Otis Worldwide : OTIS Transcript

Corrected Transcript

15-Feb-2022

Otis Worldwide Corp. (OTIS)

Investor Day

	Total Pages: 34
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Otis Worldwide Corp. (OTIS)	Corrected Transcript
Investor Day	15-Feb-2022

CORPORATE PARTICIPANTS

Michael Rednor	Robin Fiala
Senior Director-Relations Contact, Otis Worldwide Corp.	Vice President-Sales & Marketing, Otis Worldwide Corp.
Judith F. Marks	Rahul Ghai
President, Chief Executive Officer & Director, Otis Worldwide Corp.	Executive Vice President & Chief Financial Officer, Otis Worldwide Corp.

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OTHER PARTICIPANTS

Jeffrey Todd Sprague	Joseph O'Dea
Analyst, Vertical Research Partners LLC	Analyst, Wells Fargo Securities LLC
Nigel Coe	Cai von Rumohr
Analyst, Wolfe Research LLC	Analyst, Cowen & Co. LLC
Julian Mitchell	John Walsh
Analyst, Barclays Capital, Inc.	Analyst, Credit Suisse Securities (USA) LLC
C. Stephen Tusa	Nick Housden
Analyst, JPMorgan Securities LLC	Analyst, RBC Capital Markets

Miguel Borrega

Analyst, Exane SA (United Kingdom)

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MANAGEMENT DISCUSSION SECTION

Michael Rednor

Senior Director-Relations Contact, Otis Worldwide Corp.

Good morning, everyone. Welcome to Otis' 2022 Investor Day. I'm Mike Rednor and I lead Investor Relations for Otis. We're happy to have you here with us today. Before we get started, just a few reminders. This presentation is being carried live on the internet and is being recorded for replay. Presentation materials are available for download at otisinvestors.com. Please note, except or otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant non-recurring items. The company will also refer to adjusted results where adjustments were made as though Otis was a standalone company in prior periods. A reconciliation of these measures can be found in the appendix of the presentation.

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.

Okay. With that, let's start the agenda for today. I'm joined by several members of Otis' leadership team. We'll start with Judy Marks, our Chair, President and CEO, who will give us an overview of the industry and Otis. Next, Robin Fiala, who leads Sales and Marketing at Otis, will discuss our global growth strategy before Rahul Ghai, our CFO, finishes with a financial overview. After prepared remarks, there will be dial-in instructions for about an hour of Q&A.

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Otis Worldwide Corp. (OTIS)	Corrected Transcript
Investor Day	15-Feb-2022

With that, I'd like to welcome Judy Marks.

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Judith F. Marks

President, Chief Executive Officer & Director, Otis Worldwide Corp.

Thanks, Mike, and thank you, everyone, for joining us virtually today. We're excited to share the progress we've made since you joined us in Freedom Hall in February of 2020. Since then, we've delivered on our long-term strategy, proving that it's sound and that our team can execute at a high level. Today, and that our team can execute at a high level. Today, I'm pleased to be joined by Rahul and Robin to share our vision for the future and to update you on our progress creating long-term sustainable value for all stakeholders.

Before I begin, let me thank our team we wish could be here in person, but know that the team that leads Otis is with us today and every day, creating value for our shareholders, customers, colleagues and communities.

Starting on slide 5 with the elevator and escalator industry. Our industry that Otis began nearly 170 years ago is large and expanding at approximately $80 billion. The industry has strong fundamentals that are backed by global growth trends, including urbanization, which is expected to cover approximately 60% of the global population by 2030. And that population is aging, increasing the demand for elevators.

This industry is highly regulated. Many of you use our product every day, and this happens in cities across the globe, not just in high rises, but in schools, hospitals, airports and anywhere that people are on the move. Above all, it's important that elevators and escalators provide safe movement for passengers everywhere. The top five E&E participants represent approximately 70% of the $80 billion industry. Because of code and other regulations there are not many new entrants in the $35 billion New Equipment market, and the New Equipment business is stable.

