up 10 basis points. Productivity and pricing are offsetting the added volume and mix impact from a weaker China outlook. We now expect overall adjusted operating profit margin expansion of 80 basis points as a result of Service volume, productivity and pricing tailwinds. This represents a 30 basis point improvement versus our prior outlook. Turning to cash flow. We expect to achieve adjusted free cash flow in the range of $1.5 billion to $1.6 billion, with net income growth, partially offset by changes in working capital. Moving to the 2024 EPS bridge on Slide 12. We have raised the low end of our outlook for adjusted EPS by $0.02 to a range of $3.85 to $3.90. At the midpoint, this is $0.34 of EPS growth versus the prior year, driven by operational performance. At constant currency, we expect approximately $0.32 of operating profit growth, level loaded between the first and the second half. Reductions in the effective tax rate and the lower share count more than offset headwinds from higher interest expense and ForEx. In closing, first half results demonstrate our ability to continue performing despite macro headwinds. There is a lot in our control in the second half, and we are focused on growing our portfolio, leveraging our expanding MOD backlog while ramping on the Uplift program and driving productivity throughout the organization. This sets us up well to achieve our full year outlook of approximately 10% EPS growth in line with our medium term guide. With that, Sarah, please open the line for questions.

Jeffrey Sprague:

Thank you. Good morning, Judy, Anurag and Cristina.

Jeffrey Sprague:

Good morning. I guess, first Anurag, we're going to miss you, but I'm guessing we're not really going to miss you, but do you have anything to say about what your plans are?

Jeffrey Sprague:

Awesome. Judy, can we drill a little bit more just into China? Obviously, it's kind of readily apparent, things are just challenging there from a macro standpoint. But I think you noted Service was growing mid-single digit in Asia. I don't know if you said China, if you did, I missed it. So maybe just give us a little bit more color on sort of the counter actions you're taking there to kind of support and drive profitability in country?

Jeffrey Sprague:

Great. Thank you for all that color. Appreciate it. I’ll pass the baton.

Nigel Coe:

Thanks. Good morning, and Anurag, you'll be missed. But again, I'm pretty sure you're going to pop up somewhere soon. Cristina, congratulations on the promotion. So just want to pick up on the baton on the China question. I'm just wondering, is there any change in your strategy, which has been clearly focused on gaining share? And is there now more of a focus on preserving margin there? And I'm just curious on the NCI kind of expense being flat at $100 million, that seems to indicate that China EBIT is actually hold up rather well. So just curious, if there's a change in strategy and that comment on margins?

Anurag Maheshwari:

Yeah. Thanks, Judy. So Nigel, if you look at the new equipment market in China, it is clearly challenging. And the revenue in the second quarter was down as well double-digit, as we said. Okay. The reason you don't see on the NCI line is because we're able to manage the volume headwind through productivity through growing our Service business. And it's not only all across all the other regions, it's also in China as well. So we do what we can control. So from a margin perspective and a profit perspective, we've been able to preserve it.

Nigel Coe:

Okay. That's great. Thanks. That's great color. And then one quick one for Anurag. I want to make sure that he works before he leaves. So the free cash flow clipped down to 1.5, 1.6. (ph) Is that a function really of the new equipment weakness we're seeing, and therefore, we've seen kind of a headwind on advance payable -- advanced deposits from customers. Is that really what's happening here? Was there something else we need to consider?

Nigel Coe:

That’s great. Thank you.

Julian Mitchell:

Hi. Good morning and congratulations to Anurag and Cristina. Maybe just my first question is really on that New Equipment organic sales outlook sort of globally and then more with a focus on the Americas, I suppose, not so much to China. So the backlog, I think, was down 3% year-on-year in June, your sales are down, I think, in the back half in New Equipment, mid-single digits. But I wondered kind of how much of a lead time now we're getting from that backlog into your revenues for 2025? If I look at the Americas, for example, your TTM (ph) orders were down mid-teens in New Equipment, but you're still guiding revenue this year up mid-single. So in something like the Americas, does the confluence of those two things mean 25 sales in New Equipment are almost certainly down a reasonable amount. And then, any sort of broader global color on that?

Julian Mitchell:

That's very helpful. Thank you. And then just maybe a more sort of near-term fiddly question, just maybe for Anurag, as we think about that second half outlook, do we just assume kind of sequentially EPS is down both quarters, Q3 and Q4 to a similar degree. Any sort of color on that second half intra-quarter split?

Cristina Mendez:

Yeah. Thank you, Anurag. Happy to give you some color on the Q1. So with interest expenses at the current run rate and tax rate growing to 27% in Q3. We would expect roughly EPS flat in the quarter, that would mean that full year EPS will go up $0.34. That is the midpoint of the guide, and that means $0.12 (ph) up in the first half, probably flat in Q3 and just over a dime in Q4.

Judith Marks:

Yeah. And Julian, let me just correct myself quickly. The backlog total ex-China is up low-single digit, but the Americas backlog is down.

Operator:

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Judith Marks:

Hi, Steve.

Judith Marks:

Yeah. Well, let me take price and when it impacts services, and I'll let Anurag comment on margins. It is a very competitive environment in China. Pricing is challenged and is down, I would say, roughly 10%. But the costs are coming down. So again, in a deflationary environment, whether it's commodities, whether it's the productivity that we're doing, we're pulling costs out, we've got tailwinds on commodities, and we're driving productivity. So we'll continue to monitor that, Steve. I think we are seeing -- we've been saying it's competitive there now for three years on pricing. I don't anticipate that changing, but our team continues to respond well on the cost side. In terms of how that converts, when you look at our service portfolio in China, again, we're now -- we said last quarter, we were over 400,000 units. We're now about 415,000 units, growing nicely. A lot of that's conversion and our conversion rates are doing well in China. We're pleased with that continuing to move up as we've set in our medium-term guide. But part of that's also recapturing and adding on non-Otis units. So at 425,000 units, we've got a little 4% market share. So there's ample opportunity for us to bring non-Otis units and Otis units that aren't under our portfolio back. So all those activities are going to happen simultaneously, and we believe we can continue mid-teens to high-teens growth in China portfolio for the medium-term. So I don't -- we don't believe that's going to roll into a service impact for us. Anurag?

Steve Tusa:

Great. Thanks a lot.

Joseph O'Dea:

Hi. Good morning. I wanted to ask about the Modernization backlog. And if you could talk about the pricing within that backlog and what kind of line of sight you have to continued margin expansion in MOD, any quantification of that that over the next few quarters?

Joseph O'Dea:

And then can you just talk to China kind of cycle perspective when you talk about a market 425,000, 450,000 units and down for a few years now. Just kind of any indications you see around where that can go? How you get comfortable with, at least at a volume level, market doesn't get much worse?

Joseph O'Dea:

That’s great color. Thank you.

Justin Pellegrino:

Good morning, everybody. This is Justin Pellegrino on for Rob and congratulations to Cristina and Anurag again. Our question is kind of around MODs as well and there's been continued impressive growth. Can you just put that in context of sales effort? Is that more outreach? And I know, Judy, you touched on looking for better conversions? Is it more market awareness of the product? Can you just tell us what's kind of driving that impressive growth? Thanks.

Justin Pellegrino:

Wonderful. Thank you.

Nicholas Housden:

Yeah. Hi, Judy, Anurag, Cristina. Yeah. Thanks for taking the question. I'd like to ask about the maintenance and repair business, so the 4.9% organic growth, I mean, it's not a bad number overall, but it does look like the slowest growth in quite a few quarters. So I'm just wondering, if you can maybe provide some color about what's going on there and whether it's maybe some of the above trend growth that we've been seeing in the repair business coming off? Thanks.

Nicholas Housden:

Okay. Great.

Nicholas Housden:

Okay. Great. And then, Judy, I think you mentioned 10% lower prices in China, I'm guessing year-over-year. Is that a like-for-like comment or is that price and mix? Because I think the 10% number is similar to what one of the competitors called out recently.

Nicholas Housden:

Okay. Great. Thank you very much.

Jack Ayers:

Hi, guys. How is it going? This is Jack Ayers on for Gautam today. And Anurag and Cristina, yeah, congrats everyone on the transitions here. It's been a pleasure working with you, Anurag. So a quick question, just, Judy, if you can maybe square up on some of the new equipment order trends just by geography, totally understand China and America weakness. But looks pretty good in EMEA and Asia-Pacific, ex-China. So maybe if you can maybe just square us just the divergence there. And then back to the pricing comment. I guess is that 10% down like-for-like. Is that just kind of like organic pricing down? Are you seeing any poor actors maybe trying to gain share or maybe just hit on the ISPs, if that's kind of influencing pricing trends in China? Just any color there would be helpful. Thanks.

Jack Ayers:

Okay. Great. Thanks, Judy. Appreciate it.

Operator:

Your next question comes from the line of Miguel Borrega with BNP Paribas. Your line is open.

Anurag Maheshwari:

Thanks for the question. So firstly, just to ground everyone, China New Equipment is our largest margin region in Otis. So it's actually, when China volume goes down, it's a mixed headwind for us. It's not a mix tailwind for us, where team was able to offset the mix which is quite substantial for the quarter because if you look at a revenue down a couple of hundred million dollars and that to essentially in China on the New Equipment side, and that causes about a $40 million, $50 million headwind. We were able to offset that because of pricing in our backlog from the other regions, which was positive, commodities, productivity and the benefits of uplift. So we control what we can control. And as we've gone through this call, China is an important New Equipment market. We all appreciate that. But I think the other regions plus productivity have been more than able to offset that as a result of what you saw the margin expansion.

Miguel Borrega:

That's great. Thank you. And then the second one, just to understand a little bit better the organic growth in maintenance 4.9%, given that the portfolio growth was 4.2%. So aside from repairs, is there anything else that contributed to the slower growth relative to the other quarters? The 70 basis points above portfolio growth, can you provide some color on price mix and churn and how has that changed over the previous quarters?

Miguel Borrega:

Thank you very much.

Judith Marks:

Thank you, Sarah. Our results in the first half reflect the strength of our service driven business model, as we remain focused on delivering value for our shareholders in the balance of 2024 and beyond. I want to once again thank Anurag and wish him well in his future endeavors, while also expressing my excitement to partner with Cristina as together, we both look forward to meeting with investors and analysts in the near future. Everyone, please stay safe and well. Thank you very much.

Judith Marks:

Thank you, Mike, and good morning, afternoon and evening, everyone. Thank you for joining us. Starting on Slide 3. Otis started the year off with a solid first quarter, again confirming and demonstrating the continued strength of our Service-driven business model, as we outlined during our Investor Day in February. Through the hard work and commitment of our colleagues across the globe, we achieved mid-single-digit organic sales growth driven by our Service business.

Anurag Maheshwari:

Thank you, Judy. Starting with segment sales performance on Slide 6. Otis New Equipment organic sales were roughly flat in the first quarter when compared to the prior year. Americas grew mid-teens and solid backlog conversion, EMEA and Asia Pacific both grew low single digits, driven by growth in key markets, and China experienced a double-digit decline due to the lower backlog and weaker market conditions that Judy mentioned.

Judith Marks:

Now on Slide 8. Before I discuss our updated 2024 financial outlook, let me briefly update you on our global market outlook.

Anurag Maheshwari:

Taking a more detailed look at our outlook and starting with sales on Slide 9. We expect total organic sales to remain consistent with our prior outlook. For New Equipment organic sales, we still expect to be roughly flat, with no change to our outlook in EMEA, up low single digits. However, driven by a weaker market, we now expect China New Equipment sales to be down approximately 10%, offset by better-than-expected backlog conversion in the Americas and Asia Pacific.

Operator:

[Operator Instructions] Your first question comes from the line of Rob Wertheimer with Melius Research.

Judith Marks:

Sure. Thanks, Rob. Listen, Mod was up nicely in all regions. I think our strategy is on track. Our team is executing that strategy. And these are still early days in what will be probably more than a decade-long Mod growth market. So we're really encouraged by what we're seeing. Orders up almost 13% in the quarter, backlog up 15%. So now we're just building on quarter after quarter of double-digit growth.

Operator:

Your next question comes from the line of Julian Mitchell with Barclays Capital.

Anurag Maheshwari:

Yes. Thanks, Julian, for the question. Listen, as we said, Mod was down about 10% in the first quarter, second quarter -- sorry, New Equipment was down 10% in the first quarter, expected to be down mid- to high single digit in the second quarter. So as the year kind of progresses, the compares do get better in the second half of the year because we started seeing the slowdown on the New Equipment side, especially in Americas and EMEA more towards starting from 2Q of last year. So let's see how that progresses. If we perform in line with what -- how the market does, the backlog of New Equipment could be down a couple of points. If we do better than the market, then it could be flattish. So there is a possibility that the New Equipment backlog as we end this year, could be flattish to down low single digits.

Julian Mitchell:

That's helpful. And then just maybe, my second question on the Service margins, very good performance in the first quarter, up 70 bps year-on-year. Based on what you said about the second quarter could be up similarly year-on-year sort of 60, 70 bps in Q2 and the first half. So that guide of plus 50 bps of margin for the year, is that just reflecting sort of it's still only April a long way to go? Or is there anything specific happening with costs or technician wages or something in the back half? Maybe just any update around that wage inflation headwind.

Operator:

Your next question comes from the line of Nigel Coe with Wolfe Research.

Judith Marks:

I know. I'm fun selecting them, Nigel.

Anurag Maheshwari:

Yes. Thanks for the question, Nigel. The reason we give a little bit -- we typically give quite good color on the New Equipment and Service outstanding for the quarter. You gave a little bit more color this time was exactly the question you asked was on the tax rate, which was much lower in the quarter coming in at 20% for the full year. The guide is roughly the same at 25.5%. But because of planning and discrete items, they shift quarter-to-quarter, so wanted to kind of highlight the fact that where tax was coming in for the quarter. And obviously, the team is doing a really good job in terms of managing it through the course and bringing it down in years to come.

Nigel Coe:

Okay. That's really helpful. And then on the free cash flow, I understand it's mainly AR timing, but is there anything in the mix of business on Mod mix, so anything else that may be leading to a lengthening in the billing cycles, just curious seeing AR increasing from 4Q to 1Q. Anything to call out there? Or was it just timing?

Operator:

Your next question comes from the line of Steve Tusa with JPMorgan.

Judith Marks:

Yes. Let me break it into New Equipment and Service pricing. China is by far the most competitive pricing market we are in anywhere in the globe, and it's the only region where we are not getting price for New Equipment. Now we've offset that with both productivity and a great job on commodities where we've seen -- we've locked in and we've seen steel prices, which are 80% of our commodity purchases come down. But it is extremely competitive. And we see that through the public bids, we see that through the volume bids, and we just see that through the segment. I mean the segment itself, the New Equipment market is weak. It's down 10% in the quarter, and we're calling it down high single digit to 10% for the year, and that's after really 2 years of it already being down.

Judith Marks:

No. I mean it's been challenging. This is year 3 of challenging pricing there. Again, Sally and the team were just focused on productivity, on commodities, on everything we can in terms of getting cost out of our products even from an engineering perspective and installation. So I think we've done a really good job there staying as neutral as we can in terms of price cost.

Operator:

Your next question comes from the line of Joe O'Dea with Wells Fargo.

Judith Marks:

Yes. So in North America, I would tell you that the New Equipment market segment that we saw in Q1, it remained weak but it was at a lesser pace than the weakness we saw in the second half of '23. And you saw we delivered -- we increased price and we delivered on the backlog significantly because our revenue was up 15%. Our orders challenge in the first quarter was a really tough compare. North America to us is Canada and the U.S. We had several major infrastructure orders in Canada first quarter last year. So I would tell you it's more of a compare. We are expecting more New Equipment stability in '24 than in '23. But the latest ABI data at 43.6%, I mean this is the lowest since December of 2020 and now another quarter of less than -- less below 50%, which means things are contracting similar Dodge is down.

Joseph O'Dea:

That's helpful. And then just on capital deployment and increasing the share repurchase for the year, it sounds like some opportunities there related to repatriation. My question is just related to the M&A side of things, what you're seeing on opportunities there, the pipeline just expectations for being able to execute on any bolt-on opportunities this year?

Operator:

Your next question comes from the line of Nick Housden with RBC Capital Markets.

Anurag Maheshwari:

Yes, you got it. It's more around the conversion time, right? So if you look at our Modernization sales growth, it's actually been picking up every quarter. There's no reason why it should not be going up double-digit in the next 3 to 4 quarters. And as the sales conversion catches up with our backlog. And part of it is the same thing which is driving a margin increase. I think it's more around standardization of products, reducing the lead time from the factory, reducing the lead time to install it. I think those are drivers which will help us get there. So it's ticking up in the right direction, but where it should kind of mirror is where the backlog grows at, and we should be there in the next few quarters.

