Otis Worldwide Corporation (OTIS) Earnings Call Transcript & Summary

Well, good morning, everyone. Welcome to the Otis Investor Day for 2020. My name is Stacy Laszewski, and I head up Investor Relations for Otis, and we're really happy to have you here today. Before we get going, just a few reminders, the presentation is being carried live on the Internet and is being recorded for replay. Presentation materials are available to download utc.com. Please note, the company will speak to results and expectations from continuing operations and adjusted for restructuring and other significant items, except where otherwise noted. The company also reminds listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ materially from the anticipated results. Otis' registration statement on Form 10 and the reports of UTC's SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Okay. With that out of the way, let's talk a little bit about the agenda today. We're going to start with Judy, who'll give us an overview of Otis. Robin Fiala will come up after that and give us an overview of the business segment. We'll take a break for about 15 minutes, and then we'll come up and we'll have a deeper dive into Europe and China, and Rahul will finish up today. I would ask, if you hold all questions until the end, we'll have plenty of time for questions at the end. So with that, I'd like to welcome Judy Marks, President and CEO of Otis. [Presentation]

Good morning, and welcome to our Investor Day for the Otis Worldwide Corporation. Today, you'll hear from several leaders of our Otis leadership team. I'll give an introduction. I'll be followed by Robin Fiala, 30 years Otis employee, working in many of our elements, many of our responsibilities, a deep domain knowledge of our business and our customers. She'll be followed by Mark Eubanks. Mark joined us in the spring of last year, come to us with extensive P&L experience from both Eaton and Cooper Industries. Mark leads our largest service region, 43 countries in the EMEA region. We'll then connect to Perry Zheng. Perry is our President in China, where we have over 15,000 colleagues in the midst of returning to work. He's focused and has been focused in-country on our #1 absolute, the health and safety of our employees, but he's also focused on business continuity. And I think it's important that everyone understands that while our manufacturing is ramping back up and our branch offices are opening, our front-line service technicians have been on duty since the Chinese New Year in hospitals and infrastructure. It shows the resiliency and the demand on our service business even as our customer faces -- our customers face times of need. And then my partner, Rahul, will join me, but he'll close first before we take Q&A, walk you through our financial outlook after I give a little of that at the beginning. But Rahul comes to us an experienced public company CFO, someone who, together with myself, will drive capital allocation to align management with shareholders. I am so excited to be here with you today to reach this milestone. And there's probably no place more fitting than to be in Freedom Hall at the New York Stock Exchange, not just because it's Freedom Hall as we return to our roots as a public independently traded company but because in April 1920, 100 years ago, Otis first listed right here on the New York Stock Exchange. And as we target a spin that we are ready for, that we have spent time since November 2018 preparing for, that we are operating today as a company within UTC, a company within a company, we will return to our roots and list here with the ticker you see hanging up, OTIS, to celebrate our centennial anniversary of first listing on the stock exchange. Our vision is we provide people the freedom to connect and thrive in a taller, faster, smarter world. Our founder started this industry, and we take great responsibility in the 2 billion people a day who touch our product. We take our heritage as the leading elevator and escalator industry manufacturer and installer and service provider. We marry that up to strong performance we had, proven performance in 2019, and we accelerate that as we start our journey as a new company. Otis is an incredible company. It's an -- a company -- it's a people enterprise made up of 69,000 colleagues. We talk about ourselves being globally local, and those 2 terms are a really important balance for us. We have tremendous reach going to market in 200 countries and territories throughout the world. But 40,000 of our 69,000 employees are our field professionals, and they spend every day at customer sites, earning that customer trust and driving -- 33,000 of them driving our service business. $13.1 billion in revenue last year, #1 by far in the industry. We maintain over 2 million units globally. But we do that locally through 1,400 branches and offices. And it's that balance, it's that local knowledge, it's that local customer relationship, it's that local ability to handle economic headwinds in local territories that gives us our strength. That 2 million portfolio, though, gives us scale, gives us density and gives us reach. And in this business, having that density on routes and in cities is what's critical to our success, and it's what drives our profit premium above our nearest competitor. Our next closest competitor's service portfolio, we are 25% larger than them, and scale and density matter in a service business, especially a service business that's migrating from a purely mechanical business to a far more digital business. We look back 167 years, but we don't rest. And one of the key elements that I brought as I joined Otis a little over 2 years ago was a focus on pace, was a focus on digital, was a focus on bringing us into the taller but more importantly, the faster and smarter world. We are building on this leadership and building on performance. So let me share with you why I am so excited about Otis, why I believe this has an incredible, not just market thesis, but investor thesis: #1 in our industry for 167 years running, largest sales, highest profit margins; largest service portfolio, largest number of employees, best coverage in industry. We are a global leader in a $75 billion very attractive market. And as units continue to get added in the new equipment segment, today, about 900,000 units a year, the installed base grows. The installed base alone grew 50% over the last 6 years. And with another 900,000 units getting added every year, our service opportunity continues to grow. It gives us the ability to leverage. It gives us the ability to apply the Internet of Things, and we'll take you through that as we go. It's that unparalleled service portfolio, though, that is our strength. It's our strength by city. It's our strength by region, and it's our strength holistically. It gives us the ability to drive supply chain optimization. It gives us the ability to have spare parts where we need them, when we need them so that we can service our customers. The other wonderful thing that our service portfolio brings us is predictable, recurring revenue, even in times of economic headwinds. For example, in China, we don't know that this is a black swan event, but our employees, our frontline colleagues, have been providing services since the coronavirus broke out. And we'll continue to provide those services, again, to keep people moving safely. We take that responsibility seriously. 2 billion people a day touch our product, and we need to keep them safe. Our best-in-class margins are showing the results of investments that started a few years ago. We made strategic investments. We changed our R&D profile. And we're more focused on bringing more products to market and really driving a connected elevator for smart cities and smart buildings. You're going to hear more about that as we go on today. These margins, again, last -- for the last 6 straight quarters, we have had service contribution growth, and we see far more productivity as these investments are paying off. We also see SG&A reduction opportunities as well as global supply chain opportunities to continue to show earnings growth and margin growth. We are not a capital-intensive business, as you can imagine. We have incredible robust free cash flow. Last year, we had a stellar year, 119% free cash flow over net income. And you'll see both in the 2020 outlook and in the midterm, we're forecasting 110% to 120% return on free cash flow. Our CapEx as a percent of sales averages about 1.3%, and our working capital is extremely efficient at about 2.6%, both of those significantly under our multi-industry peers that we compete with. And what's really important to Rahul and I and to this leadership team is ensuring that management is aligned with our shareholders. So you'll see, when we get to our capital allocation model, we've got a 40% dividend ratio. And once we delever and repay back some of the debt over the next 2 years that we'd committed to at $250 million a year, we will then turn to share buybacks and bolt-on M&A as well. This is an exciting time in our history, again, in a $75 billion growing market where Otis is #1. In terms of revenue, we are #1 with 17% share. And you'll see the top 5 -- this is a consolidated industry where the top 5 represents 70% of the revenue and sales volume globally. We're in the life safety business here. Each of you rides our product probably every day. That happens in cities across the world, not just in high rises but in schools, in hospitals, in churches. It happens everywhere you turn, in malls, in airports. All of that continues to drive a market thesis of sustained growth. The industry itself remains attractive with 53% of the industry revenue tied to service and 47% of the industry revenue tied to new equipment. Very strong fundamentals. Those fundamentals are built on urbanization. 50% of the world's population today -- 50% of about 7.5 billion people live in cities today. It's a great target market for us and for this entire industry as buildings grow taller. By 2050, 70% of the world's population, over 7 billion of the 9.8 billion people, will be living in cities and will be demanding more buildings, they will be demanding older buildings getting modernized and upgraded, and there's just incredible opportunity on the new equipment segment side over time. The middle class is demanding more. And we see that in cities in China, where buildings were built 20 years ago, up to 7 stories with no elevators, where now they're demanding more. We're going to see that throughout the globe, and it's that demand signal that's going to drive the segment for both new equipment and then service. And even though we're a long-cycle industry, we are a long-cycle industrial, we have the ability of this industry to see construction trends about 18 months out. We have the ability to weather, obviously, service and maintenance trends. But this industry absolutely has the need to move digital the way all other industrials are. And we take that responsibility seriously. We'll be talking about what that means, with more connected devices, with all elevators and escalators eventually being connected, providing us with sensor data. We'll have the ability to be more predictable, more proactive and more transparent. People will demand it, both passengers in a connected mode as well as customers to understand, "Is my elevator working?" We want elevators to move quickly, to take the least amount of space in a building, to move safely and to transport people as effectively as possible. The business model has been consistent for well over 100 years in this industry. It's a beautiful business model that starts by selling new equipment. Again, about 900,000 to 1 million units a year get sold throughout the globe, more than half of those in China for the past few years. The new equipment is sold. We then have a warranty period, and then we go into service. And that service includes scheduled maintenance and repair. Our typical service contract globally is about 4 years in duration. So through that time period, we measure conversion rates to make sure we convert to service, and then we measure retention rates. We have an industry-leading retention rate of 93%. Those customers re-sign with us 93% of the time, and we're working to continue to raise that retention rate through relationships, through data and through performance. Then at about the 20-year point, those buildings with those elevators, as you can imagine here in the city, are competing with new buildings. So they need to modernize. They need to modernize. They choose to modernize for aesthetics inside the cab, but they also choose to modernize for technology insertion, for new controllers, for new systems of propulsion. That modernization business offers us tremendous opportunity in the future. And several of our presenters will take you through exactly how large that opportunity is. The opportunity alone is exciting. But what I love about it is it resets the clock for another 20 -- average 20 years of maintenance and service. And that's why the maintenance and service business continues to grow rapidly. Over the last 6 years, the new equipment market has grown about 9%. Over those same 6 years, the installed base has grown 50%. That's the opportunity. We ended last year with 16 million units in the world. Otis has 2 million of those on our portfolio. Every dollar in this market of new equipment profitability generates 2.5x that over the life cycle