Although the $45 billion Service market is fragmented, today the top five OEMs make up about 40% of the total Service market. Service is the profit and growth driver of this industry. This growth is built on maintenance of the compounding installed base, shown on slide 6, and supplemented with both repair and modernization business. The New Equipment market has been growing steadily at a low-single-digit CAGR, adding about 1 million units annually. This steady stream of units results in compounding growth for the Service installed base expected to grow at a mid-single-digit CAGR globally with growth in all regions. This growing Service base is the highlight of our industry and provides resilient and recurring growth and profitability opportunities for Otis.

Moving to slide 7. Otis is the leader in this industry with $14.3 billion in 2021 sales, over 2.1 million units under maintenance and industry-leading adjusted operating margins of approximately 15.3%. We do that through 1,400 branches and offices, leveraging our local knowledge, presence and customer relationships at a global scale and driving a margin premium through the density and size of our Service portfolio, pricing and productivity initiatives.

Similar to the industry as a whole, Otis' business is driven by Service, with about 55% of sales coming from Service. While the New Equipment business is profitable, the margins in Service are about 3 times that of New Equipment, and the Service business contributes about 80% of our adjusted operating profit. New Equipment margins were 7.5% in 2021 and Service margins were 22.8%.

Next on slide 8, you'll see that Otis benefits from strong geographic diversity in addition to a broad customer base. Starting with New Equipment, while the China market is about 60% of overall global units, it is less by value. For Otis, the Americas and EMEA represent about a quarter each of our New Equipment sales in 2021, Asia Pacific about 10% and China approximately 35%. From a New Equipment profitability standpoint, both the Americas and

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Otis Worldwide Corp. (OTIS)	Corrected Transcript
Investor Day	15-Feb-2022

China are above average and similar, while EMEA and Asia Pacific are below company average New Equipment margins.

On Service, EMEA were about half of our 2.1 million portfolio units operate, represents the largest share, with 2021 sales still roughly split a third each by region: Americas, EMEA and Asia. Otis' Service business in EMEA benefits from density and the higher-than-average Service margins. But Service revenue in each region is accretive to overall Otis margins.

On slide 9, we have an integrated approach to achieving our strategic vision and ESG commitments. Our business strategy supports sustained New Equipment growth, accelerated Service portfolio growth, advancing digitalization and empowering our organization to drive sales, earnings and cash flow growth to create sustainable shareholder value. At the same time, we're focused on fostering a strong foundation and culture that embraces many voices and points of view and proactively engages the communities we serve. We strive to reduce the environmental impacts of our products, operations and services, and uphold the highest standards for strong governance, ethics and integrity. And above all, we are committed to the health and safety of our colleagues and passengers in Otis Absolutes.

On slide 10, we're continuing to invest in innovation, a driving force behind sustained New Equipment growth. We have made enhancements to our bestselling Gen2 platform to address specific customer needs, including our entry tier, low cost offering Gen2 Prime. Our future is the connected elevator. And in 2021, we launched Gen3 and Gen360, two platforms with built-in Otis ONE connectivity and digital options. Gen3 is being sold in China and North America currently, while Gen360, our next generation platform, is currently being sold in Europe. These platforms address the growing customer needs for space optimal options, improved aesthetics and digital services that improve uptime, simplify elevator management, and enhance the passenger experience. These introductions are a direct result of our focus-product strategy and investments in research, development and other strategic investments.

Moving to Slide 11. This sustained New Equipment growth supports acceleration in our Service portfolio. Over the last several years, we've driven growth of the Service portfolio from 1% to 2%, and in 2021 to 3%. We plan to accelerate this growth to faster to 3% CAGR over the medium-term period. How will we do this? Through focused improvements in each of the key service metrics: retention, conversion, and recapture, each of which improved year-over-year basis in 2021. Robin will elaborate more on how we plan to achieve this.

On slide 12, digitalization is foundational to everything we're doing to drive productivity in the field, enhance the passenger and customer experience and optimize our back office functions. Enabling connectivity will drive step function change in how we manage our portfolio, changing how we address customer and passenger needs and allowing us to do this far more remotely. At the end of 2021, approximately one-third of our global units were connected, including 200,000 Otis ONE units. We plan to accelerate deployment over the medium-term to connect over 60% of units under our maintenance. This technology improved service provided to our customers, resulting in improved conversion out of warranty and stickiness with existing maintenance customers. Connectivity also provides major benefits to Otis, improving the productivity of our service technicians and allowing us to capitalize on incremental subscription service sales. Put simply, Otis ONE drive Service growth, pricing and customer loyalty while making Otis more competitive against the independent service providers.