Nicholas Housden:

That's great. And then just on the Service pricing, I think a couple of times that it was 3 points in the quarter net, maybe I'm misremembering, but I think previously you commented saying that you were expecting 100 basis points of net pricing for 2024. So I'm just wondering where the extra 2 points has come from?

Miguel Nabeiro Ensinas Serra Borrega:

I've got 2 questions. The first one, just on China. For several quarters now, you mentioned 3 years in a row that you're seeing price pressure. I know you're offsetting with lower product costs, but where do you think the price -- that the floor of pricing is? When you look at your competitors that are putting pressure on pricing, how long do you think this will keep going? And then long-term, where do you think margins in China New Equipment will ultimately converge to if you think it'll end up at Western levels? That's my first question.

Anurag Maheshwari:

Yes. Just exactly. It's a balance between the pricing and the share of segment, and I think we look at both. In terms of margins for us, if pricing is coming down in China, as we earlier mentioned, it's also commodity prices. We've seen tailwinds over there, and we're taking cost out and seeing more supply chain efficiencies. So we are maintaining our margin rates in China. And as we go forward, between price, between share, between margin, we're going to find a balance between all 3 of that so we can continue to grow our profitability as we move along.

Miguel Nabeiro Ensinas Serra Borrega:

That's great. And then just a follow-up on capital allocation. So after you upped the dividend and buyback, I know you're buying the minorities in Japan. So does that mean there's not much out there? I know you talked about bolt-ons, but how would you think about potential targets in Southeast Asia, Japan also, what would be the rationale for buying more companies in Southeast Asia versus the rest of the world?

Gautam Khanna:

I wanted to ask about India specifically, and just what -- it sounds like that's a source of strength still. If you could just talk about what the big drivers are there? And if you could dimensionalize how big that is relative to the rest of Asia-Pac?

Judith Marks:

Yes. We -- the good news is we've worked through the majority of any of our supply chain issues. From a comfort perspective for you on commodities, we expect this year after last year, we drove about $44 million, $45 million of savings on commodities. This year, we're looking at $15 million to $20 million. We think we can get that on top of last year's. And the only reason I say $15 million to $20 million instead of $20 million as we've seen steel increase in certain parts of the world. But we are locked in terms of our commodities for the rest of this year from a productivity and a cost standpoint, fairly well, 60% locked, 80% on steel, our magnets are fully locked. So our supply chain team has done a great job through the challenges and now is optimizing.

Operator:

This concludes the question-and-answer session. I will turn the call to Judy for closing remarks.

Operator:

This concludes today's conference call. Thank you for joining. You may now disconnect.

Michael Rednor:

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.

Anurag Maheshwari:

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, favorable maintenance pricing and productivity were partially offset by annual wage increases and higher material costs. For the past 16 consecutive quarters, we have delivered consistent service margin expansion. And for the second consecutive year, we expanded margin by 50 basis points exiting the year at a 24% rate. For the full year, overall operating profit was up $166 million at constant currency, and margin expanded 30 basis points. Despite the weakness in China, we were able to achieve $26 million of new equipment profit growth at constant currency as pricing, productivity and growth in all other regions more than offset unfavorable mix. This performance was better than anticipated and put us at the midpoint of our initial full year guidance for operating profit growth at constant currency as we overcame the weaker macro backdrop experienced during the year. Service operating profit increased $178 million at constant currency, supported by strong volume, pricing and productivity. Since then, we have increased service margins by 240 basis points. Slide 8 lays out the full year '23 adjusted EPS bridge. Adjusted EPS in the year grew $0.37, driven by $0.29 of solid operational performance. Accretion from the Zardoya transaction, share repurchases of $800 million and optimization of a tax rate by 40 basis points drove an additional $0.12, which more than offset $0.04 of foreign exchange headwinds. Additionally, we closed out 2023 with notable adjusted free cash flow of $573 million in the quarter, up more than 30% versus the prior year driven by higher net income and favorable working capital. In addition to the growth in down payments from increased new equipment orders in the quarter, the team continued to manage working capital well. As a result, we achieved our annual guidance generating approximately $1.5 billion of adjusted free cash flow. If we were to look back to the beginning of '23, we initially guided that we would achieve low to mid-single-digit sales growth, 20 to 30 basis points of operating profit margin expansion and approximately 8% EPS growth. Due to our operational performance, continued penetration of repair sales on a growing maintenance base robust pricing and productivity, we were able to outperform all these metrics despite an uncertain macro environment and grew adjusted EPS by approximately 12%, all while returning approximately $1.35 billion to the shareholders. With a strong end to the year on new equipment orders and solid modernization order activity throughout '23, we further expanded both our new equipment and more backlog, which will support us in '24 and beyond. I'll now turn it back to Judy to discuss our 2024 outlook.

Anurag Maheshwari:

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 the added benefit of helping to drive modernization margin expansion. Turning to service profit. We expect roughly 50 basis points of margin expansion, continued strong volume, price, productivity and uplift are expected to more than offset annual wage inflation and higher SG&A similar to '23. Now turning to Slide 12. We began executing Project Uplift initiatives in the second half of '23 as we leverage enterprise scale, optimize our indirect and supply chain spend and improve and standardize our processes. We are on-track to achieve our targeted savings of $150 million with $80 million of run rate savings anticipated by year-end 2024, and $150 million in run rate savings by mid-'25. Out of the $150 million in total savings to be realized, nearly half will come from leveraging enterprise scale roughly 25% from indirect and supply chain optimization and the rest from process improvements and standardization. We continue to analyze and execute on the opportunities and estimate 70% of the savings will be in the service segment with the remaining split between new equipment and corporate. Moving to the '24 EPS bridge on Slide 13. Our guidance for adjusted EPS is $3.80 to $3.90 driven by approximately $0.30 of operating profit growth at the midpoint, reflecting organic sales growth of 3% to 5%, with approximately 50 basis points of margin expansion. Below the line, we expect to offset $0.03 to $0.04 of Forex and increased interest expense headwinds with continued optimization of our tax rate and the benefit of approximately $800 million in share repurchases supported by $1.6 billion in adjusted free cash flow. Looking at the EPS cadence for the year, we expect the $0.30 of EPS growth to be fairly level loaded between the first and the second half, while in the first half, we expect the first quarter EPS growth to be a couple of cents lighter than the second quarter. A little bit more color on the first quarter metrics, starting with orders. We faced a difficult compare versus the first quarter of last year where we grew more than 7%. So we expect new equipment orders to be down roughly 10%, while portfolio and modernization orders growth should remain strong. As for sales and profit, sales growth will be roughly 3%, and total company operating profit margins should expand over 50 basis points to 16%-plus both led by service. Below the line, headwinds from higher interest costs and a tax rate roughly in line with the prior year due to timing will be offset by lower share count. All in, this should lead to $0.06 to $0.07 of EPS growth driven primarily by operational performance. Overall, our outlook reflects another year of performance led by consistent service business. We remain focused on continuing to mitigate macro challenges and further driving shareholder value. With that, I will request Krista to please open the line for questions.

Nigel Coe:

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?

Nigel Coe:

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

Nigel Coe:

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?

Anurag Maheshwari:

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.

Gautam Khanna:

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?

Gautam Khanna:

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?

Operator:

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

Judy Marks:

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.

Julian Mitchell:

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?

Operator:

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

Judy Marks:

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.

Judy Marks:

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.

Operator:

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.

Operator:

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

Michael Rednor:

Thank you, Michelle. Welcome to Otis' third 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 additional details on important factors that could cause actual results to differ materially. Now, I'd like to turn the call over to Judy.

Anurag Maheshwari:

Thank you, Judy, and good morning everyone. Starting with third quarter results on slide five. Net sales of $3.5 billion grew 5.4% and organic sales were up 5.2% with growth in both segments. Adjusted operating profit was up $52 million at actual FX and $47 million at constant currency with margins expanding 60 basis points to 16.9%. Drop-through on service volume, productivity, and pricing in both segments, and commodity tailwinds were partially offset by inflationary pressures, including annual wage increases and higher corporate costs. Adjusted EPS increased 19% or $0.15, with over half of this improvement coming from strong operational performance and the rest from a combination of a capital allocation initiatives and ongoing effort to reduce the tax rate, which came in at 25.5% in the quarter. Free cash flow came in at $272 million, up $57 million versus prior year, largely driven by higher net income. Year-to-date, we generated $934 million of free cash flow, $81 million lower versus the prior year, driven by lower down payments on fewer new equipment orders and the continued outperformance of a repair business as this work tends to be paid in [areas] (ph). Moving to slide six. Let me start by giving some color on Q3 new equipment orders and backlog. In the third quarter, at constant currency, new equipment orders declined 10% versus prior year. Despite this, our new equipment backlog increased 2% with mid-teens growth in Asia Pacific, mid-single-digit growth in the Americas, and EMEA roughly flat. China backlog is down low-single-digits. Sequentially outside of China, our new equipment backlog was relatively stable in all regions. Globally, pricing on new equipment orders was up low-single-digits, building on a similar increase in the third quarter of the prior year. Excluding China, pricing improved by mid-single-digits are better in all regions. Although pricing was down mid-single-digits in China due to macro challenges, we remained price cost neutral in the region from our continued focus on driving material productivity. New equipment organic sales were up 1% in the quarter with strong growth in all regions outside of China. Asia Pacific grew low-teens driven by continued performance in India, as well as traction with major projects. In EMEA, new equipment sales grew high-single-digits underpinned by the significant orders over the past several quarters in Southern Europe and the Middle East, while in the Americas the region grew high-single-digits for the second consecutive quarter, executing on its multi-billion-dollar backlog. We grew new equipment operating profit by $10 million at constant currency, despite China sales coming in weaker than expected. Driving productivity, pricing flowed through from the backlog, and tailwinds from commodities more than offset the project in regional mixed headwinds, leading to a 7.2% margin in the quarter. Turning to service segment results on slide seven. Maintenance units were up 4.2% with growth in all regions, led by high-teens growth in China for the fourth quarter in a row. We deliver another strong quarter of modernization orders, up 13% including China Mod orders growing double-digits from continued success of new product offerings. Asia-Pacific also grew double-digits due to a number of volume and major project wins with standout performance coming from North Asia. EMEA Mod orders grew 10% driven by major project wins. At quarter end our Mod backlog was up 15% with growth in all regions. Service revenue came in better-than-expected with all lines of business contributing to organic sales growth of 8.4%. Maintenance and repair was up 8.6% from higher than anticipated repair volumes, and Mod was up 7.6% with growth across all regions highlighted by a double-digit increase in Asia. Service pricing excluding mix and churn came in around 4 points, similar to last quarter's performance, and adjusted for mix and churn was a net 2 points. Higher volume, favorable pricing, and productivity were partially offset by annual wage increases and higher material costs, leading to $53 million of service profit growth at constant currency. Service adjusted operating profit margin expanded 90 basis points in the quarter to 24.8%. Overall, we are pleased with our results in the quarter, as well as year-to-date. We've grown our new equipment and Mod backlogs, expanded the portfolio at 4% and delivered over 10% EPS growth. Moving to slide eight, and the revised outlook. Starting with sales, total Otis organic sales are expected to be up approximately 5.5% consistent with the midpoint of a prior guide, including slight adjustments by segment. Adjusted operating profit growth at constant currency is expected to be $170 million, a $5 million increase versus the prior guide's midpoint, and the result of strong performance in the service segment. At actual currency, we expect adjusted operating profit of $2.265 billion, as the better operating performance is offset by a slightly higher foreign exchange headwind, driven by a change in the euro and the weakening of various Asian currencies such as the CNY. Our margin expectations remain unchanged with service margins expected to expand 50 basis points to 24% and new equipment margins expected to expand 20 basis points to just under 7%. This puts overall operating margins at approximately 16%, up 30 basis points. We have grazed our guidance for adjusted EPS, now expected to be up 11% versus the prior guide, to $3.52. This represents a $0.04 increase versus the prior guide's midpoint, largely driven by strong operational performance and improvements in below-the-line items, including tax now expected to end the year at 26%. We expect to generate approximately $1.5 billion in free cash flow, a roughly 105% conversion rate, and return substantially all of it to shareholders through $1.35 billion of dividends and share repurchases. Taking a further look at the organic sales outlook on slide nine. We now expect new equipment organic sales growth of approximately 3% at the low-end of the prior range driven by larger than expected headwinds in China, which we expect to be down mid-single-digits. The Americas and EMAs are still expected to grow mid-single-digits organically. In service, organic sales are expected to be up approximately 7.5%, a 1 point increase versus the midpoint of the prior guide driven by maintenance and repair. Consistent maintenance portfolio growth and pricing, together with another quarter of strong repair volume, enable us to raise the outlook by 130 basis points to up 7.3% versus the prior guide. Modernization organic sales expectations remain unchanged, up 8% as we execute on our backlog, which was up 15% at quarter end. Moving to slide 10, we have raised our expectations for adjusted EPS and now anticipate growth of approximately 11% or $3.52, a $0.35 increase versus the prior year driven by $0.30 of operational improvement. In closing, we continue to execute well on the things we can control, and our resilient service business is driving profitable growth in an uncertain macroeconomic environment. Our strong year-to-date performance gives us confidence to again raise our EPS outlook and deliver a solid fourth quarter, while positioning us well to perform in ‘24 and beyond. With that, Michelle, please open the line for questions.

Jeffrey Sprague:

Thank you. Good morning, everyone. Judy or Anurag, could you just elaborate a little bit more on your view on both America's and China new equipment, kind of, the downward tick in the outlook, and maybe just some thoughts on kind of even the trajectory as we exit 2023 into 2024 in those particular regions?

Jeffrey Sprague:

Great. And just to shift completely in a different direction, you know, you started the conversation, Judy, with uplift, kind of, getting off the ground. I guess no pun intended. But maybe just a little bit of color. Is it impacting results in Q3? How do you see kind of the staging of that $150 million that you're talking about?

Jeffrey Sprague:

Great. Thank you.

Nigel Coe:

Thanks. Good morning everyone. So, I understand the kind of like the weakness you've update across the globe. I mean, are we seeing any, you know, product cancellations, you know, with the rising rates, you know, some projects not penciled out. So, just wondering on that. And then -- but really, I did want to dig a bit more into China with the pricing down, mid-single-digits. I think that the view was that China would not, kind of, be as bad as perhaps prior down cycles, because margins there are much lower. So just curious how you see the risk of further deterioration in China? And you mentioned price costs remaining positive or rather neutral in China. You know, are China margins holding in there? You know, or are we seeing some deterioration in margins?

Anurag Maheshwari:

Yes, so on price cost as you mentioned Nigel, we are, you know, either neutral or positive right? In China definitely pricing the new equipment side is coming down, but we are driving hard on material productivity, and the -- it's a deflationary economy over there as well. So a combination of that and this pricing discipline in the market, you put all of that together. Right now, price cost is favorable, and we are able to offset the China mix as you saw in third quarter with a new equipment margin being at 7.2%. And even if you look at the fourth quarter implied outlook its -- new equipment margin is going to be about 7%, even though China is going to be down. So and a couple of reasons one is obviously the price cost in China. Second, pricing in all the other markets that has gone up over the past 12, 15-months, which is in our backlog, has started flushing through to the P&L. We again saw this quarter another $10 million pick up of pricing. We're going to see that similar in the next quarter, and commodities are tailwind. So if I look at pricing in the backlog overall, which is probably up 50 basis points to 70 basis points, and if we snap the line on commodity today, right, we should still see another $40 million or so tailwind next year. You add these two things together, I think it more than kind of makes up for the China mix for us to believe that a new equipment is at a sustainable margin rate.

Judy Marks:

Well, we're not going to guide yet for ‘24 uplift savings. So we just need to be, yes, we're not prepared to do that yet. We'll get back to you, obviously, when we do our ‘24 guide to let you know what's going to be in that late January. In terms of restructuring, I think we've been…

Nigel Coe:

That's great. Thank you very much.

Julian Mitchell:

Hi. Good morning. I just wanted to start off with the global new equipment revenue outlook. So you've been, you know, feeding off a good backlog there and the organic sales maybe flat to up 1% year-on-year in new equipment in the back half of the current year? I just wondered though when you look at the sort of 12-month rolling on new equipment orders down 4%, year-to-date down 6%, last quarter down 10%, and then we think about sort of the nature of how quickly the backlog wears off. It's very fast in China, slower the rest of the world? Is it sort of base assumption as we start out next year that new equipment sales are down then as those weaker orders feed through?

Julian Mitchell:

That's very helpful. And thanks, Anurag. And maybe just my follow-up would be around the service margins perhaps. So, you know, one element is, you know, if I just, maybe it's some incorrect math’s, but it looks like the service margin in Q4 in the guide is down sequentially off flat sales and sort of flattish year-on-year, despite a big increase year-to-date. So just wanted to check if that's right and if it's just conservatism or what have you? And then secondly, on the service margin, how are we thinking about sort of price cost or price net of material cost and service wages playing out? Is that, sort of, getting larger into next year or narrowing as a tailwind? Just any context around that, please.