of the installed unit, and again, with a very attractive cash flow portfolio in terms of advanced payments both on the new equipment side and on the service side. So within this attractive industry, we are the leader. We've been the leader for 167 years, over $13 billion in annual revenue last year, 14.3% adjusted profit margin after we've included the corporate costs that will now be part of an independent Otis, and again, over 2 million units, giving us density and scale where scale matters. As opposed to the market itself, we are more heavily skewed in terms of our revenue to service, 57-43. And as we now shared in the Form 10 filing and sharing here today, we have an 80-20 breakout for our adjusted profit. Our service business drives 80% of our profit, which is why we made significant investments several years ago in service productivity and service transformation. And the proof, again, 6 straight quarters of service contribution, and the last 4 quarters, every quarter in 2019, every 1 of our regions had service contribution growth every quarter. So we absolutely have found that productivity lever, and we're going to continue to expand on it. But it's important to note, as opposed to a lot of other industries, our new equipment business is also profitable. So it contributes at the beginning, and then, again, with that 2.5x ratio, just creates a business model that's very attractive for the industry, but more importantly, for Otis. And our portfolio and our people and our revenue have a beautiful spread in terms of diversity, both geographically as well as revenue. We cover the world, and we take that responsibility seriously. You can see the sales numbers here, very balanced between EMEA, the Americas and Asia. But what you do see here are 2 things. One is, in the more mature markets, not surprisingly, our service revenue is higher. That will also drive the modernization that I spoke about. We will also record as a subsegment in our service segment, and we'll report on that as we go forward. You'll see modernization broken out. So in EMEA and the Americas, we have more developed -- primarily, developed markets, you've got more mature markets and far larger service portfolios. In the higher-growth markets in Asia, in China, in India, in Southeast Asia, we're at an earlier stage in many of the countries, and our new equipment sales are much higher. The other attribute about Otis you need to be aware of is we have no single customer, no single project that is large or impactful or can really be significantly material. We have a diversity of customers. We have a diversity of projects. And we have an internal process to ensure that anything, even our regional presidency -- any bid over $5 million. And Rahul and I see those at a little higher threshold as you can imagine. We don't have a lot of those. This $13.1 billion comes together a few thousand dollars at a time in our service business and then with installs throughout the globe. Nice diversity, nice stability, great predictability, recurring revenue that even when there are construction or real estate headwinds in parts of the world, our service portfolio carries us through. And we can't do this without being an innovator. Our founder was an innovator. He founded this industry in 1853 right here in Yonkers in New York. Elisha Graves Otis started this industry. I have a photo of him in my office. And I recall, as I look at that, the guts and the innovation this person had to cut the rope at the World's Fair in 1854 many times a day to prove that his product was safe. It's that safety and quality that's in our DNA but also the innovation, the need to continue to drive forward in this long-cycle, fairly traditional mechanical business. So we made some changes, and we've made some commitments. We've increased, over the past 5 years, our R&D spend after some years where we probably were not investing as much as we needed to about 10 years ago. We've changed that R&D and the strategic investment spend now to be about 1.6% of sales. We think that's about the right level. And I think if you convert that to absolute dollars versus our sales, you'll find it's pretty close to our elevator and escalator peers. We believe that's about the steady-state level to drive us forward, not just with our next-generation elevator you'll hear about today, our Gen360, but we've hired 300 software engineers, data analysts, people who specialize in artificial intelligence. Again, with the largest installed base, we have tremendous information available to us. And by advancing our investments in IoT sensors, in the Internet of Things sensors, in our Otis ONE program, we absolutely will continue to grow our service portfolio significantly. We've changed the mindset from a fairly mechanical product, a robust product but a fairly mechanical product, to make it electronic. And beyond all the speed advantages and data advantages that gives us, think of the service advantages that's going to give us. Think of your vehicle that you buy today and the fact that pretty much now, you take it back to the OEM because it's got a smart computer in it. And that's what's going to be part of our IoT offering. And in that portfolio where we have 2 million of the 16 million last year, 9 million of that portfolio was held by independent service providers. Over 50% of the installed base is serviced by smaller independent service providers. We're going after that market. We're going after the 3.5 million units that have Otis controllers in them that we have about 1.5 million in our 2 million portfolio because we'll be able to take fault codes off of those, we'll be able to use that data more effectively than any other service provider. And as we move to that IoT Otis ONE offering, that digital offering is going to be a discriminator, and it's going to allow us to accelerate our portfolio. We talk about smarter and faster. We're going to show you products today that do that. Our destination dispatch product, our Compass 360, our Gen360 elevator, which is being piloted right now in Europe that provides significant features that Robin will take you through. And faster is not just about moving people every day. Faster is also our customers telling us they want to construct faster. And so we have our new SkyBuild elevator that allows -- instead of the construction elevator you see rented on the side of a building, actually allows the end-use elevator to be used during construction, to move construction workers faster and actually get buildings raised faster. And then as we think about connecting, connecting the elevator to passengers, connecting the elevator to customers, connecting the elevators to our field technicians, it is all about using data, having it being personalized, and we're going to talk about our digital apps and Otis ONE and what that drives as we go on. We can't do this without disrupting ourselves and creating a -- becoming a digital company, a digital industrial in a long-cycle industrial business. That's the journey we've been on for a few years. That's the journey that is absolutely returning the results we saw in 2019 in terms of service productivity. And that's the journey that will take us into the future. We have the skills, we have the technology, we have the reach, and we have the scale to drive that better than any competitor in this industry. You're going to hear more about that. It's going to drive conversion rates and retention rates. It drives stickiness, that enhancement in that customer relationship, where they say, "Yes, Otis, I want to do business with you over and over again." And the reason we do that is because very few of our customers actually buy service when they buy the equipment. Our new equipment customer set is primarily architects, general contractors, developers. Our service customer set is different. It's building managers, facility owners. So with the exception of infrastructure-type or government opportunities, we have 2 sales forces, and that's why we operate in 2 segments focused on 2 different customer sets. We can't do this without our people: 69,000 colleagues who show up every day, the majority of them showing up at a customer location, if not multiple customer locations, every day, representing us and representing our brand. They are the heart and soul of our company, and I'm pleased to report that our attrition rates have decreased 25% in the last 3 years, so we're in the mid-single digits on voluntary attrition in terms of our employee base. And I think it's because of the culture we've created, a culture that empowers people in 1,400 branch offices to make decisions real time that empowers our field professionals to be able to serve customers real time and say, "Yes" and get their elevators back up and running. We're based -- and our culture is really based on our 3 absolutes. First and foremost, we want every employee to go home every day safe, back to their family. This is a life safety industry, and we take that responsibility seriously. In parallel, 2 billion people, including yourselves, trust us every day with our product. And we want every one of you to be safe and not think about stepping onto our escalators or stepping into our elevators. We will always do the right thing, and we will ensure the same quality that started this company is pervasive throughout the globe. Innovation and our core values are what drive us. We will continue to drive with the pace I'm not sure you've seen at Otis in a long time, but there's an excitement building in this company. I'm excited. I'm confident. The employees are confident. We're here to deliver. And we will be aligned with you. We do this in the communities we live and work. And we take that responsibility not just for the rider safety, but for also the impact we have in the communities where we serve. So we're focused on reducing our environmental footprint, not just in our manufacturing plants, but also in our products, making our products more energy efficient. And if you go to the iconic Empire State Building, you'll see our ReGen product there, driving 75% energy efficiency. We are not a large energy consumer in buildings, but we can all do better. And you'll see we'll continue to drive that. And because we're a distributed workforce, it's important to us that we look like and hire the best talent and represent the best talent in every place we serve. I'm delighted to lead a diverse leadership team because all voices are important, and we want the best ideas. We brought in some people, some experts from the outside to help us with our pace, to help us become a digital industrial, to help us grow to drive better shareholder value. We'll continue to do that. But 1/3 of our executives are female, and we have diversity. Whether you go to any country in Otis, we look like the country we're doing business in, and we want the best talent every day for those 69,000 colleagues. And I'm really pleased with our Board of Directors. Again, another diverse group, 5 diverse of the 9. But more importantly, the diversity of the backgrounds they bring, the knowledge they bring, the experiences they bring across a myriad of industries to help us govern. So before I turn it over to Robin, I'd like to share with you an early look at our 2020 outlook as well as our midterm outlook. Rahul will go into more details, but this is what we've put together, our first view going forward and obviously, our intent to meet our commitments, the way we did in 2019 as well. So 2020, expect it to be a solid year for us. We are obviously taking on the corporate costs, which we have an SG&A commitment between us to continue to drive down. We expect sales to grow organically 2% to 3%, in line with our expectation for global market growth. Our operating profit will be up $40 million to $70 million by continued growth in service contribution as a result of our investments and our service transformation activities. And our free cash flow will be about $1 billion to $1.1 billion at a conversion rate of 110% to 120%. Again, we'll go into more details on our financial initiatives and our capital allocation strategy in Rahul's presentation. In the midterm, we've got a strong outlook. We're targeting organic sales growth of low to mid-single digits; low single digits on the new equipment side, again, with a flattish China market that's over half of the accessible market; and mid-single digits on the service side. Building on our best-in-class margins that already exist at 14.3%, we're going to have consistent margin expansion every year as a result of our investments. Operating profits will be up mid-single digits, but there will be margin expansion starting in 2020 and every year ensuing. Our EPS will grow in high single digits. So earnings will be up, earnings growth will continue, but EPS will be up even more because we have opportunities. And we'll talk about our tax situation and some of the opportunity in terms of the effective tax rate for us to drive high single-digit EPS for our shareholders. And our free cash flow, again, just an incredible cash profile, 110% to 120% conversion. This is an exciting time, best-in-class margins, recurrable, predictable revenue, high single-digit EPS growth, robust free cash flow. It's an exciting time to be part of Otis, and it's an exciting time for investors. We're ready, and we look forward in early April to becoming our own publicly traded company. And with that, I'll ask Robin Fiala to come up and take you through the 2 segments.