More on slide 13, where we highlight how the digitalization of Otis is improving the experience for our mechanics. In addition to Otis ONE, we've deployed several proprietary iPhone apps that allow mechanics to optimize their time, reduce unnecessary travel and arrive to the customer site with all the information and tools required. One app example is our Tune App that allows a service mechanic to place his or her iPhone on the floor of the

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Otis Worldwide Corp. (OTIS)	Corrected Transcript
Investor Day	15-Feb-2022

elevator and diagnose severe vibration sensing. This saves time and effort where the mechanic would otherwise have to access the top of the car to diagnose.

Another example is our Upgrade App, which facilitates repair sales while the mechanic is on site, allowing him or her to execute a contract for incremental work if needed. And you can see this reflected in the productivity of our service technicians who are generating 9% more revenue per technician as well as the favorable survey results and reduction in attrition that we've driven since 2019.

On the next slide, you'll see our meaningful progress on our ESG journey in a relatively short timeframe. This journey is continuous. We laid the foundational framework and made progress on our long-term goals this year, including 100% ISO 14001 certification of all our factories. We also advanced new products and modernization offerings that have lower power consumption needs and include technology to generate and redistribute power within the building.

This year, we'll continue to make progress on our long term goals to reduce Scope 1 and 2 greenhouse gas emissions and achieve gender parity in our executive ranks. These two metrics are now included in the 2022 executive compensation plan, reflecting the emphasis we place on progressing our ESG initiatives. There will be more details on all our progress in our first ESG report that will be published next month.

Moving to slide 15. Otis has delivered strong financial results over the last two years, despite facing a challenging environment. In February of 2020, we gave our first medium-term outlook as an independent company, just before the COVID-19 pandemic began to affect the way we live and work. I am very proud of the results that this team has delivered over the past two years, reaching some of our medium-term objectives ahead of schedule.

We drove 3% organic sales growth while expanding margins 100 basis points and taking cost out of the business in response to COVID and we made strong progress on below-the-line items, resulting in a adjusted EPS CAGR of 16% from 2019 to 2021. Cash generation remains strong, over 130% of net income, and we were focused on capital deployment that benefits all stakeholders, including $725 million in share repurchases, approximately $135 million in bolt-on M&A transactions, a solid dividend payout and the announcement of our tender offer for the remaining stake in Zardoya Otis.

Despite fluid market dynamics, we expect this strong performance to continue in 2022, on slide 16. The New Equipment market is expected to be up mid- to high-single digits in the Americas, low-single digits in EMEA, and down mid- to high-single digits in Asia, driven by uncertainty in China, where we expect the market to be down

5% to 10%. While the China New Equipment market faces headwinds, this will not detract from solid growth in the Service installed base, where approximately 1 million units are added each year globally, a mid-single digit growth rate annually. Industry installed base in the Americas and EMEA are expected to grow low-single digits; and in Asia, we're expecting high-single digit growth driven by China.

In 2022, for Otis, we expect to deliver organic sales growth of 2.5% to 4.5%, with net sales in the range of $14.4 billion to $14.7 billion. Adjusted operating profit is expected to be in the range of $2.24 billion to $2.3 billion, up $95 million to $165 million, excluding the impacts of foreign exchange. At actual currency, adjusted operating profit is expected to be in the $50 million to $120 million range. Adjusted EPS is expected to be in the range of $3.20 to $3.30, up 6% to 10% versus the prior year and $0.24 at the midpoint. Lastly, we expect free cash flow to be robust at about $1.6 billion or approximately 115% to 120% conversion of GAAP net income.

Finally, on slide 17, Otis' medium-term outlook. We're targeting organic sales growth of low- to mid-single digits, with low-single-digit growth in the New Equipment segment and mid-single-digit growth in the Service segment.

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