Judy Marks:

Yes, Julian, on the second question where you're talking about wages and inflation, inflation on the service side, while we have had wage inflation, you know, we know we need to offset that with productivity, and what we've been doing with price has been fairly significant. We have another quarter where our service pricing, like-for-like is up 4 points, and with inflation staying pretty high, especially in EMEA and in the Americas, we should be able to as we negotiate the majority of our maintenance contracts, you know, first, second quarter next year, which are mainly backward looking for this year's inflation, we expect to be able to get price again at levels comparable to that for 2024. We have line of sight now, the majority of our ‘23 maintenance contracts are in the books, as our commodity prices and everything else as we go with 2.5 months left to go now. So we're actually feeling pretty good about service pricing for next year and price cost. And we've negotiated with the majority of our collective bargaining across the globe. Most of our mechanics are represented. And I think, I know we've treated them fairly and we're able to recover that in both price and productivity.

Operator:

Please stand by for the next question. The next question comes from Joe O’Dea with Wells Fargo. Your line is open.

Anurag Maheshwari:

Yes, absolutely. If you look at a backlog, it is significantly more than a 12-month revenue, because we got major projects in there. We have other kind of long-tailed projects as well. But very specifically, the reason why I said earlier we have confidence of America and Europe, kind of, growing low-single-digit next year is the back half -- even if we snap the line today, we have very high visibility of that converting. We enter any political year with 80%, 90% of America's and EMEA revenue coming out of backlog. Followed by that is Asia-Pacific Ex-China, which is probably a little bit lower, depending upon the geography mix, but that backlog is up very healthy. It's probably double-digit up, right? Then China is the only one where we have higher book-and-ship. So when we enter the year, I would say two-thirds of that revenue probably comes from the backlog and a third comes from the book-in-ship, which is why for three out of four regions, we feel it's low-single-digit growth for next year. China is the only variable that we need to see how the next few month’s go.

Judy Marks:

Yes, Joe, we would tell you that, you know, if you go back to peak years in China, we probably peaked the segment, peaked new equipment at about 650,000 units. That's been coming down now for the past two years, and we're at about 450,000 currently for this year. Still 450,000 of the 850,000 global units. So still a large healthy market. And 450,000 you'd probably have to go back to 2018-ish timeframe to where we had, you know, obviously pre-COVID to having a market like this. And so we still think it's a very attractive market. We've gained share there this year as we look in China and we will continue to execute our strategies of our agents and distributors being our partners, which we now have about 2,350 agents and distributors, more than twice since we spun. We focus on our key accounts. And we've also really focused on the Tier cities that are having an impact. So if you look at the third quarter, Tier 1 cities, Beijing, Shanghai had the best market segments. And then, you know, obviously it trailed off as you got all the way to Tier 5. So we've adjusted our strategy. That's why our agents and distributors are so helpful, as well as our internal sales folks that support them. The key accounts, again, those relationships are strong, and they are yielding for us.

Operator:

Please stand by for the next question. The next question comes from Steve Tusa with JPMorgan. Your line is open.

Anurag Maheshwari:

Hey, good morning, Steve.

Judy Marks:

Yes, I think you're going to, I mean, orders are lumpy, kind of, across the board for both modernization and new equipment. And I would argue share is also, kind of, hard to measure on a quarterly basis and something more you'd like to do on an annual level when you really have some fidelity in the information. I can't comment on what our competitors are doing, but I can tell you that, you know, we're, again, our China team is executing our strategy. In a down market, you know, our China team has both driven cost out in terms of material productivity. So that, again, if you look at and you step back, you know, we're driving growth in all lines of business in Otis, especially in service. We're seeing good growth in three regions outside of China. But our China team has really in despite a tough macro environment on new equipment, has really now added this service component, which now we're at 365,000 units in our portfolio in China, more than double from when we spun. And our China modernization business has grown double-digits this year. So we're finding we're moving Mod into the factory, so we're optimizing the cost basis there, and you're going to see that modernization business really in China, as well as globally take off. And for us, we need to watch that mix. That's what Anurag commented on for fourth quarter for service margins. But we think, we know it's actually worth getting that modernization business, because it will bring more units to our portfolio. So we're going to end this year at 2.3 million units in our portfolio. And when you think about 1% portfolio growth throughout the decade before we spun, and now us, four straight quarters over 4%, we're going to end this year at 2.3 million units. And that is the strongest, but it's still at 2.3 million units of a $21 million, $22 million segment leaves us lots of room for growth. And that's why we're convinced the service-driven growth strategy globally is the right answer for us and our shareholders.

Anurag Maheshwari:

Oh yes, absolutely. It's two weeks, okay, So firstly on cash we are at about $934 million. We got $550 million and I guess your question is tweaking it to the low-end of the guidance is two reasons; one is clearly lower down payments, because of new equipment orders which have been a little bit lower. But second is also a repair business which has grown very, we started this year would be low-single-digit repair. It's growing at a very good rate. Great for sales, great for profit on the P&L side, but we do get paid after we complete our work, so it's a little bit of a receivable drag. I think it's a combination of these two reasons why you see a little bit of a tweak in the cash flow guide.

Steve Tusa:

Sorry, sorry, one last quick one. A lot of volatility in multifamily in the U.S., kind of hard to tell where that business is going. Any impact on you guys from that? And thanks a lot for the answers to the questions.

Steve Tusa:

Great. Thanks a lot.

Nick Housden:

Yes. Hi Judy, Anurag, Mike. Thanks for the questions. So, yes, just on that free cash flow point, I mean, it looks like China is never going to go back to that 650,000 unit mark. So I'm just wondering if that means that over the medium term there needs to be a permanent reset on the expectations for cash conversion from the current 100%, 110% target that you've already got. That's the first one, thanks.

Nick Housden:

Okay.

Nick Housden:

Okay. Great. Very clear. And then just a second question on some of the competitive dynamics in modernization. So it sounds like when you guys or some of your European competitors modernize a unit, especially in China, it's almost always someone else's unit and very often it's one of the Asian competitors units that you're modernizing and then moving into your own portfolio. Are the Asian guys just not focused on modernization? Or why does it seem to be the case that you are kind of eating their lunch there?

Nick Housden:

Okay, great, Thank you.

Gautam Khanna:

Hey, good morning, guys.

Gautam Khanna:

I had two questions. First, Anurag, on your comment about escalators next year being comparable to that of this year. I was just wondering if you could elaborate maybe by region and why that's so given the level of inflation this year seems below that of last year? And then I have a follow-up.

Gautam Khanna:

Yes.

Gautam Khanna:

Okay. And just a quick follow-up. Could you talk a little bit about any trends in churn coming down in the quarter? And maybe year-to-date on service renewals?

Gautam Khanna:

Thank you.

Judy Marks:

Yes, thank you, Michelle. Our service-driven business model is working as we approach 2.3 million units in our portfolio by year-end with the compounding lifetime value of each additional unit. Year-to-date results are indicative of the strength of our strategy as we continue to prioritize value creation for our shareholders for the remainder of 2023 and beyond. Thank you for joining us today. Stay safe and well.

Michael Rednor:

Thank you, Liz. Welcome to Otis' second 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 additional details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Judy.

Anurag Maheshwari:

Thank you, Judy. Starting with second quarter results on Slide 6. Net sales of $3.7 billion were up 6.7% and organic sales were up 9.5%, driven by strong performance in all business lines. Adjusted operating profit was up $49 million at actual FX and $60 million at constant currency. Drop through on higher volume, productivity, and pricing in both segments, and commodity tailwinds were partially offset by inflationary pressures, including annual wage increases, unfavorable new equipment mix, and higher corporate costs. Adjusted EPS increased 7% or $0.06, reflecting $0.11 of benefit from operations. This strong operational performance and accretion from a lower share count were partially offset by a $0.03 headwind from foreign exchange translation and a $0.03 tax headwind as a result of a tough compare. Free cash flow was strong in the quarter at $409 million or 109% conversion, up $83 million. The increase versus prior year was driven by higher net income and improved changes in working capital. Moving to Slide 7. In the second quarter, as we noted previously, new equipment orders faced a tough compare and were down 12% at constant currency. New equipment backlog, however, continues to trend higher, and was up 5% at constant currency versus the prior year and up 3% sequentially, with all regions being up, providing visibility for sales in the second half and beyond. Globally, pricing on new equipment orders was up low-single digit, building on solid pricing improvements from the middle of 2022. Pricing trends improved mid-single digits or better year-over-year in all regions excluding China. While pricing was down low-single digits in China due to deflationary pressure and the softer market, we maintained price-cost neutrality by focusing on material productivity. New equipment organic sales were up nearly 10% in the quarter with all regions contributing. APAC grew double digits, driven by strong performance in Korea and India; EMEA grew high-single digits, primarily from Southern Europe; the Americas grew high-single digits as job site delays and field inefficiencies eased; and China delivered mid-single-digit growth by executing on a stable backlog. Overall, we saw solid execution across all regions. Adjusted operating profit was up $15 million at constant currency. The benefits from higher volume, price beginning to flow from the backlog, strong productivity and better-than-anticipated commodity tailwinds were partially offset by continued unfavorable regional and product mix, transactional FX and higher SG&A expense. Now turning to service segment results on Slide 8. Maintenance units were up 4.2%, with growth in all regions, led by China, where we achieved another quarter of high-teens portfolio growth. Modernization backlog expanded by 14%, with growth across all regions, driven by strong orders growth of 16% in the quarter. Service organic sales grew 9.4%, the highest rate since spin with growth in all business lines. Maintenance and repair grew 9.1% from better-than-expected repair volume. Our portfolio continued to expand 4.2% and we achieved strong pricing, up 4 points on a like-for-like basis. With strong backlog conversion in the quarter, modernization sales were up 10.9%, with particularly strong performance in Asia, including China. Service profit was up $52 million at constant currency as the benefit from higher volume, favorable pricing and productivity were partially offset by annual wage increases and higher material costs. Margins expanded 50 basis points, in line with our full year guidance. Overall, we're pleased with our first half results, where we gained approximately 50 basis points of new equipment share, grew the portfolio again over 4%, increased organic sales by 6.6%, and improved operating profit by $67 million at constant currency, while continuing to grow our backlog in both new equipment and modernization. This provides good growth visibility over the next several quarters. With that, moving to Slide 9 and the revised outlook. Starting with sales. With strong service momentum, we are raising outlook and now expect total Otis organic sales to be up 4.5% to 6% versus the prior guide of 4% to 6%. Adjusted operating profit growth at constant currency is expected to be in the range of $155 million to $175 million, and approximately $15 million increase at the midpoint versus the prior guide, linked to the better-than-expected service volume. Service margins are still expected to expand about 50 basis points to 24% and we anticipate new equipment margins to expand 20 basis points to 6.8%. Overall, margins are expected to be up approximately 30 basis points to 16%, the high end of the previous range. Adjusted EPS is expected to be up 9% to 10% versus the prior year, within the range of $3.45 to $3.50, and approximately $0.03 increase at the midpoint versus the prior outlook, largely the result of strong operational performance. Due to our continued cash mobilization activities, we have increased our share repurchase target to $800 million, and the outlook for free cash flow is $1.5 billion to $1.55 billion or roughly 110% conversion. Now taking a further look at the organic sales outlook on Slide 10. There is no change to the overall new equipment outlook. By region, we still expect the Americas and EMEA to be up mid-single digits, consistent with our prior guide. Within Asia, Asia Pacific is performing better than anticipated, led by India, which we expect to offset a decline in China due to the continuing weak demand environment. Turning to service. Organic sales are now expected to improve by 50 basis points versus the prior outlook to a range of 6% to 7%, with improvement in all business lines. We're increasing the outlook for maintenance and repair organic sales, now expected to be up 5.5% to 6.5% in '23, driven by the strong first half repair volume. Supported by a robust backlog, which is up mid-teens, we are increasing our modernization organic sales outlook to be in the range of 7% to 9%. Moving to Slide 11. We expect adjusted EPS growth of 9% to 10% in the range of $3.45 to $3.50, a $0.31 increase for the full year with $0.29 coming from operations. Overall, with a strong first half behind us, we are well positioned to improve our outlook and deliver solid second half financial performance on the strength of a service-driven business model and focus on operational excellence. With that, Liz, please open the line for questions.

Nigel Coe:

Thanks. Good morning. Hope everyone's well. So, I guess, first of all, on the new equipment margins, the clip to the 40 basis points high end, down 20 basis points, all right, it' a small move, but you haven't changed your growth outlook. It doesn't feel like the mix [geographically changes] (ph). I'm just wondering what sort of driving that sort of more kind of moderate view, if you will, on margin? And are we still on track for that price-cost tailwind in the back half of the year?

Nigel Coe:

Okay. That's very clear. And then my follow-up is on the [Uprise] (ph) program, the $150 million of cost. Maybe just a bit more detail on where you see the opportunities to further streamline the cost base? How much of that $150 million do you think will come to the bottom-line versus being reinvested? And then, is this additive to your other programs? I'm thinking things like the modernization margin initiatives, service productivity initiatives, is this additive to those programs?

Nigel Coe:

Okay. Sorry.

Nigel Coe:

Okay, great. UpLift. I got it. Okay. Thanks.

Operator:

Our next question comes from the line of Julian Mitchell with Barclays.

Judy Marks:

Yes, well, I'll let Anurag answer the backlog, but let me just really straight on hit, we do not expect a lower backlog as we exit '23 and enter '24. Really pleased with the 5% backlog growth. And if you go to our first appendix chart, we have a record backlog, which gives us really good line-of-sight for our future and really helped us drive the sales growth that you saw the organic growth in both segments. But let me talk to the market and then I'll turn backlog over to Anurag, just so you get -- to give you a little more color. Let me start in Asia Pac. We expect the market itself on new equipment to still grow mid-single digits. We're seeing really strong markets. We're actually seeing double-digit demand in India and really pleased with how our teams responding there. But think of Asia Pac continuing at mid-single. The Americas, what we saw in the first half at the market level in units, was the first half was down mid-teens. Our view is the second half is going to be flattish to slightly down. So, the full year will be down high-single for the market itself. The units are slowing, but the Americas market itself was sequentially flat. So, we're watching all the indicators, obviously, talking to our customers, looking at Dodge, looking at ABI, but again, watching the Americas carefully and happy to talk about the orders there, as well as we go through these questions. In EMEA, we say that we're going to be down high-single digit for the rest of '23. We're watching the rate impact, a little bit of a sluggish market especially in Northern Europe, I think Germany, France and U.K. being weaker, and it's delays in decision-making uncertainty. The proposals are still going in. The customers, it's a matter of when they're going to make those decisions. Spain and Italy are pretty resilient. And for the segment itself the Middle East is up low-single digits. We're going into Europe with a strong backlog for the second half. And again, when you look at our backlog, we're looking out 18 to 24 months with a backlog of this scale. On China, the market itself, we're calling down 10%. We started -- April momentum was good, May was weaker, and we really exited Q2 with the volumes being down in the market itself. So that lack of acceleration that we had been planning on for the book-and-ship business in the second half really has taken us to the lower end of the range. The only thing I'll remind everybody, again, that new equipment market outlook is very different from the service outlook, which is still solid. It's growing mid-single digit, again, led by Asia, low-single digit in developed markets. Anurag, do you want to talk to backlog?

Judy Marks:

Yes, even in EMEA, Julian, our backlog is up modestly both versus last year and versus last quarter. So, we're really -- we're watching the backlog closely. We've always shared with our shareholders that you should watch us at year-end, it's the best indicator for our next year in terms of top-line and bottom-line. And that's -- we expect this year to be no different.

Anurag Maheshwari:

Yes. So, if you kind of look at the second half of the year, for the first six months, we did about $1.72 of EPS, which means $1.76 in the back half, and I think it's pretty equally split between Q3 and Q4, Julian, in terms of our EPS split. If you look at new equipment, and I'll just start with new equipment and go on to service, we expect about 3%-ish growth in the second half of the year. I think it should be kind of equal between the two quarters around that. We're going to see commodity tailwind pricing at the tune of about $30 million, $40 million. Obviously, a little bit of that is more towards Q4 than Q3, but the margin rate, which should be above 7%, should be between -- in Q3, Q4 should be no difference between that. Now, if you look at the service, we're doing $40 million, $50 million of operating profit increase every quarter. We expect that again in Q3 and Q4. Maintenance continues to do well with the pricing as well as the portfolio growth and we're converting the mod backlog. So, I think we're in a pretty good run rate over there. And obviously, there's a little bit more of corporate expense headwind in Q3 versus Q4. So, you put all puts and takes over there, I think the cadence between Q3, Q4 from an EPS perspective should be pretty similar.