Well, good morning, everyone. I'm Robin Fiala, the Vice President of Sales and Marketing for Otis. As you heard Judy mention, I started my career 30 years ago at Otis in the local operation, doing almost every job on the front line: selling, supervising technicians, running the P&L and really learning the business from the ground up. In fact, I started my career right here on Wall Street selling for Otis. And as the song goes, "If you can make it here, you could make it anywhere," is especially true in the elevator industry. I was later able to leverage that experience and go on and do many different roles, including leading the global -- leading the Americas sales and marketing organization and now doing it at a global level. So during my tenure, I've traveled to every major market around the world. And I've been part of every sales and marketing -- every part of the sales and marketing cycle, being responsible for releasing some of the industry's most innovative products, like our Gen2 offering and our Compass dispatching system. Today, and as we lead up to spin, it's certainly a very historic time for Otis. And as a result, the focus of the organization on ensuring that we execute our strategy has never been stronger. And it's why I'm really excited to be able to share with you today the transformation that's well underway in both our service and our new equipment segment. I'll share with you both the things that are going well as well as where -- our opportunities for future growth. So let's talk about Otis. We operate at over 200 countries and territories around the world, arguably one of the most global companies, with over 1,400 branch locations. And it's our ability to leverage our scale to deliver the highest-quality products and services in each one of our branches that truly sets Otis apart. Whether you're in Kuwait at the airport or in Chicago at the Willis Tower, where we're currently performing the largest modernization in the world, customers across the different verticals, the geographies and across these 2 different segments choose Otis Elevator Company because of our industry-leading reputation for quality, safety and reliability. And while we report our results separately for our new equipment and our service business, these businesses are closely intertwined, whether it's from a business model perspective that you heard from Judy or from our customers' decision-making process. And our strength across both segments is what is a key competitive advantage for Otis in the market and will continue to allow us to differentiate our business performance going forward. So let me start with our view of industry growth over the next 5 years. This chart shows our forecast of both new equipment and the installed base growth over all major regions around the world. And we're using the installed base as a proxy for growth for the service business. We're expecting the global new equipment market to be relatively flat to slightly up driven primarily by our expectations that the market in China will be flat over the same period of time. In China, new equipment installs remain around 550,000 units or so. And while this is a strong base, it pulls down the overall growth rate. Other major markets are expected to grow low single digits. The global installed base should grow around mid-single digits, considering the industry typically installs about 1 million units a year on a base of 16 million as of the end of 2018. China's installed base will be in high single digits as the installed base there is about 6 million units, growing a little more than 0.5 million units a year. So let me review now our plan of how we're going to grow faster than the market in new equipment. Of the approximately 1 million units sold globally, Otis has a very strong position, winning a little more than 16% share. Supporting these sales are our industry-leading products, whether it's in our volume business with our Gen2 offering, the most energy-efficient, flexible product on the market; to our SkyRise system, the product of choice in many premier installations, whether it's the renovation of the Empire State Building or the new installation here in New York at 30 Hudson Yards. As Judy mentioned, our focus on sustaining new equipment growth is a key part of our strategy not only because it provides incremental profit to new equipment, but it's a key driver of our service portfolio and thus, our reoccurring service revenue. To drive new equipment, we're focused in 3 key areas. First, identifying pockets of opportunity to better cover the market with our sales channel. From the product side, it's looking for opportunities to expand our industry-leading product portfolio. Finally, it's about introducing new innovative solutions focused on meeting customer needs. So let me start by looking at how we can improve sales coverage to drive growth. We're identifying opportunities where our current sales channels aren't fully covering the market. To do this, we're assessing each one of the top markets, looking at both our coverage and our share of segment. Directionally, the higher our coverage or the more projects that we're bidding in any given market, the higher our share. Globally, we miss about 20% of the global market. And while there's opportunity, the good news is we're making progress. And you see an example here with Germany. Germany is the fifth largest country from an elevator perspective in the world, the largest market in Europe. And over the last 5 years, you see that we've improved our coverage in Germany by 5 points and as a result, have improved our share there by 2. To close these gaps globally, we're expanding our sales force and our sales channel. And you're going to hear a little bit more from Perry Zheng on what we're doing specifically in China to expand our agent and distribution network to cover the China market more. At the same time, we continue to drive sales efficiency through new tools and technology. In fact, let me give you an example of how we're leveraging technology to reach more customers, particularly customers that we don't cover well today based on size of a -- based on size of the largest segment of customers in many countries have only one unit in their projects. Yet today, these are the customers typically engaging with us online. To help these customers, we've created easy-to-use online tools, and you see an example of the Otis Create digital configurator. Feedback on these enhancements have been great. We see this as opportunity to enhance our coverage through more effective means, particularly for the customers that we don't reach well today. Let me talk more about product now. Just like in sales coverage, we're looking to identify areas where we have gaps in our product offering that are preventing us from covering the entire market. To understand the full opportunity, we've segmented each one of our top countries. Here, you see an example of the Indian market. And if I orient you to the slide on -- the chart on the left for a second, when we look at product coverage in our industry, it's typical to slice the data based on speed and size of the elevator. In this case, we're using vertical as a proxy for size. The box in green shows the significant progress we've made on closing the gap from 1 meter per second and above in the Indian market, which is a significant portion of their business -- of their market, excuse me, allowing us to gain 5 points of share in India. The remaining opportunity in the lower left of the chart is the entry-level market, less than 1 meter per second. This also exists in other countries like Southeast Asia, Turkey, Middle East and Africa. It represents about 5% of the global market, and closing this gap will allow us to increase our global share by about 1 point. But of course, it isn't just about expanding our current product offering. It's also about bringing innovation. In fact, over the last 4 years, we've increased our investment spend by channeling it in a few strategic areas. First, we focused on making our systems smarter. That includes IoT and sensors. Next, we've invested in helping customers build their building faster. You heard Judy talk about the Otis SkyBuild system that allows customers to use the permanent elevator and hoistway to move construction workers 3 to 4x faster than the hoist that you typically see on the outside of the building. This allows them to build their building faster, get tenants in sooner and overall reduces the total cost of capital. Finally, we're focused on the entire passenger journey, making it more personalized, faster and seamless, and you'll hear more about those products throughout the day. I'm going to shift for a minute and talk about our next-generation system. Otis has been inventing since Elisha Otis cut the rope to demonstrate the safety break in 1854. Our latest innovation, the Gen360 system, is a digitally native platform. It allows us to move from a more mechanical system to an electronic architecture, similar to what you see in the airline and automotive industries. This architecture itself gives us significantly more information about what's happening with that elevator on the job site. It also allows us to do far more remotely, whether it's fixing issues or it's allowing us to activate subscription services over the air. It also gives us a compact design. As a result, we're going to see step-function change not just in productivity and reliability but in the value we can provide our customers. And based on our experience with other connected products, we not only expect to see improvement in our new equipment business but also in our service business in improvement in our service rates, both our retention rate as well as our conversion of new equipment units into our service portfolio. Gen360 is currently in pilot phase now, with units up and running in Europe. The bottom line is our strategy for growth in new equipment is demonstrating results. We've been able to grow our share by 2 points over the last couple of years. And this strategy is really a balance of tactical elements combined with new innovation that's driving significant value for our customers. The focus and investment that you've just heard about will allow us to grow faster than the market. I'm going to just underscore the fact that the growth in the new equipment business helps us grow our service portfolio, and it's really a key piece of it. And I'm going to turn now to talk about our service business. The service business itself is more fragmented than new equipment due to the lower barriers of entry. In fact, independent service providers are estimated to have 50% share of the new equipment business. However, our over 2 million units in our portfolio makes Otis the clear leader in service by nearly 25% the second largest player. The more units in our portfolio, the more opportunity we have to sell modernization and repair. Thus, accelerating the growth of our portfolio is a key piece of our strategy, and we have momentum. Our industry-leading retention rate of 93% has improved over the past 4 years. At the same time, our conversion of new equipment units into our service portfolio finished 2019 at an 11-year high. Keeping the customers at the center of everything we do is a key piece of our service transformation. And the reoccurring nature of our service business makes our service portfolio size key. So let me take -- let me share with you now some of the drivers driving the growth in service. First, it's leveraging the data from our expanding portfolio of connected units. It's putting technology in the hands of our frontline employee. It's adding additional revenue streams through subscription services. And it's earning our share of the modernization market. So let me start with talking about our experience with connected elevators and why the introduction of Otis ONE gives us a unique advantage in the market. Just as Otis enabled the modern skylines of today, we are reinventing the services of tomorrow with our Otis ONE connected platform. In 1985, over 30 years ago, we launched the industry's first connected elevator. And as technology has evolved, so has our connected product. Our experience has taught us, not only with data to collect, but more importantly, how to turn that data into action. And that's what gives us the unique advantage in the market. In fact, our portfolio of almost 400,000 connected units, we have fewer shutdowns, we have better uptime, and we're able to fix issues faster. But more importantly, our customers see the value. And as a result, we have higher retention rates. And because we have to spend less time on the job site fixing issues, our costs are less. With the introduction of Otis ONE and our cloud-based IoT system, we can now provide real-time actionable information to our entire service network at once, whether it's our customers, our technicians or our call center, giving us the ability to further drive productivity, customer satisfaction as well as find ways to monetize data. Let me drive home the power of Otis ONE. Today, on a unit without Otis ONE, a customer has to call us when there's an issue with the elevator. When the technician arrives on the job site, they have very little information about what's going on with that elevator. Maybe they know it's the eastside elevator that shut down, and they have to begin the comprehensive troubleshooting process from the beginning. Where is the elevator? Why did it shut down? What was it doing before it shut down? With Otis ONE, the elevator notifies us when it has an issue. No need for the customer to call us. The technician, on their app, in real time, away from the building is able to see exactly what's happening with that elevator, "Is it shut down? What's been happening to it? Where is it located? Is the doors open or not?" allowing them to be far more efficient. At the same time, the customer could see through our customer portal also exactly what's happening at the same time. Otis ONE is a game changer for us, proactive, predictive and transparent information. And later in the presentations, we'll share with you on what we're doing to further roll out this product. Let's talk about ways we're -- other ways we're leveraging technology. We've also made significant headway in putting technology in the hands of our frontline employee, and we're doing that through our iPhone deployment and our suite of applications, focused on productivity, growth and improving customer satisfaction. On the left is an app that allows the technician to use their iPhone and simply put it on the ground of the elevator or an escalator. And then through the technology of the iPhone, they're able to pick up vibration and sound. And then through our proprietary algorithms, we're able to diagnose the issue and then, more importantly, tell them what they need to do to fix it, and that's what you see up here on the screen. It's truly a win-win. For our customers, the elevators are back up and running faster. And for us, because we can fix it faster, our costs are lower. On the right, you see the upgrade app. This is an application that we give to all of our service technicians, who, by the way, are trusted advisers of our customer. It allows them to be able to sell parts and upgrades directly to our customers, allowing us to expand our channel by tenfold here. Let me now switch to discuss our progress with selling subscription services. This is a key opportunity for us going forward. The good news is we have success to date, but we're just beginning to scratch the surface here. Historically, we sold upgrades as really onetime purchases, onetime fees. Today, we have several products out on the market where we're changing this strategy. In fact, over the last 3 years, we have been selling products using this software as a subscription service model, charging a monthly fee for things like content on the elevator screen; ability to call the app from your -- the elevator from an app on your iPhone; access to API, all providing incremental value to our customers. And as a result, we're able to get incremental monthly reoccurring revenue above and beyond the maintenance contract for these services. And Mark is going to share some more details about the success he's having in Europe here. But clearly, customers see value as we're seeing a threefold benefit. We're seeing higher profitability on these units, but we're also seeing higher service rates, both retention rates as well as conversion of new equipment into service. The upside here could be upwards of 30% more monthly reoccurring revenue. And this is just another example on how the size of our portfolio matters. It gives us more opportunity to sell things like subscription services. And again, this is a big opportunity for us going forward, and we've just begun to scratch the surface. Now let me talk about the last part of service transformation, which is modernization. It's certainly another key part of our strategy for several reasons. The modernization market is growing. It allows us to start that business cycle over again. And we use it as a way to also grow our service portfolio. If we look at the opportunity, the optimal time to modernize an elevator is 20 years. 60% of our units over 20 years old are in EMEA, and you'll hear Mark Eubanks talk about how he's capturing that opportunity. Moving forward, you see the emerging opportunity in China. Modernization is a key piece of our business strategy as it starts that business cycle over again, leading to another couple of decades of service revenue. And with our strong capabilities and modernization, we're able to use this as a strategy to recapture units not in our portfolio, helping us accelerate not just our modernization business but our portfolio as well. Let me give you a couple of recent iconic examples, the renovation of the Empire State Building and the modernization of the Willis Tower in Chicago, 2 truly -- excuse me, truly 2 of the most iconic retrofit projects in the world, some of the most complex modernizations. And in both cases, customers chose Otis because of our unique technology and innovation as well as our track record to deliver in both service and modernization. As you've heard, the service transformation is well underway. In fact, after decades of decline, we now have 6 quarters of profitable service contribution growth. The transformation is well underway in both segments, both our new equipment and our service segment. The pace and focus under Judy's leadership has been key to this, clear progress to date and runway for future growth. Thank you.