Operator:

Our next question comes from the line of Steve Tusa with JPMorgan.

Judy Marks:

Hey, Steve.

Judy Marks:

Yes, let me try and address kind of multiple items there. First, let me start with the service business. This was the eighth straight quarter we had mid- to high-teens portfolio growth in China. And Sally Loh now leads our China organization, and she is really been driving that. We are now at 350,000 units on our portfolio in China, which is a pretty big step up from when we made this commitment to grow our service business. And it is driving returns and we're increasing the conversion rates as we go. Our China, even though, the segment was down 10% in the second quarter, Steve, we were down 5%. So, yet another quarter of market share gain in new equipment, which bodes well for the two-year warranty and then for the conversions for us as well. Because even though there may be less units, our strategy to open service depots, to have the ability to drive the service conversion, shipping Gen3s with Otis ONE connected is -- at the same time, we're accelerating our conversion rates versus what we had traditionally had in the past. So, even if the volume goes down a little, our rates will offset that. So that doesn't really get me concerned. In terms of what we really changed in the second half, it was -- we had expected things to tick up, especially on the book-and-bill business -- book-and-ship business, excuse me. And as we exited the second half, we just hadn't seen the momentum. Now like you, we've heard out of Monday out of the [indiscernible] a different tone. We have to see what that translates to. I'm cautiously optimistic that once that tone is set from Beijing. There is positive potential that -- especially in the larger tier cities really starts happening and sentiment changes. But our outlook did not assume that. If and when that happens, again being cautiously optimistic, obviously, we're prepared for it. We've got the capacity, we've got the sales channel, and we've got the product and innovation to be able to deliver as soon as that picks up. The state-owned enterprises are still doing well. They're still growing. They are buying the land, and that's why again, we think we've done really well with our strategy on key accounts and growing share.

Anurag Maheshwari:

Yes, it's -- I mean, with orders being down, obviously, the some -- if orders were to be down -- firstly, we're not saying orders are going to be down in the second half of the year, obviously, it will come with lower advance payments for sure. However, as you can -- we've built up a fair amount of receivables in the first because of the higher revenue and that should kind of unwind into the second half of the year, right? So from a cash perspective, I think we will be fine over there, Steve.

Anurag Maheshwari:

Yes, thanks.

Jeffrey Sprague:

Thank you. Good morning, everyone.

Jeffrey Sprague:

Just coming back around the price, Anurag, I think you gave us some good color on price, on orders on new equipment. Just wondering if you could give us a little color on what's coming through in revenues at this point on new equipment side and how that might build over the next two or three quarters.

Jeffrey Sprague:

Great. And then maybe we could just get a little more color on mods. Obviously, it's very robust and creates some margin headwind as you do that work. You seem to be kind of managing that quite effectively. But my question is really more around what the back-end is looking like on the mods? Are you seeing higher service retention on the back-end, higher revenue per unit on the back-end? Just how kind of the mods is really playing into your overall service portfolio growth strategy?

Jeffrey Sprague:

Great. Thanks a lot.

Nick Housden:

Yes. Hi, everyone. Thanks for taking the questions. So, it's been another strong performance from repair. I was wondering if you could just remind us how much of maintenance and repair is the repair piece specifically? And how sustainable the growth is? Because I think it's been a couple of quarters now where the growth has surprised to the upside. So, I'm wondering if maybe it's just a structurally stronger market than you maybe thought previously. That's the first one. Thanks.

Anurag Maheshwari:

Yes. Just a couple of points to add over there. I think the team has really executed very well on the repair side. I mean, after two years of double-digit growth, as we entered this year, we thought that repair would be a low-single digit growth. So, if you look at our outperformance on the service business, I think it's largely because of repair. Our maintenance portfolio is growing at 4.2%. We have price on a like-to-like basis of 4%. If you adjust for mix and churn, it's 200 basis points and maybe maintenance is more than high-single digits. So, repair is definitely growing double digit in the first half of the year. And it's not only because of coming back to work, just executing on a very good strategy over there. On the second half, the reason you see a step down in the service revenue is because maintenance continues to grow at the same clip, modernization backlog converts, as we're just assuming repair is going to be flattish. Now, we may be a little bit cautious over there. If we continue to execute well, there could be a little bit more upside in the second half of the year.

Judy Marks:

Yes. We're really pleased. The Otis ONE units are making a difference. We are shipping all of our Gen3s with Otis ONE and our new Gen3 Core will have that in North America, the new product we announced this quarter. We're driving a much larger volume of Otis ONE this year because of all the shipments that are happening and because of all the conversions in China that are happening. So, where in the past, we would tell you about $100,000 a year, that number is going to be up significantly more in 2023, which is what continues us along that journey in our medium-term guide. Right now, we've got over 800,000 of our units connected, in general, more than just Otis ONE, but now Otis ONE is picking up a bigger proportion of that. And you'll see far more than 100,000 units this year connecting. It is making a difference. If you look at China alone, I would tell you it's the part of their significant service productivity, the majority of that is being driven by Otis ONE. Our running on arrivals are down across the globe, and that we are getting -- any time we have a connected product, our ability not just to convert, but to retain that especially from the ISPs, who really -- they don't want to come into an Otis elevator that's got an eView screen and figure out how to maintain that, and they can't offer that same connectivity. So, we provide all those numbers on an annual basis. We'll do that in fourth quarter, but it is an integral part of our strategy. It is working. It's helping us with service pricing. And as Anurag said on service pricing, like-for-like, we're up 4 points. So, we're up from last year. And honestly, I've got to give EMEA incredible kudos. They're up mid-single digits this year in service pricing. And Bernardo and the team there are doing a great job on that. But a big part of that's being connected. I was in Portugal a few weeks ago with our team, more than half of their portfolios connected and their service margins are outstanding. So, it makes a difference. Our strategy, again, to define that connection versus having people -- customers opt in from a subscription, we're getting subscription services too. But again, we chose to invest the CapEx and we chose how we were going to deploy Otis ONE, and I would tell you, you're seeing it in our service margins.

Operator:

Our next question comes from Josh Pokrzywinski with Morgan Stanley.

Judy Marks:

Hey, Josh.

Judy Marks:

Yes. No, fair question, Josh. Listen, we call them key accounts, which are the large developers. Our team has continued to develop those key accounts. And as a matter of fact, our portion of national or key accounts that are now state-owned enterprises is significantly larger than the private developers. So that's really making a difference for us. The Tier 1 and Tier 2 cities continue to outperform not just the segment, but also outperform for Otis versus the lower-tier cities. But in the lower tier cities, it was volume for us. And our team performed pretty well. As you look at the second quarter, the positive segments in China were the same as the first quarter, infrastructure and industrial, and the weakness was more in resi and commercial. But I think we -- I like the strategy we're on, again, having those state-owned enterprises. And then we're seeing what's going to happen again with the government policy, with the tone that's being set, and then how these policy eases, whether it's mortgages, lending rates, or again, houses -- just the whole philosophy of housing is for living versus investment. That phrase was no longer used on Monday after many years. So, we're watching it carefully. We think we've got the right tuning for the second half if there is an upturn with either stimulus or just sentiment helping on volumes, we're ready and you'll see it flow through.

Anurag Maheshwari:

A great question, Josh. And I think you answered it, it's a bit of everything, right? So, if you kind of look at our mod business, just to level set everyone, firstly, it is our lowest margin segment today even relative to new equipment and, obviously, repair and maintenance. But as we standardize the products, as we build scale, and as we kind of get a more sustained go-to-market strategy, we're already seeing those margins pick up because we're getting scale. So we are fairly confident that the trajectory that we are on right now that you should see mod margins pick up over the next six to nine months, and we will take the new equipment margin as well. So, it's on a good track right now.

Operator:

Our next question comes from the line of Joe O'Dea with Wells Fargo.

Judy Marks:

Yes, thanks, Joe.

Judy Marks:

Yes. So, let me just touch on a few at the top level. Supply chain is improving, and you're seeing that come through with the volumes we're being able to ship, and that's been helpful. As Anurag said in his opening remarks, commodities are improving as well. We had about a $15 million tailwind in the second quarter, and we've upped our outlook for commodities as well. So, price is up, commodities is up, supply chain is improving, that's all fairly positive. Our backlog, again, is at a record. And we -- it really will see us through 2024 with some certainty, with probably the question mark being on China, and when China bounces back and/or at what level. Our China team has done an incredible job on material productivity. And even though pricing is extremely competitive in China, we have hit at least price-cost neutral, the price-cost is slightly positive in China through the first half of the year. So that's going to -- if the market doesn't change and there's no stimulus, we'll adapt and continue to change our cost structure. If it does come back, we're ready.

Anurag Maheshwari:

Go ahead, Joe.

Judy Marks:

So China pricing is very competitive, but no one has yet taken it down to being unrealistic or undisciplined. So it is the most challenging place for us to get price, and I think that's -- you see that market wide. Everywhere else in the matured and the emerging markets, we're seeing good price, and we're seeing rational competitors doing the same things.

Joe O'Dea:

Thank you.

Operator:

Our next question comes from the line of Gautam Khanna with TD Cowen.

Judy Marks:

Good morning.

Gautam Khanna:

Just to follow up on just the dynamics on '24, I was curious, do you have an early read of where pricing might head portfolio-wide in '24 relative to '23? And then, secondly, have you seen any indications of backlog stretching, whether it's decommits or just timelines extending across any of these markets where orders have been a bit softer? Thanks.

Gautam Khanna:

Thanks.

Judy Marks:

Thanks, Liz. Our results in the first half reflect the continued execution of our strategy as we remain focused on ensuring we continue delivering value for our shareholders in the balance of 2023 and beyond. Thank you all for joining the call today, and please stay safe and well.

Michael Rednor :

Thank you, [Didi]. Welcome to Otis' First 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 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.

Anurag Maheshwari :

Thank you, Judy. Starting with first quarter results on Slide 5. We delivered net sales of $3.3 billion, with organic sales up 3.6%. This represents our tenth consecutive quarter of organic growth with better-than-expected performance in both segments. Adjusted operating profit was down $19 million at actual FX and up $7 million at constant currency. Drop-through on higher service volume, favorable service pricing and traction reproductivity in both segments were partially offset by inflationary pressures, including annual wage increases, new equipment mix and higher corporate costs. Adjusted EPS growth of $0.04 in the quarter was driven by stronger operational performance, continued tax rate improvement and a lower share count. Accretion from the Zardoya transaction offsets the $0.04 of foreign exchange headwind. Moving to Slide 6. Q1 new equipment orders were up 7.4%, led by Asia Pacific and the Americas, up 27% and 15%, respectively, with modest growth of 1 point in EMEA, more than offsetting a 3% decline in orders in China. Strong orders growth has contributed to our adjusted new equipment backlog increasing 10% at constant currency, with growth in Americas, APAC and EMEA. China backlog was roughly flat. Our strong backlog provides new equipment sales visibility for the balance of the year as well as over the medium term. Globally, pricing on new equipment orders was up mid-single digits, leading to sequential backlog margin improvement in all regions. We benefited from pricing increases of approximately 10% in the Americas and mid-single digit in both EMEA and APAC. While pricing in China remains competitive, down low single digits, we are driving material productivity to achieve slight price/cost favorability in the region while continuing to increase our share. New Equipment organic sales were roughly flat in the quarter, with 22% growth in Asia Pacific, driven by strong performance in India and Korea, and high single-digit growth in EMEA, largely from Southern Europe. This growth was offset by a mid-single-digit decline in the Americas due to job site delays and supply chain impacts and a 10% decline in China as expected, driven by the lower demand environment. Adjusted operating profit declined $24 million at actual FX and $19 million at constant currency as strong material productivity was more than offset by the impact of unfavorable regional and product mix. Turning to Service segment results on Slide 7. Maintenance portfolio units were up 4.2%, with recaptured units more than offsetting cancellations. This was the sixth consecutive quarter of accelerating portfolio growth, with China delivering another quarter of IT's portfolio growth. Modernization orders grew nearly 30%, our third consecutive quarter of more than 10% growth, driven by several major project wins, the continued success of our mod packages and good momentum in proposal activity from improved sales coverage. Our modernization business continues to perform well across all regions, with backlog up 13% at constant currency. Service organic sales of 6.3% was modestly ahead of expectations. Maintenance and repair grew 7%, driven by solid repair volume, strong portfolio growth and 3.5 points of maintenance pricing improvement on a like-for-like basis. Organic modernization sales were up 3.3% in the quarter, driven by EMEA and Asia, partially offset by the timing of major project execution in the Americas. Service operating profit at constant currency was up $40 million and margins expanded 40 basis points. Drop-through on higher volume, favorable pricing and productivity more than offset the headwinds from annual wage increases and higher material costs. Moving to Slide 8 and the revised outlook. Overall, we are off to a solid start in 2023, delivering strong orders, sales and portfolio growth, while expanding service margins to drive mid-single-digit EPS growth in the quarter despite continued macroeconomic uncertainty. This strong start gives us confidence to reiterate our February outlook for organic sales growth, adjusted operating profit at constant currency and adjusted profit margins at both the Otis and the segment level. We are improving our adjusted operating profit outlook by $20 million versus the prior guide, now expected to be up $90 million to $150 million from a smaller foreign exchange headwind. This FX change results in an approximately $0.03 increase in adjusted EPS at the midpoint. Our free cash flow outlook remains unchanged at $1.5 billion to $1.55 billion for the full year. In the first quarter, free cash flow came in at $253 million, with working capital use of cash of roughly $125 million, largely due to payables. We expect this to unwind as we execute on our new equipment backlog throughout the year. Taking a further look at the organic sales outlook on Slide 9. Our outlook remains consistent with the prior guide across all regions and segments, with new equipment up 3% to 5% and Service up 5% to 7%, driving total Otis organic sales growth of 4% to 6% for the year. New Equipment organic sales growth will be driven by the Americas, APAC and EMEA, as we execute on the strong backlog built over the past few years. We still expect to achieve roughly flat new equipment sales in China given the quarter ending backlog and favorable compares into year-end. On the Service side, we expect to build on our performance in the first quarter with growth in repair work moderating and modernization accelerating. Overall, we would expect to see consistent growth at around the midpoint of our guide each quarter. Moving to our adjusted EPS outlook on Slide 10. We now expect 7% to 10% growth, reflecting an approximately $0.03 increase from the prior guide at the midpoint. We anticipate second quarter EPS to be flattish year-over-year as strong operational performance is offset by last year's lower tax rate. The continued strong growth in our Service segment, coupled with pricing and commodity tailwinds and new equipment, will drive the acceleration in our second half EPS growth. For FX, we are now assuming full year rates of 1.06 and 6.93 for the euro and CNY respectively. Overall, we are encouraged by our first quarter results and well positioned to deliver solid financial performance for the balance of the year by executing on our new equipment backlog, accelerating our service portfolio growth and focusing on operational execution to offset macro headwinds. With that, Didi, please open the line for questions.

Jeffrey Sprague :

And just a couple of quick ones here from me. First, just on mods. Interestingly, Schindler pointed the soft mods this last week you and co. are saying they're strong, always thought of a little bit more of a discretionary aspect to kind of mod work. So maybe you could just give a little bit of color on what's -- is there anything in particular driving the strength there? Your visibility beyond kind of the current orders you booked? And is there sort of a kind of pent-up demand to catch up on mods still from the delays we had back in COVID?

Jeffrey Sprague :

Great. And just on the growth in service units, great to see, and you're kind of checking the box there on strategic plan, it sounds like. I just missed, unless you didn't say it, the growth in service and maintenance units in China specifically and any other just kind of regional color that you might have on that?

Operator:

[Operator Instructions] And our next question comes from Steve Tusa of Morgan Stanley.

Judy Marks:

Yes. Thanks, Steve, and we fully recognize JPMorgan. So let me be clear there. So Steve, I had the -- and I'm going to say honor of finally being on the ground again in China. So what I'm going to share is a little personal, having spent 10 days there earlier -- late last month, early this month. And just really getting a sense of the economy. And I can tell you, you can feel it in the 4 cities I was in and with our colleagues. It's in a state of recovery, and my view is primed for economic development, no matter whether it was a government official I met or with our customers, we do believe the second half recovery will come and will come strongly. The government is being very supportive in their policies, whether it's mortgage rates or other things. So kind of where we started the year is what we're still seeing. We thought the market would be down 10%. We were down 3% in orders. So clear market share gain by Sally and team in China. But the strength in the market in the first quarter, just see the segments, infrastructure and industrials were up, industrial buildings. There was weakness in resi and the commercial market. But we are still expecting the market recovery. And I'm feeling good about the health of our business. To be able to see the progress our team has made throughout the COVID years, whether it's in the automation and Industry 4.0 in our factories, the acceptance by our customers of our new product introductions, the relationships, I got to meet our agents and distributors, I'm very positive on a China recovery in the second half. Obviously, we want to see what the second quarter holds and when that inflection point is going to happen, but all signals look positive for China recovery second half and then obviously that continuing into the out years.