Thanks, Robin. As we said, we'll take about a 15-minute break. But before we get going, I just want to introduce a few other members of management that we have with us today. We have Tom Vining, our President of the Americas business; Stephane de Montlivault, our President of Asia Pacific; and Todd Glance, our Senior Vice President of Operations. So with that, we'll see everyone back in about 15 minutes. [Break]

All right. Good morning. I'm Mark Eubanks, and I'm responsible for Otis' Europe, Middle East and Africa regions. As Judy mentioned, I joined Otis back in April of last year after spending 13 years with Cooper Industries and Eaton, most recently as the President of the Electrical Products Group where I had a chance to meet many of you. But I'm extremely excited to join Otis and the entire Otis family up here at the front at an exciting and momentous time in our history. What I didn't realize beyond the brand, the market share and the size of the business was how great the business fundamentals were once I landed in Europe. First and foremost, our size and scale of our service portfolio is second to none, providing recurring revenue models that allow us to stay focused on investment and execution through all economic cycles. The low capital intensity as well as the strong cash flow conversion give us significant investment optionality in the long term. And then third, since Judy arrived, a significant and intense focus on digital, both in digitizing our back-office processes, enabling connectivity in our field mobility applications for our service technicians but also, most importantly, around our new product innovation and hardware, securing Otis' spot in smart building, smart city and seamless mobility of urban landscapes. Now let's talk a little bit about the business. The region across EMEA is vast in geography, stretching from London to Moscow to Dubai to Johannesburg, where we operate in over 43 countries with -- across 14 time zones. This region is highly diverse in terms of market structures as well as maturity with both developed and developing economies. This makes up almost 20% of the global new equipment market and 45% of the installed base. The region has always been very important to Otis, where we have a long and rich history. First of all, it's our second largest new equipment market in the company and is home to more than 50% of our service portfolio. Because of this, the mix of our business is highly leveraged towards our service business where we derive 65% of our revenues. The strength of these operations is built on more than 700 branch service centers as well as our more than 12,000 skilled service technicians. These skilled service technicians, for many of our customers, are the face of Otis, ensuring daily reliability and providing safety for building occupants and riding passengers for our elevators and escalators. This infrastructure is key to support the industry's largest service portfolio in the region as well as understanding what that responsibility is of over 1.1 million units. Today, we're super proud of that position but we're not satisfied. We want more and we expect to get there. The growth dynamics as well as the opportunities in our European service business will be the focus of the discussion going forward. The transformation of our service business is well underway. Over the last few years, you heard us talk about some of the technology investments, the market trends and even some of the high-level performance indicators. Today, we're going to show you that both our customers as well as Otis are benefiting from these investments. On the left side, you'll see the 4 key strategies we're using to drive transformation across the business. First, we're leveraging our customer data as well as advanced analytics tools to create tailored pricing strategies and service plans to make sure that we're offering the right service for the right price to the right customer and at the right time in the cycle. This is key to ensuring not only that we migrate our new equipment installations into our service portfolio, but then we also continue to retain the relationships that we already have. The second is an intense focus on improving our customer experience with service excellence. We're doing this by leveraging more information and more data coming off of our connected systems as well as our Otis IoT platform. We're doing this to ensure -- to enable our service technicians to ensure greater uptime, higher reliability and faster response rates. The third area of focus is on arming our technicians with better mobility tools in the field, better mobility applications to ensure that we're not only eliminating non-value-added work but that we're increasing the velocity of services to our customers. On the right, you'll see some of the proof points where we think these investments are paying off. The first is our ultimate measure of customer loyalty is our customer retention rates. As you can see, this year, we provided a 40 basis point improvement on an already high service retention rate at 94%. As well, we're increasing productivity of our technicians in our field applications around maintenance. We're doing this in the last 2 years with an increasing rate reaching up to 4% this year in 2019, and we really like the trajectory of this. We're doing this by eliminating idle time on job sites, optimizing our travel routes between customer sites, eliminating other non-value-added work and improving the quality of our preventative maintenance visits to ensure we don't drive too many callbacks. And then third, as you can see here in the bottom, a significant step-up in our services revenue per unit. This has been a result of creating a higher mix of higher-value contracts, improved productivity that we're seeing on our maintenance side being redeployed to activities around upgrade and repair as well as increasing the stickiness of our customers, eliminating cancellations. And then lastly, we're transforming and energizing our modernization business. This is the key to making sure that we extend our customer relationships. As Robin mentioned, we're going to see low single digits for new equipment installations in the coming couple of years. Modernization is a great lever to drive incremental organic growth as well as extend the value and life of our customer relationships. All of these activities are focused, again, on creating a higher-value, higher-health service portfolio. Otis has been investing in connectivity and IoT solutions for decades. As you can see from Robin's presentation, we have a high, high focus here in this area. We rolled out our first connected systems that really were focused on remote monitoring as well as storing data for remote diagnostics and root cause analysis after the fact. Today, we have over 400,000 units globally that are connected to our Otis monitoring systems, and 2/3 of those units today are in Europe. These systems provide not only system health, remote diagnostics but also remote intervention to allow us to put our customers' systems back in service more quickly. A simple but powerful case study is here in this chart in Spain, regarding the increasing adoption of connected systems across our portfolio. In the last 3 years, we've seen an acceleration rate and certainly, in '19, another inflection point of growth on this portfolio. Across the 250,000 units today, more than 25% of these systems are connected and continues to grow. It first started with remote diagnostics and simple remote monitoring and then has evolved into an improved customer experience through streaming personal passenger infotainment into the cab. And our latest connected systems are leveraging cloud connectivity, not only to deliver cab-personalized content but passenger-personalized content as well as leveraging real-time data to increase uptime as well as system reliability. Today, across the region, our 275,000 units are really delivering results. The first, as we talked about, improving our customer retention rate, we actually see a higher customer retention rate in the customers that are connected. We're also seeing that our latest eView system in our new equipment installations are creating this 8% to 9% increase in conversion rates from construction into our service portfolio. At the same time, on average, across the region, we're seeing a 19% increase in services revenue per unit for these systems. This technology is a key enabler as we go forward with our Otis ONE technology platform. We think that these systems can continue to provide rich data sets that allow us to better predict system failures and make sure that our customers are realizing data-driven business outcomes. We also believe that this improved passenger experience not only will be focused on entertainment but also on safety. You'll have a chance to see one of the use cases of our interactive video in-cab for entrapped passengers in some of the demos outside. And then lastly, this technology will allow us to become a key building block in the smart city, smart building infrastructure of the future. You heard Judy and Robin both talk about empowering our technicians, and we're doing this with digitization as a key component of our strategy. We're making significant investments not only in iPhones but in mobile applications that are customized to allow our field service techs to avoid the inconvenience of having to drive back to a branch service center to complete paper- or PC-based workflows like our repair work order or a parts requisition or even their own time sheets. By the end of 2020, we'll have deployed iPhones with this connectivity to more than 85% of our mechanics before the end of the year. Two examples, one that was already mentioned, here is our upgrade app. This really demonstrates the power of mobility. We're able to generate repair and upgrade proposals directly on job site. Recently, I was on a ride-along in the Paris area with one of our mechanics on our preventative service visit. We took the opportunity to replace a burned-out fluorescent light bulb in the cab. As soon as we were done, the mechanic pulled out his iPhone, opened up the upgrade app, scanned the QR code in the elevator, took a picture of the elevator control cab, used a pull-down menu to select LED lighting upgrade and hit submit. Less than 5 minutes, we created a -- not only a warm lead but a hot lead for our service sales reps to follow up on. This is the kind of activity that generated what we saw is a 2x increase of repair orders from our maintenance technicians in 2019. This was an incremental $20 million worth of repair orders resulted just from the mechanics that received this in 2019. The other significant time saver and productivity lever is our parts app. This is an application that allows our field service technicians to order spare parts directly on the job site, over 6x faster than the previous processes. This not only reduces the administrative burden and also allows us to order the part faster but more importantly, gets our customer's unit back up and running. We are continuing to innovate in this area of mobile apps. Today, in EMEA, we have over 10 of these applications deployed, empowering our service technicians to not only create a more satisfying work experience during their day but also to solve more customer pain points efficiently and drive revenue growth across the portfolio. Across the region, modernization will be a significant opportunity going forward, actually one of the largest. As Robin mentioned, more than 3 million units in the installed base across the EMEA are over 20 years old and are ready for modernization. With the largest installed base and the largest share of portfolio and the largest share in the mod business, we think we're well positioned to outgrow the competition in this area. The investment thesis is straightforward: modernization is a lever to increase the health, the longevity and the value of our service portfolio. We have the opportunity not only to use these mod solutions to extend the life of our agreements with our existing customers but also capture other units into the portfolio. Beyond the business model of modernizing existing elevators, there are other fundamentals underlying this investment thesis. One of these is the missing elevators in many of the buildings across Europe. In Spain and France alone, there are 630,000 buildings that have 4 floors or more and don't have elevators. Couple this with the aging demographics that's been well chronicled, we know that the demand for vertical accessibility will continue in existing buildings without mobility. To capture the opportunity, we built an end-to-end strategy with a dedicated organization, digitalized selling tools and proposal configurators and a comprehensive product offering that allows us to offer real value propositions to our customers that are not only saving energy but also providing more visibility and uptime. Our modernization strategy will continue to be focused on bringing these units into the portfolio to not only grow but extend our sticky relationships. Our track record is improving. We're making consistent gains across the service business in EMEA. As you can see, 2010 was the first -- I mean 2019 was the first year since 2010 where we demonstrated contribution margin growth in our service business. This wasn't from a one-off event that allowed us to put the data point out there. As you can see, it was 4 consecutive quarters of increasing growth. Not only did we demonstrate a full year of growth, but we like the trend as it extends into 2020. This growth all came from being in tune with our customers, understanding the data, how to offer the right service, the right price, the right time and the right customer to maintain the health of our existing portfolio. We're also leveraging data to create a better customer experience as well as empowering our field sales and field service organization to extend touch points with our customers. All of this was built under the premise of supporting growth of our service portfolio to strengthen our recurring revenue and strong cash flow model to continue to support a growth-oriented investment strategy for the future of EMEA. Thank you, and I'd like to now turn the floor over to Perry to discuss China.

Good morning, everyone. I apologize for not being there due to the coronavirus outbreak. Otis China management and I are actively monitoring the situation, and our obvious priority at this moment is to ensure the health and safety of our employees and at the same time, support our customers as needed. Our service team is still on duty and is focused on responding to customer calls and ensuring that we fulfill our maintenance contract obligations. We are allowed to reopen our offices this week gradually, and employees are beginning to come back to work where possible. As soon as the situation is getting back to normal, we will be running full speed to catch up the business. Let me start with the first page. China is the largest market for elevator industry in the world. 2019, for new equipment units, China represented around 60% of the global volume and 6 million units installed base, which was around 40% of the global installed base. All the global players are in this market with another over 300 local companies. Competition is always very active. The trend in last 10 years is that new equipment market keeps consolidating into top players, while service market remains fragmented with over 13,000 individual service providers. Otis China is a leading player in this market. We established the first JV 36 years ago, and it was one of the earliest JV in China elevator industry. We've built strong local partnership since then and still are very effective now. In the last 10 years, we underperformed slightly on unit term for new equipment and service as we always wanted to focus on profit growth. However, we gained share nicely in recent 4 years. Today, we have a strong presence in this market with over 15,000 employees, including 8,000 service mechanics and more than 650 locations to serve our customers in both new equipment and service. Next page. China market is a market with quick changes. In the last 10 years since 2009, there were 2 phases with regard to the market situation and in coming 5 years, it's going to be a very different period. The first phase was after 2008 financial crisis. The investment in infrastructure and property market were boosted to stimulate the economy. Elevator market grew very quickly with less price pressure. The second phase was from 2015 while the property market was quoted down. Competition was heavily price-focused, while input costs increased due to the commodity headwinds. This situation improved slightly since 2018 as the infrastructure investment increased and the real estate market became more active. To offset the economic growth pressure from U.S.-China trade war, the commodity price stabilized due to decline of the demand as well. As we look forward 5, 6 years from 2019, the market will be quite different but still have lots of opportunities. China urbanization will continue. The first 3 megacity clusters have been approved, infrastructure and real estate investment in those areas will be expected to continue and the quality of those investments will be a key focus. However, the coding measures are expected to remain, and we anticipate the new equipment segment size will be stable and flat at the current very high level. Real estate developers are consolidating and they will more prefer to work with big OEMs and international brands for both new equipment and service. Building maintenance code is changing, and the regulators are driving towards IoT and condition-based maintenance. It will significantly change the current service practice and the profitability in China. Installed base will continue to grow high single digits with increased aged portfolio. The refurbishment of existing properties becomes a great opportunity for modernization. To conclude, next 5 years is going to be a new phase for elevator industry in China. We're very exciting about industry growth opportunities. Next page. Otis China has a strong team and a talent with rich experience. We had a solid performance in each of those phases in new equipment business by adapting right strategy at the time. In the fast-growth phase, Otis China leveraged the multibrands to better penetrate each segment with strong cost reduction efforts to offset the price erosion with gross sales and profit at the same pace during this period. When the market becomes saturated with commodity price headwinds, we focused on taking cost out of our system. We rationalized the brands and manufacturing footprint, invested in engineering and product rationalization and invested in service digitalization. At the end, we stabilized the new equipment pricing in 2018 and significantly improved it in 2019. At the same time, we increased the shares through Tier 3 to 6 cities. In each phase, we always carefully balance the share growth with sales and profit in order to have the healthy and sustainable financials to support future growth. All this solid performance, the transformation and investment we made in the last 5 years make Otis China well positioned for the next 5 years. Despite the new equipment market mildly flat in the next 5 years, our strategy in engaging strong sales network, expanding coverage, working innovatively with top developers and infrastructure customers, introducing new products and solutions will allow us to gain shares in this market while improving new equipment profitability. Next page. China new equipment go-to-market strategy is a hybrid strategy that will leverage agent and distributor network where it is impactful and invest in direct sales in where it works. Our agent and distributors coverage and the productivity is the key for the success. In the last 5 years, we consolidated 2 lower-end brands into one of the larger brands, Otis Electric. This change allowed us to better attract agents and distributors, and we doubled our network in lower-tier cities where the market was more active as coding measures were less restrictive. Our shares in lower-tier cities increased nicely. This change also helped us to stabilize and improve new equipment pricing in 2018 and 2019. In the next 5 years, the playing field changed back to Tier 1 and 2 cities, especially for Tier 1 cities where lots of top developers' headquarters are. The success with those top developers will help us to increase shares in all tier cities through frame agreements. There is a clear trend that top 100 national developers are consolidating the real estate market. Their shares in sales are moving towards 50% now. Their demand in elevator will be doubled in 10 years from 2016. Otis are well positioned in this top developer segment, especially with top 30 developers. We have been working with most of them, and in any given time, we have frame agreements with around 60% and of them since 2015. Our coverage for rest of 70 can be improved, but even though our volume from top 100 developers doubled in the last 4 years. We have made investments and changes to support top developer business, including develop and enhance channel partnership to better connect with top developers; tailor-make product for top developers in order to respond to their specific needs with big volume and achieve cost of competitiveness at the same time; collaboration model, one interface with their headquarters and local reach to their branches; good installation and service quality, which will be measured in the very sophisticated management system. Our goal is to keep 20% CAGR in the next 5 years by focusing on shares of the wallet and acquisition of new top developers. In 2024, our volume from top developers will be 5x of 2015. Next page. At the same time, the infrastructure investment is expected to continue along with the megacity cluster planning for China urbanization in the next phase. We believe urban transportation mileage in railway and metro will continue to grow at 17% CAGR. You may not be aware that China is even a bigger escalator market than elevator. 70% of annual escalator volume is in China. Otis China always did well in infrastructure segment. Our share in this segment is one of the highest. We have 2 reputable brands with good track record in metro and railway segment. They can join the bid together in most of the case, which increase our chance of winning. Our new platform escalator product, good reputation in project execution and service made us stronger in this segment. With increasing knowledge and experience with infrastructure customers, we expect it to continue our success in this segment. All the successes in different segments are going to be supported by new products and innovative solutions. In the last 5 years, we rationalized the China product offerings. The rationalization projects covered all existing products and converted 15 product platforms into 5, which are named as new platform products. The new platform products are more modular based, reflecting latest customer requirements and quality enhancement, much more field friendly. You can imagine how much complexity removed from operations side for cost, quality and efficiency. By the end of 2019, 95% of the new bookings were new platform products already. We also invested in product customization capabilities to better support emerging customer needs. Enhanced modular-based new platform products, 3D modeling design plus newly enhanced contract engineering capability allows us to quickly generate account-based solutions with competitive cost. It gives confidence to customers, mainly top developers. Other innovative solutions are also welcomed by customers, including new equipment IoT solution, modular aesthetics, eco and other seamless security features. With the right sales network focused on the right segment with new products and innovative solutions, we are confident that we can gain shares in a flat market with sustainable profit. Next page. While we are optimistic in new equipment opportunities, the service opportunities are even more significant and exciting. With recent market development trends, we believe these opportunities are accelerating to materialize. China elevator installed base reached to 6 million units in 2019 and expect to reach to 9 million units in 2024, even with the assumption that new equipment market size will be flat in the next 5 years. In the total installed base, there will be 1.2 million units aged than 15 years in 2024, which is likely to be modernized or replaced. Great opportunity. China service market is still very fragmented with more than 13,000 individual service providers while major OEM share is very low. With expansion in infrastructure and the top developer segment, the conversion rate of the big OEMs is able to be improved dramatically. We can also be selective based on service pricing to achieve both portfolio and profit growth at the same time, which has been proven in recent years in Otis China. New equipment share growth will also be helpful. China code is developing to condition-based maintenance, which will reward investments we made in service digitalization and IoT in the last few years. With increasing service portfolio, there is nice recurring sales with improving profit ahead of us. Next page. To be more specific, there are 2 drivers allowing Otis to grow service portfolio and profit. The first one is improving conversion rate through customer mix and other traditional actions. New equipment volume expansion in infrastructure and top developer segment will largely help the conversion rate for service. This trend drives consolidation of property management industry who are our service customers. Large property management companies require elevator maintenance companies with national coverage, standardized quality and management system. All these will be favorable to large OEMs like us as you can see that we have around 80% conversion rate in infrastructures and top developer portfolio while others' conversion rate is around 30%. These customers care about the service quality and would like to pay for the service. There will be a significant shipment mix change in next 5 years. The volume from infrastructure and the top developers would reach to 50% in 2024, along with our growth strategy in new equipment. Combined with high conversion rate in these segments, new equipment volume increase and other traditional conversion efforts, the service portfolio mix will be changed as well. The pricing of the portfolio will be improved with higher conversion rate at a bigger base. Next page. The second driver is leveraging IoT and service digitalization for customer stickiness and service productivity. Chinese regulators are experimenting condition-based maintenance with IoT and intend to change the code to promote this new service model. Otis as an industry leader is actively participating in such experiments and launched end-to-end IoT solution named Otis ONE. Robin has talked about the capability of Otis ONE. I won't repeat it. What I only want to emphasize is that the core of Otis ONE is data analytical capability, which has unlimited potential for customer value and service quality and productivity. It was interesting that with IoT, we even can quickly capture the safety law violation of our service mechanics in their operation. China code is likely to allow service companies to reduce the number of visits if they can prove effectiveness of IoT. Some cities already started. It will be -- dramatically reduce the maintenance visits and hours, improve callbacks rates and first-time fixed rates. All this value will help on conversion and cancellation reduction. It will help Otis' service profit growth while provide more value to customers. We are exciting to believe it is the path to change the China service market and practice. The goal is to connect more than 30% of Otis' service portfolio with IoT in 2022 and more than 50% in 2024. Overall, we are more confident to accelerate the portfolio growth's pace and improve the quality of the portfolio. We expect the service revenue and profit growth significantly in the next 5 years. Next page. To conclude, we are exciting about the opportunities we see in the next 5 years in China for both new equipment and service. We believe we have a good position and the reputation in this market. Our team and experience, our customer centricity culture allows us to accelerate our performance. We are comfortable with the strategies and initiatives we laid out for the next 5 years, supported by the transformation and investment in the last few years. We are confident to continue growth momentum and deliver sustainable financials in coming 5 years. This is the end of my presentation. Thank you.