Judy Marks:

Yes. So as we shared last quarter, we said China would be down 10% of the market. Americas would be flattish. We're seeing Asia Pac continuing to grow more to high single digit, and we think that offsets maybe a little more negative now with EMEA down low to mid-single digits.

Judy Marks:

And I will Anurag answer the second part.

Operator:

Our next question comes from Nigel Coe of Wolfe Research.

Judy Marks:

Yes. So kudos to Jim and the team, I mean, the Americas after a really strong '22 to come in up 15% this quarter and rolling 12 months being strong as well, over 18%, just really highlights, we've got a big backlog to work off in the Americas and our team knows it. Listen, we saw the Americas itself, the year is playing out as we thought it would. Nonresi is actually better this first quarter. Infrastructure and commercial were up and multifamily was down, coming off some really tough compares, if you think about where multifamily has been the past few years. I will tell you, Nigel, that we got a real tough compare in the Americas coming up in the second quarter because last year's second quarter, we were up 54% in the Americas. So we're going to do the best we can to try to match that, but it's going to be a tough compare. We still expect a flattish market through year-end. We think we're in a really good position. You saw the Montreal program we won, which was a major project in the first quarter, and that will take us a few years to perform on. But both the volume business and the major projects did really well in the Americas, both Latin and North America for the first quarter.

Judy Marks:

Let me take the pricing question. We are seeing rational pricing. I know we've shared that about 90% of the new equipment orders that happen in China now happen with the top 10 OEMs, and they're all being rational. And we get to see that, especially on public infrastructure bids. So not to say there's not a bid or to someone really wants because of density and they'll do something. But we're seeing rational pricing in China. It's always the most competitive there in pricing of anywhere in the world, and which means we've got to continue to drive our costs down. And that's where, so far, we've seen the material productivity far better in China than we have everywhere else in the world. Part of that's commodity's coming down, but part of that is through great supply chain management, negotiation and our engineering team continuing to take cost out with our manufacturing team. So we're seeing rational. We don't anticipate that changing, but obviously, we're keeping an eye on that.

Nigel Coe :

Okay.

Operator:

And our next question comes from Julian Mitchell of Barclays.

Judy Marks:

Thanks, Julian. So yes, we're saying EMEA now is going to be down low- to mid-single digit. Obviously, we're watching rates and impact on building permits and starts. But in the first quarter, our team in Southern Europe performed incredibly well. Spain, Italy, extremely resilient. Where we saw some of the weakness was really Germany and the U.K. and then the Middle East was up probably low single digits. So it's really a mix and we're going to continue to monitor and watch that. When we think back in time, I look at 2 key metrics. One is pricing and service pricing like-for-like in the last quarter, we were up 3.5 points, and our Europe business was up mid-single digits. So Bernardo and the team have been passing price through. We've had those inflationary clauses in, and the team's been passing service price through, which is really good to see because the majority of our European contracts do come due, service contracts come due in the first half of the year, with most in the first quarter. The other part would be all the constructors from 15 years ago who moved into service and became independent service providers, we don't see that labor. If you look at even unemployment is at fairly low levels in Spain and in other locations in Western Europe. So we don't see those -- that available workforce starting up as independent service providers. And the other difference now is what we call Otis One, and the fact that when you have a connected elevator, it's not easy to start up as an independent right now or to grow your share. So I think all that combines to set us up to a very different Europe. But again, we think we're being responsible looking at the market at low to mid-single, potentially down for the year.

Anurag Maheshwari :

Julian, thanks for the question. In February, when we gave guidance, we had a page on each of the segments, on New Equipment and Service. And at that point in time, we had highlighted mix and churn as 1 of the headwinds. And we just collapsed it into this chart right now. There's been no change in our thinking since the beginning of the year. When we talk about mix and churn, we essentially -- and the New Equipment side, the mix was coming from -- as you know, China is our most profitable New Equipment margin market. So -- and the other markets are growing faster. So New Equipment side, that is the mix from the regional perspective. And obviously, we've built a very good backlog. We won a lot of share, but it's a combination of volume and major projects and these major projects, through they come with a very good portfolio stickiness, they are low New Equipment margin. So on the mix side, I would say, on New Equipment, it's more region and projects similar to what we had called out in the last call. Nothing has changed from there. In Service, it's the same thing, which you've seen in the past couple of years, China growing faster. And obviously, churn is more around the cancellation units, which come with a little bit higher margin. So nothing really changed over there. Same thing for labor and wage inflation, right? It's -- so far, our labor negotiations are trending really, really well. We thought it would be low to mid-single-digit. In most of the European markets it's playing out that way and same on the material. So if I kind of take a step back, if you look at price over gross cost and mix and churn, we should be about $75 million positive for the year. That would contribute to half of the operating profit that you see in the bar, so price minus gross cost of material labor inflation and adjusting for mix and churn.

Jack Ayers :

This is Jack on for Gautam. I wanted to dig into service and apologies, I joined the call fairly late here. But if you could kind of just touch on the monetization orders up 29%. It seems extremely strong, which is encouraging. And then just piggybacking off that last comment, just the sort of the maintenance units up 4.2%, obviously, really strong again. Kind of just what's happening there this quarter from like a retention/conversion mix sort of churn perspective? Just any color there around Service would be really helpful.

Operator:

[Operator Instructions] One moment for our next question. And our next question comes from Nick Housden of RBC.

Judy Marks:

Yes. Nick. Go ahead. Go ahead.

Judy Marks:

And, Nick, in China, the margin drivers are less about price. They're really more about productivity, volume, density and Otis One and all of those are good contributors for us.

Judy Marks:

I think we can and we should close that gap. That's the challenge we've given to our team, and that's why you see the much higher growth rates in Asia, especially China, for our service portfolio. Now it creates a mix, but we'll deal with that mix challenge as we get it. But yes, we can and should be closing that gap.

Operator:

I would now like to turn the conference back to Judy Marks for closing remarks.

Operator:

This concludes today's call. Thank you for participating, and you may now disconnect.

Michael Rednor:

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.

Anurag Maheshwari:

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 than expected orders growth in the quarter, we finished the year with a new equipment adjusted backlog up 11% at constant currency with growth in all regions, including notably in China. Pricing on new equipment orders in the quarter increased 3 points led by the Americas with solid performance in EMEA and APAC. In China, we have been roughly price cost neutral throughout 2022 as commodity inflation eased and we continue to drive productivity to offset pricing pressure in the market. Fourth quarter new equipment sales of $1.5 billion return to growth driven by over 10% growth in the America, EMEA and Asia Pacific with EMEA outperforming our prior expectations. China sales declined at a lower rate than what we saw in the middle of the year as the team navigated well through post lockdown COVID outbreaks to execute on the backlog. Overall, strong execution by the team will return to sales growth in the fourth quarter in new equipment. Operating profit margins were roughly flat for the quarter. The benefit of higher volume, strong productivity and cost containment nearly mitigated the approximately $25 million headwinds from commodities and Forex. Now turning to Service segment performance on Slide 8. We saw an acceleration in our portfolio growth to over 4% with every region adding to the portfolio this year. With another year of excellent high teens growth in China and low single digit growth elsewhere, our portfolio now is about 2.2 million units. Globally, our recaptures more than offset cancellations for the year with conversions as the growth driver. Additional details on our portfolio growth in 2022 and drivers for future growth can be found in the appendix. Modernization orders were also a highlight up 13% with growth in all regions, including some major project bookings in the Americas and Asia Pacific and continued strength from a mod package offerings. Our modernization backlog is up 7% versus the prior year, giving us good line of sight for growth in 2023. Moving on to service sales. We delivered another quarter of strong organic sales growth up almost 7% with growth in all lines of business. Maintenance pricing, excluding the impact of mix and churn came in as expected up about 3 points for the year, contributing approximately 1 point to overall revenue growth. Organic modernization sales grew 8.8% and similar to last quarter we saw broad growth across regions, including double digit growth in both Americas and Asia Pacific. We finished with our best service margin expansion for the year up 70 basis points in the quarter. Adjusted operating profit, excluding $42 million of Forex headwind was up $51 million as higher volume, favorable pricing and productivity were partially offset by our annual wage increases. We have now delivered 12 consecutive quarters of service margin expansion with margins increasing roughly 200 basis points over the past three years. Slide 9 lays out the full year 2022 adjusted EPS bridge. Strong operational execution drove $0.39 of constant currency EPS growth, which mitigated $0. 18 in commodity headwinds leading to operating profit growth of $124 million or $0.21. Through our capital allocation strategy, including the accretion from the Zardoya transaction and share repurchase of $850 million and optimizing a tax rate, we were able to offset $0.26 in Forex headwinds. Overall, strong operational performance led to EPS growth of 7.5% or $0.22. We finished the year with 2022 adjusted tax rate of 26.5%, a 220 basis point improvement versus 2021, which contributed to EPS growth both in the quarter and for the full year. Overall, the team performed well throughout 2022 by executing on the controllables, which helped us to build a strong backlog, grow organic sales, expand margin by 30 basis points and return $1.3 billion to shareholders. As we look ahead to 2023, the new equipment outlook is on Slide 10. Over the past few years, we have delivered strong orders globally from a combination of market growth, our share gain initiatives and incremental pricing actions. This has resulted in a robust multi-year backlog, giving us good line of sight for the next couple of years. In 2023, we expect new equipment organic sales to grow between 3% to 5% with Americas and EMEA up mid-single digits and Asia growing low single digits. Asia-Pacific is expected to be up at least mid-single digits, and though the backlog in China is up 2 points, we expect sales to be about flat reflecting pressure on the Book and Ship business from expected market declines in the first half. We expect new equipment profit margins to be flat to up 40 basis points. We expect roughly $100 million of tailwinds from volume, pricing, productivity and commodities. This will be partially offset by unfavorable regional and project mix and some snap back in SG&A expense due to 2022 cost containment actions. We will continue to drive strong productivity on both material and installation and project closeouts as the year progresses to drive out performance. Turning to our service outlook on Slide 11. Starting with sales, we expect another solid year in service and anticipate organic sales increasing 5% to 7%. Maintenance and repair organic sales are expected to grow 4.5% or 6.5% driven by maintenance portfolio growth, pricing and low to mid-single digit repair growth after two strong years of COVID-related recovery. We expect more than 1 point of pricing after adjusting for mix and churn. For modernization, we anticipate organic sales of mid to high single digits as we execute on a solid backlog and drive our Book and Ship business from new product launches and focus on sales force specialization. Turning to profit, we expect roughly 50 basis points of margin expansion. Headwinds from annual wage inflation will be more than offset by volume, price and productivity similar drivers to 2022. Turning to Slide 12 for the 2023 adjusted EPS bridge. We are expecting $3.35 to $3.50 in adjusted EPS driven by $0.23 to $0.31 of operating profit growth. We expect to offset $0.09 of Forex headwind at the midpoint and a modest increase in interest expense through a lower share count, $0.04 of remaining Zardoya accretion and continued optimization of a tax rate. We plan to complete $600 million to $800 million in share repurchases during the year. For cadence, we expect strong EPS growth in the second half of the year, while the first half remains roughly flat. We see the bulk of the FX headwind, post lockdown COVID impact in China, and a modest supply chain overhang in new equipment in the first quarter. We anticipate stronger growth sequentially thereafter, including better performance in China in the second half of the year. Overall, we anticipate Otis organic sales growth of 4% to 6% with approximately 20 basis points to 30 basis points of margin expansion leading to 6% to 10% EPS growth. And on cash, we expect to generate $1.5 billion to $1.55 billion in free cash flow in 2023, 110% conversion of GAAP net income at the midpoint. This outlook demonstrates another year of consistent and solid operational execution as we continue to mitigate macro challenges and create meaningful shareholder value. With that, I will request Norma to please open the line for questions.

Julian Mitchell:

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?

Anurag Maheshwari:

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.

Operator:

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?

Operator:

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

Judy Marks:

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.

Nick Housden:

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

Unidentified Analyst:

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

Unidentified Analyst:

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?

Unidentified Analyst:

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.

Unidentified Analyst:

Thank you.

Nigel Coe:

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?

Anurag Maheshwari:

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.

Judy Marks:

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

Judy Marks:

You bet.

Steve Tusa:

Hey, good morning.

Steve Tusa:

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%.

Steve Tusa:

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?

Steve Tusa:

Great, thanks a lot.

Miguel Borrega:

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.

Miguel Borrega:

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.?

Miguel Borrega:

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.

Judy Marks:

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.

Judy Marks:

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.

Michael Rednor:

Thank you, Norma. Welcome to Otis' Third 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.

Anurag Maheshwari:

Thank you, Judy, and good morning, everyone. Starting with third quarter results on Slide 5. Net sales of $3.3 billion were down 7.6%, driven by the broad strengthening of the U.S. dollar, a 7.2% headwind in the quarter. Organically, sales were up 80 basis points, the eighth consecutive quarter of growth driven by service, which increased over 6%. Adjusted operating profit, excluding a $50 million foreign exchange translation headwind, was up $35 million. Drop-through on higher service volume, favorable service pricing, strong SG&A cost control and the benefit from productivity in both segments was partially offset by impact of lower New Equipment volume, commodity price increases and annual wage inflation. Adjusted SG&A expense was down 90 basis points as a percentage of sales as we continue to drive cost reduction and containment to help mitigate the inflationary headwinds. Despite the challenging environment, we maintained investment in the business and R&D spend and other strategic investments were about flat versus the prior-year. Overall, adjusted operating profit margin expanded 60 basis points, driven by segment mix, strong Service performance and cost containment. Adjusted EPS was up 5% or $0.04. An $0.08 headwind from foreign exchange translation was more than offset by strong operational performance, driven by the Service segment, accretion from the Zardoya transaction and a benefit of $700 million in share repurchases completed year-to-date. Moving to Slide 6. Q3 New Equipment orders were down slightly at constant currency and up 7.4%, excluding China. Orders in the Americas were up 3% with solid growth and multi-family residential and infrastructure. EMEA orders were up 11% with growth in both Europe and the Middle East, and orders in Asia outside of China were up approximately 10% driven by strong growth in South Korea and India. The strong orders growth over the last 12 months contributed to New Equipment backlog increasing 12% at constant currency with growth in all regions, including China, which was up slightly. Backlog in Americas, EMEA and Asia outside of China was up high-teens. Pricing trends improved year-over-year in all regions, excluding China, where pricing was flat. Globally, pricing on New Equipment orders continues to accelerate and was up 4% leading to sequential backlog margin improvement. New Equipment organic sales were down 5% in the quarter, as mid single-digit growth in EMEA and low-teens growth in Asia, excluding China was more than offset by 4% decline in the Americas due to a tough compare and delays in building construction and a high-teens decline in China driven by the challenging market conditions. Sales decline of $191 million and adjusted operating profit declined $23 million, largely from the impact of lower volume and related under absorption. Commodity inflation of $18 million that was aligned with price expectations was more than offset by productivity and lower SG&A expense. Service segment results on Slide 7. Maintenance portfolio units were up 3.8% with recaptured units more than offsetting cancellations in the quarter. Conversion rate continues to show improvement this year in China, which contributed to mid-teens portfolio growth in the region. Modernization orders growth accelerated to 18% in the quarter with growth in all regions driven by good traction or newer mod package offerings and several major project wings. Backlog was up 7% at constant currency. Service organic sales grew for the seventh consecutive quarter up 6.2% the growth in all lines of business. Maintenance and repair grew 5.4% from the benefit of high single-digit repair volume and growth in contractual maintenance sales that outpaced our unit growth due to improved pricing, which was up three points on a like-for-like basis. Modernization sales continued the recovery that started in Q4 of '21 and were up 10% in the quarter the growth in every region. Service profit at constant FX was up $49 million driven by the drop through on higher volume, favorable pricing and productivity, which more than offset the headwinds from annual wage increases. As a result of this, margins were up 50 basis points, the 11th consecutive quarter of margin improvement. Overall, despite the significant macro headwinds, our year-to-date results are strong. We gain approximately one point of New Equipment share delivered the best portfolio growth in over a decade and more than mitigated $195 million of headwinds from FX and commodity inflation through strong execution to achieve an 8.5% EPS growth. Moving to Slide 8 and the revised outlook. These changes reflect revised expectations in the China market outlook, the continued strengthening of the U.S. dollar and our focus on productivity initiatives to offset the headwinds. Starting with sales, we are expecting organic sales to be up 2% to 2.5% versus 2.5% to 3.5% previously. This 75 basis point reduction is driven by lower expectations for China New Equipment partially offset by an improved modernization outlook in service. The New Equipment margin outlook is down 10 basis points at the midpoint from the impact of lower volume in China offset by cost containment. Service margins are now expected to be up approximately 50 basis points, a 10 basis point reduction from the prior outlook reflecting the mix impact of modernization sales growing faster than the maintenance and repair business. The overall margin outlook remains unchanged versus the prior outlook, and is expected to be up approximately 30 basis points to 15.7%. Adjusted EPS is expected to be in the range of $3.11 to $3.15 up 5% to 7% versus the prior year. This adjusted EPS growth is driven by strong operational execution, accretion from the Zardoya transaction, progress on reducing our tax rate and a lower share count that more than offset $0.47 of headwind from foreign exchange translation and commodity inflation. We now expect free cash flow to be in a range of $1.5 billion to $1.6 billion versus approximately $1.6 billion previously. Foreign exchange translation continues to weigh on cash flow generation, and we anticipate a moderate build in inventory heading into 2023 to support project execution on the growing backlog. On capital deployment, we are increasing the share repurchase target to $850 million, having already completed our previous outlook of $700 million in the first three quarters. This is an over 2x increase from the $300 million to $500 million guidance we had given in the beginning of the year, and combined with a 20% dividend increase, underscores our commitment to return cash to shareholders. Taking a further look at the organic sales outlook on Slide 9. The New Equipment business is projected to be down approximately 2.5% versus down 0.5% to 1% previously. We now expect Asia to be down approximately 6% from down low single-digits previously driven by China. Despite our backlog being up slightly versus prior year and up from the end of '21, we now expect Otis China organic sales to be down 10%, driven by the shift of project execution to the right and lower market expectations now expected to be down roughly 15%. This has been partially offset by improved outlook in Asia Pacific from the benefit of strong orders growth momentum in India and South Korea. The New Equipment outlook in the Americas and EMEA is unchanged, expected to be flat and up low to mid single-digits, respectively. Turning to Service. We now expect organic sales to be up 6% to 6.5%, an improvement of 50 basis points at the low end, driven by a conversion of modernization backlog that is up 7%. Moving to Slide 10. We expect adjusted EPS growth of 5% to 7%, an $0.18 increase at the midpoint. We expect to more than offset the $110 million headwind from commodities with $230 million to $250 million of operational improvement from higher service volume and pricing, productivity in both segments and other cost containment actions, resulting in profit growth of $120 million to $140 million at constant currency. This is $5 million lower than our prior outlook at the midpoint, driven by reduced China New Equipment volume expectations that we are partially mitigating through better cost containment and productivity. Accretion from the Zardoya transaction, over two points of tax rate reduction versus last year and the benefit from over $1.5 billion of share repurchases since spin, partially offsets the $0.29 or $175 million headwind from the significant strengthening of the U.S. dollar. We have now assumed the euro at $0.97 for the fourth quarter or $1.04 for the full-year. Overall, since 2019, this outlook represents 50 basis points of annual margin expansion and low teens three-year adjusted EPS CAGR, reflecting the execution of our long-term strategy and our ability to mitigate the macro challenges we have faced. We feel confident that this momentum, along with our growing backlog and service portfolio sets us up well to deliver strong financial performance in 2023 and beyond. And with that, I will request Norma to please open the line for questions.