All right. Thank you, Perry. Good morning, everyone. So I'll talk about 3 things today. I'll talk about our 2020 and medium-term outlook, actions that we're taking to drive Otis' margins and tax and capital deployment strategy. But before I do that, let's take a longer-term view of Otis' performance as a segment of UTC. Historically, Otis has shown tremendous revenue resilience and has grown its revenue through several economic cycles, partially due to the strong recurring revenue base. However, as you all recognize, the last decade has been challenging for Otis' margins. Now the premium that Otis was commanding over its peers was unsustainable and led to a share loss. But in addition, the downturn in Europe post the financial crisis, the China market since 2015 and the investment in Otis that UTC made that did not bear results until 2019 also contributed to the earnings downtrend. But one other thing that was there was that as a division of UTC, there was less pressure on Otis to turn around its margin and earnings performance than there would have been had Otis been a stand-alone company. Now the good news is that we have turned the corner. As you heard from both Mark and Perry, the European and the Chinese markets are stable, the investments that we have made are delivering results and we are focused on every single key performance criteria. And we grew earnings in 2019 for the first time since 2014. 2019 was a good year for us. Organic growth was over 5%, our best organic growth performance in the last 5 years and better than the guidance that UTC had provided of low to mid-single-digit growth. We have now reported 12 straight quarters of organic growth. Both new equipment and service grew last year and service margins expanded driving 5% operating profit growth. Now the other good news was that the growth was broad-based. All 4 major regions drove both sales and profit growth last year. And the momentum continues to build as we went through the year. And the earnings growth, which we had raised at the top end of the range in October, we beat that guidance on both constant and actual FX. And we plan to build on this momentum in 2020 and report both top and bottom line growth. We will drive another solid year of earnings growth, and earnings growth at constant FX will be similar to the range that we delivered last year and that actual FX will be twice what we did in 2019 driven by both the operating actions that we are taking and by reduced FX headwind. We'll grow margins by at least 20 basis points, our first margin expansion in over 8 years. Cash will continue to be strong and between 110% to 120% of net income. We are focused on managing our capital expenditures prudently and driving working capital improvement to drive robust free cash flow. Now in terms of deployment of this cash flow, as our parent has indicated, 2020 and 2021 will be focused on debt repayment, and we will repay about $250 million of debt in 2020. We'll pay a solid dividend of about 40% of our net income, which is comparable to our broader industrial peers. We also have a placeholder of about $50 million of bolt-on M&A transactions. This is in the typical range of what we do in any given year. So let's talk about margin expansion. 2020 should be the year when we finally turned around our margin trajectory and start driving margin expansion again. And we believe that we can continue to drive margin expansion by 20 to 30 basis points every year over the medium term. There are 3 key elements that we are working on to drive this margin expansion: one, continue to drive our field productivity; second, reduce our factory material cost; and third, rationalize and leverage our SG&A spend. So let me spend a minute on each. As you can see from the pie on the left, installation and field cost makes up about 2/3 of our total cost of sales, and driving efficiency in this area is absolutely critical. Now as the speakers before me, Robin and Mark and Perry, all touched upon it, the investments that we have made in this area to not only reduce the number of visits that we make but also the time that we spent per visit is working. We have reduced the number of visits by 3% since 2017. And the amount of time per visit is down 2% since 2017 and 4% since 2016 driving 6 straight quarters of service contribution growth. There's additional opportunity to make continued progress in this area through the investments that we are making and the IoT benefits that will ensue to us once we fully deploy that capability. In addition to addressing the field cost that we have tackled over the last couple of years, another big opportunity for us is to reduce our factory material costs. Material makes up about 70% of our total manufacturing cost base, and it is very fragmented. Only 1/3 of our spend is with global suppliers. And given our scale, there's a significant opportunity to drive cost reduction in this area, not only through consolidation of the number of suppliers but also driving incremental and better collaboration between engineering and manufacturing by introducing e-auctions and other analytical tools in our negotiations with our suppliers. So we are targeting a 3% material cost reduction every year through the medium term. Some of this reduction may be used to offset the price pressures that we may feel in the market depending on the conditions, and the rest will flow through to the bottom line. SG&A. So Otis has invested in SG&A over the last few years to create capabilities and implement systems that were needed. We are reaching steady state of investments. And our goal over the medium term is to reduce our SG&A cost by 100 to 150 basis points as a percentage of revenue through several actions that we are taking: implementing a common ERP and CRM tool, centralizing several back-office functions into a shared services center in Bangalore and reducing the number of layers in the -- that we have in the organization by decreasing the number of P&Ls. Now in addition to addressing the existing cost base, there will be an opportunity to address the incremental cost as well as we get on to become a public company. To stand up Otis as an independent company, the initial focus to create the systems and the processes that are needed has been on speed rather than efficiency, and there will be an opportunity to streamline these applications. And we've already identified several things that we can work on post-spin to reduce these costs. For example, taking our IT infrastructure and migrating that to a software-defined architecture, where we pay by the drink rather than paying for a fixed bandwidth; migrating several proprietary applications that we are inheriting and putting them on the cloud; taking a lot of the processes that we are getting, simplifying them and taking cost out, this will be a priority day 1. And reduction of SG&A will be a key margin growth driver over the medium term. Cash flow. So free cash in 2020 will be between $1 billion to $1.1 billion, lower than $1.3 billion that we delivered in 2019, driven by -- as earnings growth and reduction in working capital gets offset by the incremental public company cost, interest expense on the $6.1 billion of debt that we are carrying and onetime cost to exit the TSA and lastly, to stand up the IoT capability. But Otis is not a capital-intensive business. Our CapEx typically runs between 1.3% to -- between 1.1% to 1.3% of revenue. Now there will be a step-up this year in 2020 to exit this transition service agreements that we will sign with the UTC to create the systems that we needed so we can get out of these TSAs and second, to invest in IoT. But as we go into the medium term, starting 2021, it should start trending back down into the 1.2% to 1.3% range. Similarly, our working capital hovers between 2.5% to 2.6% of revenue. But there is huge variability in performance across several businesses. There are certain businesses in our portfolio that have negative working capital, and there are others that have 100-plus days of working capital. And that is what we need to work on. But this is what gives us confidence that we'll continue to drive robust cash -- free cash flow over the medium term. And we'll deploy that cash flow to meet the needs of various stakeholders. Now we will spin with about $6.1 billion of debt, $1.3 billion of cash and 2.3x debt-to-EBITDA ratio at spin. But most of the $1.3 billion of cash that we will get will be offshore. So to maintain an investment-grade rating, our discussion with the credit rating agencies has been that we will repay about $500 million of debt between 2020 and 2021. And there will be no debt repayment beyond that. During this period, we'll continue to pay a strong robust dividend at about 40% of net income. And again, as I said earlier, we believe that is comparable to our industrial peer group. The excess cash will be used to do bolt-on M&A transactions, and these transactions are typically accretive by year 2 and buy back shares, and both these actions should drive EPS growth. The other thing that will drive EPS growth is the tax rate. So we'll start with about a 33% tax rate. That is higher than the 21% that we have in the U.S., driven by a few things: profits that we generate in jurisdictions that have a higher tax rate than U.S. Cash deployment needs in the U.S. 80% of free cash that we generate is outside U.S., but most of our capital deployment needs are in U.S.: interest payments, debt repayments, dividends. And the cost to repatriate that cash adds about 2 to 3 points to our tax rate. And the rest is due to state tax payments and provisions of the U.S. tax code that makes some of our foreign tax payments undeductible. Now we fully recognize that a 33% tax rate does not reflect the optimal tax rate for a stand-alone Otis. And we have already initiated several actions to reduce this tax rate: optimizing our value chain; deciding what activities need to take place in which part of the world from a business perspective and as we do that, reducing our tax rate; offshoring the debt, placing the debt where our cash is generated, not only reducing the need for repatriation of cash but also to reduce our interest costs; and taking full benefit of the tax deductions that are available in jurisdictions outside the U.S. That is not something we do today. Some of these actions will be more near term than others, and we will provide additional details on this downward glide path of this tax rate during our quarterly updates in 2020 as we understand the benefit and the timing of some of the actions that we are taking. But reduction in tax rate will be a driver of EPS growth over the medium term. So let me wrap by spending a couple of minutes on both our 2020 outlook and medium-term outlook. So we're guiding to 2020 earnings growth of between $60 million to $90 million, driven primarily by the improvement in our service business, higher volume, better pricing and mix and continued benefits from productivity. Our new equipment business will grow, and we will drive material productivity this year. But that will get offset by the pricing pressure that we saw in North America in 2019 that led to a lower starting backlog margin and the investments that we are making in R&D to bring the next generation of products to market. At actual FX, we think it will be about $40 million to $70 million because we're penciling in about $20 million of FX headwind, and you can see the euro and the renminbi assumptions that we have made to get to the $40 million to $70 million of growth at AFX. We've assumed in this outlook that our factories in China will be back online in March, and the impact from coronavirus is fully mitigated during the year with negative Q1 performance being offset in the remaining 3 quarters of the year. As we get into the medium term, we believe we can drive revenue, low to mid-single digits, grow operating profit at mid-single digits or higher, with 20 to 30 basis points of margin expansion. Operating profit growth, combined with a lower tax rate and reduced share count should drive high single-digit EPS growth. We'll continue to drive robust free cash flow between 110% to 120% of net income, and we will deploy that for the benefit of our shareholders. Now with that, let me ask Judy to come in and make some closing remarks, and then we'll open it up for Q&A.