Nigel Coe:

Thanks. Good morning. Thanks for the question.

Nigel Coe:

So obviously -- China is obviously the sort of the big issue. But just wanted to talk about the Americas because it -- you mentioned some project and construction delays in the Americas. I'm just wondering if you could just give us some context on the geographies there. I'm assuming it's the U.S., but if there's anything else going on there, please let us know. And any verticals of standout where you've seen delays?

Nigel Coe:

Yes, I agree with that. And then my second question is really on, I think Anurag, you mentioned 4% pricing on orders, if I caught that right? What is the realized price today? Is it still trending negative today? So I'm just wondering of that 4% as we convert that backlog into 2023, if we have a little bit of good news on commodities, is there a path to expanding New Equipment margins in 2023.

Judy Marks:

Yes. Nigel, just one other thing. What I watch is that early trend as well. And we were up two points in the second quarter on New Equipment pricing and now four points this quarter. As a long cycle, it's going to take some time to get through the backlog, but it's going to come through. In terms of commodities flipping, really the only place we've seen that significantly already is China. And I would say Europe is a question mark there in terms of -- because of energy prices and everything else going on. But we would welcome commodities coming down as soon as possible, and you'll see that flow through. That again, during our long cycle, gives us the opportunity to drive material productivity, supply chain, everything in our backlog.

Operator:

Our next question comes from Jeffrey Sprague with Vertical Research. Your line is now open.

Judy Marks:

Hey, Jeff.

Judy Marks:

Sure. Let me start, and then, Anurag, feel free to jump in. So we now view full-year '22 China market growth estimates down 15%, roughly. Some of this is driven to the lockdown. Some of its driven by the property market confidence. And clearly, the market won't recover in '22. Q1 was down 5%. Q2, the segment was down 20%. Q3, we believe it was down 20% as well. And last quarter, we assumed COVID would be relieved. There'd be somewhat of a return to normal. And while this might not be as visible to everyone outside China, the COVID lockdowns are absolutely continuing, especially in Tier 3 and below cities. So those constraints are really constraining us from being able to do final shipments in terms of delivering them on the trucks and then installing them. Having said that, Jeff, I'm feeling good about the health of our business in China. When we talked about New Equipment pricing just a second ago, we're net price cost neutral to favorable in China this quarter, which is just a testament to the resiliency and the tenacity of Harry and our China team to be able to do that. The market segment was down about 20%. We were down pretty close to that in orders. So we didn't -- there was not a share gain there for us this quarter, although we've had them in the first two quarters. Our strategy and our initiatives are on track in New Equipment. We've gained share year-to-date. The only segment that was up in China in the third quarter was infrastructure. All of the others were down. All of the tier cities were down as well, but they were down -- Tier 1 was down the least, Tier 2 next and then it degraded from there in terms of larger down in terms of segment. While all this was happening, our teams still delivered. Modernization grew and service grew again. It was our fifth consecutive quarter where we had mid-teens or above portfolio growth where recaptures outpaced cancellations. And so they were all really good positive contributors. As I look into '23 without -- we're not going to give a guide right now. But as we look at it, especially in China, the segment, if you go back to our first Investor Day in February of 2020, we shared we thought the China segment would be about 550,000 units a year and be flattish. That's where it was in early '20 pre-COVID. It spiked and got up to 650,000 last year. If you assume the segment is down 15%, it gets you to a 540,000 kind of number. Our early assessment for '23 is the segment is going to be between 500,000 and 525,000. And again, the pricing we've seen is rational, and we're driving costs down, commodities are down and material productivity is doing a great job. So on the New Equipment side, I actually think we're in a good position. We've got some limited backlog in China, fourth quarter will drive that as well as we go into the rest of the year. But the rest of the -- total company-wise, we're up 12% on New Equipment orders. Everybody is growing in mod as well. And I will remind everyone that there are 8 million units at the end of this year in Service in China. So that's going to be the key growth lever. We're still going to be gaining share in New Equipment, executing our strategy, but our service growth and portfolio growth will continue. Anurag?

Jeffrey Sprague:

Maybe just, thank you for all that color. That was very helpful. Just to maybe shift gears back to mod and maybe it's more of a global question now. But any indication of just kind of economic weakness coloring some of the forward demand around mod, it's a great deal that can certainly be discretionary, at least temporarily discretionary.

Jeffrey Sprague:

Great. Thanks. I'll leave it there.

Julian Mitchell:

Hi, good morning. Maybe just wanted to start with the fourth quarter guidance. So it looks as if you're dialing in a pretty severe sequential margin decline. And I realize maybe there's some deleveraging with fixed cost under absorption because of the China calendar and also the market weakness there. Maybe just highlight if there's anything else driving that big sequential decremental margin. And also just to put a finer point on it in Q4, China New Equipment, I think those sales were down high-teens in the third quarter. Are we expecting a steeper rate of decline year-on-year in the fourth?

Julian Mitchell:

That's very helpful. Thank you. And then just my follow-up would be around not so much modernization specifically, which I think came up. But more broadly on kind of Europe pricing. I think people are very nervous because of the macro data that you might get a deep and possibly a long European construction slowdown fairly soon. The last time that happened, there was pricing pressure in a number of areas, including elevator service 14 or 13 years ago. Just wanted your thoughts today on the sort of fragmentation of the Europe service market and maybe how Otis kind of practices might be different there? And how does it work in terms of inflation feeding through to your new Service contracts for next year in Europe?

Julian Mitchell:

Great. Thank you.

Stephen Tusa:

Hi guys. Good morning.

Stephen Tusa:

So where do you expect to end the -- I'm not sure if you said it's four, I wasn't on in the first 10, 15 minutes, but where do you expect to end the year with backlog? I mean is book-to-bill still above one and/or can it be above one in the fourth quarter? Maybe just talk about kind of the regional expectations for orders in the fourth quarter?

Stephen Tusa:

Right. So high single-digit constant currency year-over-year is what you're saying for the equipment backlog end of the year? Is that what you're saying?

Stephen Tusa:

And one follow-up, just on the '23. Can you just maybe give us some color around anything that's more mechanical for '23 in the bridge, whether it's 4x snapping the line here, cost inflation? And any of that stuff that you'd highlight as part of the bridge for '23, just using the prevailing rates today?

Stephen Tusa:

Yes. Just anything else more mechanical, whether it's raws or anything like that, that on the '23 bridge that you have good visibility on today that you want to just get out there?

Judy Marks:

Yes. Steve, the only other thing I'd add is we are watching labor inflation. I think in our case, the great news is more than half of our field workforce is covered by collective bargaining. We shared that we do have a new agreement here with the International Union of Elevator Constructors, the multi-employer union in the U.S. that goes into effect in January. So we've got five years of predictability here. It was a fair agreement, and it looks very similar to the last five years. And with a little increase as it should as is appropriate. But we've got predictability. So now it comes back to us to be able to offset that with price and productivity. And we're watching labor in Europe. We've got some more negotiations coming up. But again, we will [Technical Difficulty] that. Our backlog, it takes that 12-plus months to work its way through in most countries. So we know what we need to do in terms of productivity and price to offset that. The last part of labor we're watching, just for you to know is or to be aware of are the subcontractors, mainly on the -- they're on the installation side outside the U.S. in several countries. And we've got to offset those increases with price and productivity. We know what we need to do.

Operator:

Thank you. One moment for our next question. And our next question comes from John Walsh with Credit Suisse. Your line is now open.

Anurag Maheshwari:

Hey, good morning, John, Anurag here. So just on cash flow, as you kind of think about going forward, we will grow cash pretty much with earnings, right, as to where -- and that should be the biggest driver of cash flow. Now to your second question. Yes, we -- if you look at this quarter, quarter three, we used about $150 million of cash, and it was around three different buckets. The first bucket was getting ready to execute, second was around receivables, and third was around a timing between cash and book taxes. So on the first part, we have -- our backlog is up 12%. We need to be in a position to deliver product and execute on time. So to do that, we built up some inventory, prepaid certain suppliers to lock in price as well as critical supply, right? On the second on receivables, the modernization grew a little bit more faster, which comes in with more back-end payment and also because of the delays in projects moving to the right, there was a few New Equipment collections. And on tax, we've done a very good job, as you saw in the second quarter on bringing the tax rate down. There's just some timing difference between cash and book taxes. So these three things should more or less unwind in the fourth quarter. So as we get into fourth quarter, so which is why we will get to the $1.5 billion to $1.6 billion guide. So they should unwind. So as we look into next year, it should be mainly earnings, which should be driving the free cash flow growth.

John Walsh:

Great. That's a very helpful answer. And then if I could just circle back to modernization, just curious if there's a particular driver to call out if you're seeing -- I mean, you talked about deferred or deferrals earlier. But what about like taking an office and converting it into multi-tenant? Are you seeing that? Or customers, buildings trying to make sustainability commitments. We don't always think of the elevators as a big energy user. But are you hearing customers talk about that? Just any more color around why the customers are moving ahead with these modernizations would be helpful? Thank you.

John Walsh:

That's great. Thanks for taking the questions.

Operator:

Thank you. One moment for our next question. And our next question comes from Joseph O'Dea with Wells Fargo. Your line is now open.

Judy Marks:

Happy to.

Judy Marks:

Yes, I think we're going to see it get better, Joe. I think it's absolutely correlated to employment in the rest of the trades. And as things change in the global -- in the economy in the U.S., we're starting to see it get better. But again, it's job by job, and it's local. Construction is local everywhere. So there's no national provider like someone like us in all the other trades that come together to build a building. We anticipate it improving, and we anticipate better backlog conversion from our Americas team, especially in North America. We're watching the same trends you are, but we expect that. And we haven't seen the indicators change yet. I mean the billing -- Architect's Billing Index is still over 50, and Dodge is still up. So will it be at the -- will the new starts be at the same amazing rate we've had probably for the last couple of years? Probably not at the same great rate, but it will be at a good rate. And we've got really good share there and team -- our team will deliver.

Joseph O'Dea:

That's helpful. And then I wanted to circle back on fourth quarter margins and specifically on Service and then corporate and other. Corporate and other was a little bit lighter than we expected in the third quarter. Just kind of what you're anticipating in the fourth quarter? And then coming off of a 23.9% service margin in the third quarter. How to think about kind of the bridge into the fourth quarter and some of the moving items there?

Anurag Maheshwari:

Thanks, Judy. Absolutely. I mean, cost is something we control. We will continue to take a look at it. On the Service margin side, if you look at quarter three, we grew 50 basis points. Year-to-date on service, we are growing at 50 basis points. There's really good performance in terms of pricing for sure, in terms of productivity, in terms of cost. So that's kind of what got us to a very good performance in Q3. We see similar performance in Q4 as well. We'll be at similar margins of 23.9%, 24%, 50 basis points more than last year, right? We will see some catch-up on the cost side because we did contain it very closely in the third quarter. There will be some part of it was permanent, part of it was temporary that we contained. There'll be some snapback in Q4, but we'll continue to look at that. And that should be a tailwind as we enter into the fourth quarter. But just on the Service side, I think the trend, if you look at revenue growth and margin expansion, it is pretty linear through the course of the year, and you expect to see the same in the fourth quarter.

Operator:

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

Judy Marks:

Good morning.

Gautam Khanna:

Had a couple of questions, just to follow-up on some of the pricing comments. On the inflation clauses in Europe, North America, et cetera, where is the magnitude of the opportunity greatest by region in terms of repricing service? Is it Europe followed by North America? Just where do you -- can you speak to the magnitude by region?

Gautam Khanna:

And then when you roll it up, do you have a view on kind of price cost and service next year, what that could be? I mean it's positive, but is it -- can you frame the magnitude?

Judy Marks:

Yes. It will be a service play, Gautam, next year. As we said in our medium-term guidance. And I think in year one, since we did the Investor Day just this past February, I think we've proven that.

Judy Marks:

Yes, we think it looks like it looked this quarter, which will be relatively flat kind of neutral. That will certainly be what we do. We're not seeing irrational pricing, and we get to see it on the infrastructure, their public bids. And so we think it will be flat.

Anurag Maheshwari:

Yes. And Gautam, just to add, in the quarter, even the market being down, we are very happy with the way it is right now, price cost. And if that continues, it's going to be very positive for us.

Gautam Khanna:

Great. Thanks.

Operator:

Thank you. One moment for our next question. And our next question comes from Joel Spungin with Berenberg. Your line is open.

Judy Marks:

Yes, good afternoon Joel.

Judy Marks:

Yes. The largest growth we're seeing, and I think I mentioned this, it's our fifth consecutive quarter in China with mid-teens plus growth. So that's the largest followed by Asia Pacific, but all four regions are growing. But those two are the biggest hitters in terms of growth rates.

Judy Marks:

Yes.

Judy Marks:

Yes. So when you think about -- so yes, it's both -- it's our field workforce. So to me, field is -- there's -- we have 41,000 field professionals. Some are in New Equipment, the majority are in Service because we do use subcontractors to help us with installations in parts of the world. It's clearly collective bargaining works councils is clearly the way we do business in Europe. We have had a unionized workforce in the United States for a long time, think about Korea, Japan. So it's the field workforce. And in many locations, it's our factory workforces as well, as well as some of our professionals. It really depends on the country. And we have -- I think we have been operating under this for so many decades to us, it's the way we go-to-market and it's the way we lead our company, it's the way our colleagues show up for work every day. So it's very normal for us. We understand the headwinds when they happen and when we understand the opportunities when they happen, and we believe we give 68,000 colleagues a great place to work and a great career.

Judy Marks:

So again, we only use them in countries where it makes sense to us. We do have thousands of our own installers and all of our supervisors who are on the job sites are Otis colleagues. The majority of where we use them, as you can imagine, is China, Asia and Europe, and it gives us flexibility in terms of surge because New Equipment has more variability as we've seen over the past few years significantly than the service business. So it gives us the opportunity to manage and lead our workforce while being able to provide solutions. Anurag, anything you want to...

Judy Marks:

Yes, a non-extension of us, Joel. They really -- they take our -- they -- our ethics, our safety program, our methods, our tools, you won't know the difference. The challenge we have, which our teams are dealing very well with is ensuring we have a robust available workforce at a good price, and that includes these subcontractors.

Anurag Maheshwari:

Sorry, what was the question?

Anurag Maheshwari:

Yes. Yes, that is correct, yes.

Operator:

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Ms. Judy Marks for closing comments.

Operator:

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

Michael Rednor:

Thank you, Michelle. Welcome to Otis' Second Quarter 2022 Earnings Conference Call. On the call with me today are Judy Marks; Rahul Ghai; and Anurag Maheshwari. 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' second 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.

Rahul Ghai:

Thank you, Judy, and good morning, everyone. Starting with second quarter results on Slide 5. Net sales of $3.5 billion were down 5.8%, primarily due to broad strengthening of the U.S. dollar. Organic sales were up 40 basis points, the seventh consecutive quarter of growth, driven by Service, which increased over 5%. Adjusted operating profit was down $21 million, excluding the impact of translational foreign exchange, adjusted operating profit was up $16 million at constant currency, drop-through on higher service volume, favorable service pricing and benefit from productivity in both segments was partially offset by the impact of commodity price increases and annual wage inflation. We also continued our unrelenting focus on cost containment. And adjusted SG&A expense was down over $50 million or 90 basis points as a percentage of sales, even with inflationary trends in the economy. Despite the challenging environment, we maintained the investment in the business and R&D spend and other strategic investments were flat versus the prior year. Adjusted EPS was up 12% or $0.09. A $0.06 headwind from foreign exchange translation was more than offset by strong operational performance, accretion from the Zardoya transaction, continued progress on reducing the tax rate and the benefit of $400 million in share repurchases completed year-to-date. Moving to Slide 6. New equipment orders in the second quarter were up 16.5% at constant currency. Orders in the Americas were up over 50%, with growth in all verticals on top of nearly 50% growth in Q2 of 2021. Awards, which preceded orders in North America stayed strong and were up 5 points on a sequential basis. EMEA orders were up 29% and growth in both Europe and the Middle East, and orders in Asia outside of China were up double digits. Driven by strong growth in South Korea and India, where bookings were more than double last year's volume. Orders in China were down low teens outperforming the market that we estimate was down about 20%. Strong orders growth contributed to new equipment backlog increasing 6% and 10% at constant currency. Backlog in China was about flat, and backlog in Americas, EMEA and Asia, outside of China, was up approximately 15%. Globally, pricing on new equipment orders was up low single digits after 5 straight quarters of year-over-year decline. Pricing trends improved year-over-year in all regions. Excluding China, where pricing was down low single digits versus the prior year. New Equipment organic sales were down 5% in the quarter, as low single-digit growth in EMEA and high single-digit growth in Asia, excluding China, was more than offset by mid-single-digit decline in the Americas due to a tough compare from the prior year and slowdown in building construction, and a low teens decline in China from COVID-related lockdowns. Adjusted operating profit was down $28 million at constant currency, largely from the impact of lower volume and related under absorption. Commodity inflation of $35 million that was in line with prior expectations was mostly mitigated by installation and material productivity and lower SG&A expense. Service segment results on Slide 7. Maintenance portfolio units were up nearly 3.5% from improvements in retention, recapture and conversion rates with recaptured units more than offsetting cancellations in the quarter. In China, conversion rates continued to improve year-over-year and contributed to the fourth consecutive quarter of high teens portfolio growth. Modernization orders growth accelerated to 9% in the quarter. With growth in all regions, driving backlog growth of 4%. Service organic sales grew for the sixth consecutive quarter, up 5.2%, with growth in all lines of business. Maintenance and repair grew 4.9% as the benefit of strong repair volume and growth in contractual maintenance sales that outpaced our unit growth due to improved pricing, which was up about 3% on a like-for-like basis. Modernization sales continued the recovery that started in Q4 of 2021 and were up 6.4% in the quarter with growth in every region. Service profit at constant FX was up $39 million. Benefit from higher volume, favorable pricing and productivity was partially offset by annual wage increases. Margins were up 50 basis points, the tenth consecutive quarter of margin improvement. Overall, the first half results reflect solid operational execution with a point of new equipment share gain, the best portfolio growth in a decade and close to $125 million of cost reduction between productivity and SG&A. These actions helped us manage through the continuing macroeconomic challenges and achieved low single-digit organic sales growth, $50 million of earnings growth at constant FX and 15.8% adjusted margins, a 30 basis point improvement over the first half of 2021. Margins for the first half are up 140 basis points from pre-COVID levels of comparable period in 2019. First half free cash flow generation of $800 million, 50% of our guide for the year enabled us to repay $500 million of debt, raise dividends by 20% and complete $400 million in share repurchases. With that, let me turn it over to Anurag to walk through the revised 2022 outlook.

Operator:

[Operator Instructions]. And our first question comes from the line of Jeff Sprague with Vertical Research Partners.

Judith Marks:

Sure, Jeff. It's Judy. Listen, we are taking our market growth estimates down really due to the lockdown impact that we felt in April and May, and we just don't expect that the market will recover fully in 2022. So we've taken the market for 2022 to decline at about 10%, which is the low end of our previous range and I will be sure to disclose that, that do not assume or factor in any return to growth or any stimulus. Listen, I'm feeling good about the health of our business in China. Our strategy and our initiatives are on track. It's helping us gain share, as you've seen. And we grew faster than the market, not just in Q1, but also in this most recent quarter. Our new equipment orders were down low teens, but the market was down 20% in the second quarter. So we're outperforming the market, and that's really what gives me the confidence that our strategy is working. Residential, infrastructure and industrial were what were strong in the second quarter in China. And the higher tier cities, Tiers 1 through 4, but especially 1 and 2 have really continued to perform for us and the market in general. And that's really where we focused our strategy. We've doubled our agents and distributors, and that is continuing to yield. We're now at about 2,250 agents and distributors who are representing both our product and services -- so net share is up in a donation market. And we have really also focused on our service strategy. As Rahul said, we had our fourth consecutive quarter of high teens portfolio growth -- and that's where it is going to continue in China. So we're trying to find balance in China, and then we have balance in geography and our mix. China is about 20% of our global revenue and really, as you've seen in the second quarter, the balance of our business, Asia Pacific, Europe and Americas just really picked up the pace. And we're feeling good the backlogs there across the globe, and we've got the new equipment orders that are going to continue to drive our future well into '23. So we're watching China like everyone else, but a really strong Q2 by Perry and the team post the COVID lockdowns. Our factories are manufacturing at peak rates. We've got capacity if there is a stimulus. And all of our service indicators are really strong. When we can tell you across the globe, including China, that our recaptures for the first quarter have exceeded cancellation rates, second quarter having exceeded cancellation rates, we are managing every KPI and every metric and the team's delivering.

Jeffrey Sprague:

Sounds great. And then just on the Americas, I mean, these orders really the headline growth itself and then especially versus the comp is just extraordinarily strong I. wonder if you could give us a little bit more context on what's going on there, a couple of large lumpy things perhaps but also address kind of the revenue slippage. Is that primarily kind of job site issues with your customers or you see folks kind of tapping the brakes on economic concerns? Just any additional color there on the Americas should be appreciated.

Operator:

And our next question is from the line of Nigel Coe with Wolfe Research.

Judith Marks:

Yes. So Nigel, great to talk to you. And June was a tremendous month for our team. They just -- the response was phenomenal. And actually, our shipments, we hit a record level of shipments out of our factories in China in June. So we were prepared. We -- our factories never shut down just based on geo location of them in China. So I think we had some readiness, both our elevator and our escalator factories ready to go. And then we just needed to produce and we need to be able to ship and cross boundaries in China in certain regions. So the team had gotten prepared for that. So June was a strong over July, and July performance continues. We don't guide to the quarter. But obviously, April and May gave us pause, but our team was prepared for it. And now we're going to match our cost structure to what we're seeing happening in terms of the market itself. We've done that before. But we are not expecting the precipitous drop we saw in 2015. We don't believe there's a an instantaneous type of drop there. And we're going to -- again, we'll match our cost to what we're seeing happen in the market.

Rahul Ghai:

Yes. Nigel, what we are seeing right now, yes, there are some projects that cancel, but it's always the case. But as you know, we get an advance we book an order. So it's not that we're booking an order or the like some other industrial companies, there has been some concern about our -- given the overall supply chain challenges, our people placing multiple orders. That doesn't happen in our industry. I mean you're creating an elevated or an escalator for a certain building and you're not going to switch designs midway through the project. So -- and we get in advance. So the cancellation do happen. Projects do get canceled, but we are not seeing any change in the year-over-year trends. And those are typically like small. I mean it's not a big thing in our business, that we have to deal with massive cancellation that we are not seeing any of that happen in any material way in terms of changes year-over-year. So the trends are kind of similar. Projects do move, and I think Judy alluded to that in both. I think we've seen that in China in terms of conversion, which to Jeff's question and then into Americas as well as projects are moving out. And I think it's the construction label shortage in EMEA and in the U.S. that is creating some challenges. Our factories are more or less -- we are having supply chain issues. It's not that we are not having supply chain issues, but as best as we can trying to track it very, very rigorously. We are not holding our projects. The challenges we are facing is that customers are behind in terms of their building construction. So we are seeing that slow down, and that is flowing through our revenue. And -- but you saw our backlog. I mean it's up 10% at constant currency. China is flattish and the other regions are combined up approximately 15%. So that bodes really, really well for 2023.

Nicholas Housden:

The first one is on the tax rate, which was obviously quite a nice tailwind this quarter. It looks like it was down about 5 percentage points quarter-on-quarter. And I know, obviously, you've been saying that you're working to reduce this on a structural level, but I'm just trying to get my head around whether the reduction that we've seen this quarter is completely structural or whether we should expect more normal levels in the next few quarters?

Nicholas Housden:

That's great. My second question is on the margin profile of modernization and just how that compares to the Service business as a whole my gut sense is that it's probably more like new equipment in terms of the profitability there. Any color you could provide would be helpful.

Judith Marks:

Yes. Nick, it's Judy. We just also very pleased with the progress. We've been telling you for a while was delayed, but there -- this is -- some of mode is discretionary, but every elevator is now about 3 years older than when we -- just before we spun -- so the market is growing in mod and it's got all the attractiveness of that stickiness we want for the follow-on service business, as Rahul said.

Charles Tusa:

Rahul, congrats again, and thanks for all the help over the last couple of years. Can you guys just give a little -- I think you said 3% price and service. Is that right? Should we assume kind of flattish in new equipment?

Charles Tusa:

Okay. And we should assume that most of the commodity headwinds. What were the -- out of that, I guess, you're guiding now kind of $108 million, $110 million in commodities year-over-year inflation year-over-year. What was that number for the quarter?

Charles Tusa:

And the vast majority of that is coming in New Equipment, right?

Charles Tusa:

Yes. Okay. And then 1 more question for you just on the second half. And anything within the 2 quarters that we should considered from a seasonality perspective? Should we assume a little more catch-up in China in the third quarter and then a bit of a fade on that in the fourth? Or how do we think about the trajectory of EPS just between the third and the fourth?

Operator:

And our next question comes from the line of Julian Mitchell with Barclays.

Judith Marks:

Yes, Julian, we're really pleased with the service pricing that we've been seeing now quarter after quarter in Europe itself. The majority of our service portfolio is Western and Southern Europe, as you know, some in the Middle East, some in Africa. But by far, more far more heavily skewed towards developed Europe, more than half of our service portfolio is there, which why the pricing is so important. And the team has done a great job, again, in Service, pricing there. So -- and they had growth in the portfolio for 2 quarters in a row there in the EMEA. So all showing the right trajectory by Bernardo and team. In terms of the market that itself, on the New Equipment side, the core European markets are really strong. And we had orders this quarter of 29.3% for New Equipment, a 12-month roll of 5.5%. So all the indicators are there. We're seeing a lot of those volume business and some nice major objects, whether it be around the Olympics coming to Paris or other places. We're seeing some nice major projects as well. And so right now, the only headwinds we're seeing are in Eastern Europe, not surprising based on the conflict there. So construction is fine. I think Rahul mentioned in one of his responses, that labor is always a challenge in terms of unemployment in Europe and with some of our installation subcontractors. So we're managing that very tightly and very closely. And we're moving our own labor around region-to-region, country-to-country, intra-Europe to be able to handle some of these larger projects.

Julian Mitchell:

That's helpful. And then just my quick follow-up would be, I think you gave some color on the commodity impact this year, which is not really changing from prior. But as we think sort of a little bit further out, maybe. Remind us, I suppose, on the hedging practices on commodities. And also, I suppose, how quickly you think that things like lower steel costs will roll into your COGS? And what degree of tailwind you might benefit from next year looking at sort of steel spot prices today? And again, the speed, just trying to understand the speed at which changes in those prices roll through into your cost of goods sold?

Operator:

And our next question comes from the line of Cai von Rumohr with Cowen.

Operator:

Our next question comes from the line of John Walsh with Credit Suisse.

Rahul Ghai:

Thanks, John.

Judith Marks:

John, it's -- our strategy is on track in China, and our team is executing it operationally. And I would tell you with excellence. We have figured out and invested in sales coverage. We've invested in product innovation with our Gen3 offering. We have our factories. Some of them are already at industry 4.0. And all of these investments and strategies are paying off. We've had share gain now in China for multiple quarters. And we believe it's absolutely sustainable. We think we're at the right price point with the most innovative products with the right customer relationships through our agents and distributors, and it's all coming together and working. So even if the segment declines, we should still be able to gain share.

Judith Marks:

Our capital allocation strategy allocates about $50 million to $70 million a year for bolt-on M&A. Obviously, the Zardoya transaction was a great opportunity for us at the right time, at the appropriate and fair price. And we not only executed it well. But with the squeeze out, we're able to execute it as quickly as possible. And we're seeing the benefit of that with the $0.12 EPS gain this year and there'll be a little more next year. But really, our M&A strategy revolves around adding to our bolt-on Service business. And we've been doing this for years, it gives us in places where we have density and opportunity, we make it accretive no later than year 2. And we have a playbook for doing it. We've got a really good deal book across the globe to continue doing it, and that's what you're going to see from us.

Miguel Borrega:

The first one, just a follow-up on the order intake, specifically in the Americas, where you said mostly comes from residential and volumes. Can you give us a flavor for timing of delivery. I suppose, lead times in residential are shorter. And then can you talk about pricing of these new orders? Do they contribute positively to the backlog margin?

Miguel Borrega:

Yes, the residential orders in the U.S.

Rahul Ghai:

Yes, it's about 12 months, Miguel. So that's Judy saying it's like we typically see 12 months and I think these new orders are going to be in the same range as well. So we should see the orders that we are getting now is probably translating into revenue in the second half of next year. And overall, I think in Americas, we've got some really good pricing. In fact, pricing was good. New Equipment pricing was up. I think it said in my prepared remarks, up kind of low single digits. So if you -- and we said China was down a couple of points, but that basically implies that all other regions, Americas, EMEA, and Asia Pac outside of China was up mid-single digits. So we're getting good pricing and we implemented these pricing actions in Q3 of last year, and we have seen the turnaround in Asia Pac and EMEA. So it was really good to see the turnaround in Americas. It's coming just as we would have expected. But the pricing overall is slightly better, I would say, in the grand scheme of things. So the pricing is good. In China, while I just want to comment on China pricing, while the pricing is down, keep in mind that the commodity prices to respond to Julian's question, there we are seeing commodity prices down 15% in the second quarter, 30% in the third quarter. So even New Equipment pricing in China is down, we are seeing VR price cost prelim second quarter in China. So overall pricing on New Equipment is good and Americas kind of led the way for us on New Equipment pricing.

Miguel Borrega:

That's great. And then just on labor inflation. Can you give us a flavor for what you've negotiated with your unions, when will that hit? And whether you expect this to be passed both in New Equipment and maintenance?

Miguel Borrega:

Great. And then just one quick last question on China. Can you just quantify the lost sales and EBIT from Q2? And whether this will be fully recovered already in Q3?

Operator:

And our last question comes from the line of Joel Spungin with Berenberg.

Judith Marks:

Yes. So listen, I do believe there are structural changes eventually that will impact the China property market. But we don't believe, Joel, that it will be as precipitous as it was then. -- there was -- in our industry, certainly, there was tremendous supply overcapacity, which then drove significant pricing actions that made the entire industry far less profitable, and that we're not seeing. I think we had 90% of the new equipment fulfillment today is by the top 10 providers. Almost all of those providers are public companies. They're all from the best we can see pricing rationally. And we're -- and I will tell you, Otis is in a far more competitive position. We have less factories than we did. We have a better offering than we did in terms of innovation. We have a far better sales network -- so we are better aligned with this potential gradual slowing and we have the ability to control that, far better than that [indiscernible] is drop where there was just a buildup from 2000 until 2015 and then a sharp drop off. So do I believe there's structural changes coming over time? Absolutely. But we're far better prepared for that, and I expect our team will perform just like we have for the past multiple quarters and actually performed better than our peers.

Judith Marks:

And the last differentiator I'll give you, Joel, is that we're seeing the state-owned enterprises have a far larger impact. And that bodes well for our relationships as well as our performance and our installed base and our customers. So again, we've been watching -- not just watching the trends, but our strategy has been to prepare for this, and we're ready.

Judith Marks:

That's correct. It's labor availability in the right market on the job site from all the trades from the people pouring the hoistway with the cement to the general contractors.

Judith Marks:

Thank you, Michelle. This solid first half demonstrates the strength of our strategy and our ability to execute and adapt to mitigate the significant macroeconomic challenges. We will continue to focus on strong execution to deliver high single-digit adjusted EPS growth in 2022 with continued growth in '23 and beyond. Thank you for joining us today. Everyone, stay safe and well.

Michael Rednor:

Thank you, Latonia. Welcome to Otis’ first quarter 2022 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President; and Rahul Ghai, 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. With that, I’d like to turn the call over to Judy.

Rahul Ghai:

Thank you, Judy and good morning everyone. Starting with first quarter results on Slide 5, net sales were up 0.2% to $3.4 billion. Organic sales grew for the sixth consecutive quarter, up 3.1% driven by service sales, which increased nearly 6%. Adjusted operating profit was up $9 million and up $29 million at constant currency as the drop-through on higher service volume, favorable service pricing, productivity in both segments and lower bad debt expense was partially offset by commodity headwinds and annual labor cost increases. We also maintained our unrelenting focus on cost containment and adjusted SG&A expense was down $17 million versus the prior year and down 60 basis points as a percentage of sales despite the inflationary trends in the economy. R&D trend and other strategic investments were flat versus the prior year. Given the strong cash flow and progress on repatriation, we completed our deleveraging and repurchased $200 million of shares in the quarter. Overall, growth in operating profit, reduction in share count and continued progress on reducing the tax rate resulted in first quarter adjusted EPS growth of 6.9%. Moving to Slide 6, new equipment orders were up 8.8% at constant currency, with growth in all regions. Orders momentum remained strong in Asia, up mid single-digits with about 10% growth in Asia, ex-China. China orders were up 3%, the eighth consecutive quarter of orders growth in the country and outgrew the market that was down mid single-digits. Orders in America were up high single-digit and awards, which precede order bookings, were up nearly 25% in North America, signaling continued strong demand. EMEA orders were up 17% with growth in both Europe and the Middle East. Strong orders growth contributed to total company backlog increasing 4% and 6% at constant currency, with growth in all regions, including approximately 6% growth in Asia. In addition, global proposal volume was up low teens with more than 25% growth in China, demonstrating robust market activity and the benefits of increased sales coverage. Globally, pricing on new equipment orders was about flat in the quarter on a year-over-year basis. New equipment organic sales were down 0.5% in the quarter. EMEA was up mid single-digits, but this was offset by a low single-digit decline in both Americas and Asia. Americas declined due to a tough compare from COVID recovery in the prior year. And in Asia, China was impacted by job site closures towards the end of the quarter. Adjusted operating profit was down $12 million, partially from the impact of lower volume. Commodity inflation of $38 million that was in line with prior expectations was largely mitigated by installation and material productivity and lower bad debt expense. Service segment results on Slide 7, maintenance portfolio units were up more than 3% from broad-based improvements in retention, recapture and conversion rates, with recaptured units more than offsetting cancellations in the quarter. In China, conversion rates continued to improve and contributed to third consecutive quarter of high-teens portfolio growth. Modernization orders were down about 6% in the quarter, but are up close to 6% on a rolling 12-month basis, driving backlog growth of 3% versus the prior year. Service organic sales grew for the fifth consecutive quarter, up 5.8% with growth in all lines of business. Maintenance and repair grew 5.6%, with mid single-digit growth in contractual maintenance sales, above our unit growth due to improved pricing that was up approximately 2.5% adjusted for geographical mix and the benefits of strong repair volumes. Modernization sales were up 6.9% with strong growth in Americas, EMEA and China. Modernization sales declined in Asia-Pacific on a tough compare after a strong demand in Southeast Asia in the prior year. Service adjusted operating profit was up $17 million, with 30 basis points of margin expansion, the ninth consecutive quarter of margin improvement. Profit at constant FX was up $40 million, driven by benefit of higher volume, favorable pricing and productivity and partially offset by annual labor cost increases. As we look forward to the balance of the year on Slide 8, we are excluding Russia, both in the current outlook for ‘22 and in prior year comparisons. Overall, organic growth expectations of 3% to 4% are unchanged at the midpoint, with the improvement in service offset by lower new equipment growth expectations. Total company margin expansion of approximately 30 basis points is also consistent with prior expectations. We are raising our outlook for service margin improvement to 70 basis points from 50 basis points previously from better maintenance pricing and drop-through from higher volume. However, this is getting offset by reduced margin expectations in the new equipment segment from increased headwinds on commodities and higher freight costs and the impact from lower volume growth. Overall, adjusted EPS is expected to be in the range of $3.22 to $3.27, up 9% to 11% versus the prior year after adjusting for Russia. This strong growth is driven by an increase in operating profit, accretion from the Zardoya transaction and progress on reducing our tax rate and share count. Taking a further look at the organic sales outlook on Slide 9, the new equipment business is projected to be flat to up 1.5%. This is a 1 point decrease from the prior outlook at the midpoint driven by adjustment in sales growth expectations for EMEA and Asia. While the backlog in EMEA is up more than 5%, our customers are requesting postponement of deliveries due to a broader slowdown in building construction activity, pushing shipments from 2022 to 2023. As a result, we now expect EMEA sales to be up low to mid single-digits for 2022. In China, our backlog at the end of Q1 was up 4% from strong orders growth. But the current lockdowns are not only impacting shipments, but are also disrupting the supply chain. While we expect deliveries to pickup starting May, given the supply chain challenges, we are adjusting our 2022 China outlook to be down low single-digits from flat to down 3% previously as some sales moved to the right. Given the lower volume expectations in China, Asia is now expected to be down slightly for the year. Outlook on new equipment organic sales in Americas remains unchanged and is expected to be up low single-digits in 2022. Turning to service, we now expect organic sales to be up 5% to 6%, an improvement from the prior outlook of 4% to 6%, driven by better than expected maintenance pricing and repair orders in the first quarter and higher confidence to execute our modernization backlog from the steps we have taken to resolve the supply chain challenges. Switching to adjusted EPS bridge on Slide 10, we now expect adjusted EPS growth of 9% to 11%, with operating profit growth of $105 million to $155 million at constant currency. This increase of $0.17 to $0.26 versus prior year is driven by strong operational execution, higher volume and favorable pricing. This is partially offset by commodity headwinds, which we now expect to be $110 million for the year, $20 million higher than in the prior outlook and incremental freight costs. We are absorbing these higher commodity and freight costs through increases in productivity and better maintenance pricing. And the midpoint of profit growth expectation at constant FX remains unchanged. Foreign exchange translation is now expected to be an $0.11 headwind versus the prior year and $0.04 worse than the prior outlook, primarily from strengthening of the U.S. dollar against the euro and the yen. The euro is now expected to be $1.10 for the year, implying a $1.09 for the balance of the year. The $0.11 FX headwind is more than offset by $0.12 of in-year accretion expected from the Zardoya transaction. This estimate is $0.02 better than the prior outlook from a faster pace of acquisition of shares. The balance of the EPS growth is driven by progress on reducing the adjusted tax rate, now expected to be approximately 27.7% for the year and a lower share count. We have completed $200 million in share repurchases for the year and plan on completing an additional $300 million in the balance of the year at the high end of the prior outlook. This guidance clearly reflects the acceleration of both sales and profit trajectory of the service business from the benefits of investments and our sustained focus on driving productivity. And while the new equipment business is challenged this year due to the current macroeconomic environment, our robust backlog, pricing actions and over $100 million of in-year productivity will ensure that the business recovers sharply once the commodity and the freight headwinds abate. And with that, I will request Latonia to please open the line for questions.

Nigel Coe:

Good morning, everyone. Thanks for the question. So there is lots of – lots to talk about. Maybe just to start off with China. What we’re seeing right now in China, obviously, lots of headlines about potentially Beijing locking down? So curious what impact you’re seeing and what we might expect for 2Q?

Nigel Coe:

Thanks, Judy. That’s great. And then on pricing, we’re seeing strong – obviously, very strong pricing on – in service. I think you said 2.6%, if I’m not mistaken. Equipment orders are [still stat] (ph) on pricing. So – the two questions here is any reason why we shouldn’t expect that kind of cadence on service pricing to continue? And then are we electing to not get price in equipment to maybe gain share – or is there still a lag impact on the pricing recovery?

Nigel Coe:

Great. Thank you.

Nigel Coe:

Great. Thank you.

Steve Tusa:

Hi, guys. Good morning.

Steve Tusa:

So on the services business, some of the key stats that you talked about as being pretty positive, the whole attrition recapture. Can you just give a little more detail on those? Just a little bit more like maybe rolling averages on those metrics, those KPIs?

Steve Tusa:

I think Schindler said something about a big difference in order volume versus order price in – specifically in North America, like a double-digit difference. Anything going on there with regards to timing of price increases? Did you guys see that a pretty significant between orders to volume and price in kind of developed markets in North America?

Judy Marks:

Yes. Steve, we’re seeing a really strong market in North America. Our orders were up 9.1%. The awards, as Rahul said, were up nearly 25%, which is our leading indicator. Resi, non-resi, but especially multifamily, in North America is just really coming in very strong. 12-month roll in the Americas is 13%. So the market is strong. We’re seeing – we’re not – obviously, we have a lag from the time we book till the time we recognize that revenue, but we think that bodes very well for the rest of ‘22 and ‘23.

Rahul Ghai:

Thanks, Steve.

Jeff Sprague:

Thank you. Good morning, everyone. First, just kind of on housekeeping on Russia, would you had kind of been anticipating something similar to that $0.06 for 2022 in your original guide? And – maybe you could just elaborate on what the plan is there? Are you unwinding the business? You’re trying to find somebody to acquire it? I’m just a little unclear what the plan is there actually.

Judy Marks:

Yes. Thanks. Good morning, Jeff, so I think everyone is aware that we stopped taking new equipment orders and making new investments. We’ve been very public about that in Russia. And really, we are right now evaluating the best ownership structure for the business, whether that’s with us or somewhere else. And that’s why we removed it from the outlook. We really wanted to be able to have a useful comparison. We’re working through our backlog in Russia to try and meet existing customer commitments. Candidly, it is very challenging due to supply chain issues and sanctions. And really, it’s against that backdrop that we’re evaluating options to provide a more certain future for the business. I can’t comment on potential future transactions, but we will update you in due course.

Judy Marks:

Yes. So on Otis ONE, we had a strong start to the year, especially versus last year first quarter and probably ‘20 first quarter. So we’re picking up nice momentum there and we are headed towards our mid-term – our midterm outlook of 60% of the portfolio covered. We also had some really nice progress in EV bookings, really, which give us another connected product. As we exited the quarter, we had significant EV bookings as well. But we’re really starting to see both the volume pickup and the stickiness, as Rahul said. All three categories are doing better conversion, retension as well as really bringing portfolios, bringing items back to our portfolio. Productivity is strong. It is taking care of any labor increases we’re seeing. And even our apps that we don’t talk about as much anymore, Jeff, have really seen sustained uptick. We’re still rolling them out in some of our Southeast Asia countries as recent as last month. And if you look at the apps, we saw a 20% increase in repair sales booked through the Upgrade app year-over-year. The Tune app, which really gives our mechanics just that ability to use their iPhones to do vibration checking is up more than double same period last year. And we had 50,000 parts ordered, which is up mid-single-digit plus over the year before all using technology. So our mechanics are getting more productive. Otis ONE is adding that ability to be predictive. They have got the ability to see what’s happening with transparency with our customers and we’re seeing actually Otis ONE make a difference in our recaptures when customers come to us, put us back on maintenance because of Otis ONE. So all in all, everything is trending, and that’s why we’ve got confidence in the service, not just in the revenue side, but it will, with volume, it’s going to fall through and the incrementals are going to be strong.

Operator:

And our next question comes from Nick Housden of RBC Capital Markets. Your line is open.

Judy Marks:

Yes. Let me start, Rahul, and then I’ll let you add. But we saw a share gain of about 1 point globally, but we saw a share gain clearly in China. We came into the year and we expected our backlog to cover 60% or so of the revenue and the rest for the in-year revenue and the rest would be kind of book-to-bill. We thought that book-to-bill, Nick, would be down 5% to 10%. But what we saw in the first quarter was it was only down 5%. So that was fairly positive. As you look at the first quarter, though, we did well Tier 1 through 4 cities, so it wasn’t just the big Tier 1s. We really did well in Tier 1 to 4, and we grew share there, and we grew share in every vertical, residential, commercial, high-rise and infrastructure. So it was an across-the-board gain in terms of share from our China team, and I think that’s what really led to the up 3% in new equipment orders and the backlog up mid-single now.

Judy Marks:

Yes, I think it’s just execution of strategy, Nick. Our sales coverage is there. We kept A&D about – our agents and distributors around 2,200. There is been some churn in them as the lower performers are exited and we bring on new for coverage. But our sales coverage actually globally went up about 150 – about 4%, and even though our SG&A went down significantly. So we’re driving everything and it’s all about executing our strategy.

Rahul Ghai:

Yes. Our business in China did really well on cash last year, Nick. I mean we were up more than 20% over 2020 levels in 2021. And for the year, for 2022, we kind of expect similar level of improvement in free cash flow in China. So last year, if you look at 2021, our receivables were up slightly less than 10% on revenue that was up more than 25%. So we did really well on cash management in China. But obviously, the situation is volatile. We are looking at our payable situation. We are extending some advances to our customers to ensure supply. But at the same time, we are also looking at, okay, where we can, we are stretching the payable terms. So we’re kind of going both ways, managing it on a supplier-by-supplier basis. But overall, listen, the situation, cash in China was good last year, and we expect a similar level of performance in ‘22.

Operator:

And our next question comes from Julian Mitchell of Barclays. Your line is open.

Judy Marks:

Hi.

Rahul Ghai:

Yes. So as you said, our orders were strong in Europe. And we are seeing – so the backlog goes up, as I said in my prepared remarks, it was up more than 5%, and the ARPU more than that, clearly. But what we are seeing, Julian, is we are seeing delays in construction activity, and that’s pretty much all the major European – or most of major Western European markets. So we are seeing that slowdown, which is extending our delivery times from our factories. So that is what we are seeing. And that is the reason we kind of looked at our revenue expectations for the year in EMEA, and we took them down slightly. We were up kind of mid-single digit levels last time if we took them to mid to high this time or low to mid this time. And part of that was obviously Russia coming out because Russia was a faster growth market. So some of that impact was just Russia getting pulled out and some of that was construction. So now we think it’s low to mid. But as you look at the overall construction activity in EMEA, that is kind of holding. So, if you look at the building permit activity that was up 2% to 3% over last year. I think they are expecting that to continue. And so that is where we expect that our orders growth in Europe should be okay for the year. We are not expecting any big slowdown at this point. So, the business seems to be holding up. And all we are seeing is this delay in revenue recognition and the pricing was good as well. So, we saw – we picked up pricing up low-single digits in EMEA. So overall, the business is doing well, except for the slowdown in construction that’s impacting us.

Julian Mitchell:

Understood. Thank you. And then just on the operating profit line. So, I think your adjusted profit at constant currency was up $29 million in Q1 year-on-year. And the year as a whole, you are guiding up around $130 million. So, you are sort of just taking it looks like the Q1 increase and sort of times it by four across the quarters. I wonder if there was any kind of cadence on that profit development to call out or it really is as simple as sort of $30 million, $35 million increase every quarter? And then specifically on that point, you mentioned the cost inflation headwind of $110 million for the year. How – what was that in Q1? How do we think about that in the second half, the $110 million?

Judy Marks:

Julian, the only other thing I would add is what we saw in repair in the first quarter was very positive, which shows even in the regions where people are concerned about office populations, we are seeing elevator usage pick up in the – really in the commercial side of the business as well. And our repair business certainly indicated that in Q1. That’s going to help drive this – again, this margin expansion in service as we go through Q2 through Q4.

Rahul Ghai:

Thanks Julian.