Thanks, Rahul. Confidence. Confidence in the $75 billion market, confidence in a portfolio, in a segment, a service segment, that's going to continue to grow. Confidence in our investments and the productivity runway we're going to continue to see. Confidence that this management team is aligned with shareholders in terms of our capital investment strategy and our capital allocation strategy. We are looking forward to early April because we believe we have the iconic brand known throughout the globe with the largest portfolio, with proven performance, with investments in both new equipment and service that will pay off for many years to come. We've stopped looking back. We are looking forward. We're looking forward to leading this company into the future and aligning ourselves with you, driving EPS growth, earnings growth, top line growth and margin enhancement, all while we're serving customers and the traveling public every day. We do this with the strength of our organization, our 69,000 colleagues that we turn to. We do this with a recurring sales and a recurring revenue model that's predictable. And we do this with conviction that we will move the world. Thank you.

Okay. So we have about 15 minutes for questions. I would just ask that you please state your name and the firm you are with, and we'll get started. Jeff?

It's Jeff Sprague from Vertical Research. One for Judy and one for Rahul, if I could. First, just on the aftermarket opportunity. Everything you said makes sense. But I'd like to understand a little bit more like what actually has to happen in the field, right? You have 1.5 million Otis units that are not in your service bank, right, that theoretically belong to you. So how do you propagate the technology in the field to make -- to drive that transition in the business? And how long does that take to play out? And then Rahul, based on what you know now about the deleveraging glide path and other things that you can do, can you hazard a rough framework of where you think the tax rate would head over kind of a 3- to 5-year time frame?

Well, let me take the first one. Thanks, Jeff. So there are actually 2 million Otis units that are not on our portfolio at the moment because, of our 2 million, about 1.5 million are ours and 0.5 million are the other OEMs that we maintain. We know those units better than anyone. We understand how they work. The challenge is literally challenging our sales force, our service sales force, we have 2,700 dedicated Otis employed service sales force, to go after those with the right pricing and simultaneously for us to have availability in Otis ONE sensors, to be able to deploy those immediately. The Otis ONE sensors come in 2 types of sensor packages: One, which is fast to install and has a lower cost point, is driven by data. The second, which has a higher cost point but is attractive to many of our high-rise customers, has much more functionality: voice, multimedia, data, et cetera. It's that data sensor that we believe we can offer competitively and install in under 15 minutes. We need to get those out there. And we need to prioritize how to go after that portfolio that's not on our portfolio but that was Otis-manufactured. So for us, it's a prioritization. We are going to deploy 100,000 of those data sensors in 2020 across the globe. And how we prioritize those is what management needs to determine, and we'll share updates with you as the quarters go on.

So Jeff, I thought the 2 -- you touched on capital deployment and tax. So on capital deployment, I think the strategy is absolutely clear. I think there's no ambiguity in our minds on what we need to do on capital deployment. We have to repay $500 million of debt in the next -- this year and next. Dividends, we've kind of spoken about 40% of net income, which we believe is the right ratio because we do have very steady, predictable free cash flow. So we want to make sure that we share that with our shareholders. And the rest is between M&A, which is kind of bolt-on M&A that we typically do, and buybacks. That part, in our mind, is absolutely clear. Now the tax piece, again, as I said, there's a high degree of confidence that we'll work this tax rate down. I listed some of the actions that we're taking. Lots of management team is working this right now. And again, I can expend a lot of time on what actually -- on the near-term opportunities that we see. Tax -- taking full benefit of the tax reductions around the world. I mean, just the fact that as we are digging under the covers, we are finding that we don't do that today, right? And again, part of that is just having greater focus. Otis' tax rate was not optimized under UTC. So we -- as we are working it, we see clear opportunity. In terms of the timing and the number, I'm hesitant to give that just today. We just started this project a couple of months ago. So I don't want to overcommit or undercommit. I think we will definitely provide more clarity by the time we get to March or by the time we get to May when we give our EPS outlook, and then more in September and then more in -- by the time we get to this year. So I think by the time we wrap up 2020, I think we will be able to put a longer-term target. I'm just hesitant to throw out a number that we don't fully understand and don't want to over or underpromise.

Julian?

Julian Mitchell of Barclays. Maybe 2 questions. The first one just around -- we heard a lot about the OE share gain efforts in China. Maybe help us understand in other emerging markets how you feel where Otis is positioned in terms of share and whether you think you have a big enough local footprint to maximize share. That would be sort of the first question. And then the second one would be around pricing. Your plan for 20 to 30 basis points of margin expansion, what do you assume for pricing in OE and aftermarket within that?

Well, let me take the first one, then we'll both probably share in the pricing. So in emerging markets, it's very important, and Otis has an incredible tradition of getting in emerging markets early. When you look at, as Perry mentioned, first JV in China in 1984, as we look back when we came to India and all the emerging markets, I believe we are investing from both the sales coverage and by putting branches in emerging markets so that we can gain our fair share. We're talking Southeast Asia, which has significant growth. Brazil had a strong comeback for us last year, and we gained share there. We actually gained share in all of Latin America last year. Every country we serve, with the exception of Mexico, which had a down market, I think, for everyone. So I think share was flat. So as we look at emerging markets and the rank in order on new equipment, India, second largest market, we believe we've got share plans there. You've seen some of the results with Robin. Southeast Asia, high growth; Latin America, high growth. We have branches in Africa, but we've not seen the segment growth in Africa that you would expect to see based on population growth. We remain invested in Africa, we remain having legal entities in Africa, but we do cover some of Africa through agents and distributors as we continue to monitor that situation.

So I just want to add one thing to Judy, and then I will get back to the second question on pricing, Julian. And maybe I will ask Stephane to jump in here as well because a lot of the emerging markets are in Asia. The other thing -- Southeast Asia, obviously, is huge. The other part, which is not well appreciated, is Japan and Korea in terms of the modernization markets. I mean there is a huge amount of aging infrastructure in both Japan and Korea. So if you look at Korea, for example, there are 140,000 units that -- Otis units that are more than 20 years old, and we only modernized 30,000 of those units. So there's a huge modernization opportunity in Korea, and same -- almost the same thing in Japan. I mean, it's like what we are -- I think our modernization revenue is up 3x, and yet we're only 1/3 of the way there. I don't know, Stephane, if you want to say anything before we move on to Julian's second question.

Yes. So it's Stephane de Montlivault. I'm in charge of the Asia Pacific business. So I think Japan and Korea is a great example of the modernization opportunity. These markets where we've been long operating in, we've built a very strong new equipment business in the '80s up to the early to mid-'90s. And today, we are reaping the benefit of that with very significant portfolio that are driving very strong aftersales organic growth. And so Japan and Korea and combined, those have 1.9 million units installed. Otis has 300,000 of these units installed and 200,000 of which we maintain. These portfolios are aged, and their aging is accelerating. So we are really at the bottom of the curve, of the aging curve, and we have already started really taking full benefit of that. In the last 3 years, we fielded up to 35 mod solutions, modernization solutions, to address this portfolio need. But then just as Rahul was saying, we also have 100,000 units, of our units, which we don't maintain, largely maintained by ISPs, and for which we have sophisticated mod solutions that we utilize to generate this modernization revenue opportunity but also to capture back some of these units and bring them back into our portfolio.

Okay. And on your second question, Julian, on pricing for new equipment, what we've assumed in our medium-term outlook that we provided today is that almost all of that 3% material cost productivity is kind of given back. So we're not assuming a huge margin expansion in our new equipment outlook over the medium term. So to the extent that the pricing conditions are better and we don't need to pass that on, our EPS growth and our operating profit growth would be higher.

Yes. And just one other addition. I mean, as you may have heard Perry, he wasn't as specific, but he's had 7 straight quarters of price in China on the new equipment side to the tune of about 5%. And so that is 7 straight running, and we see that sticking for now.

Nigel?

Nigel Coe from Wolfe. So just want to kind of dig into the comments on the margin framework. So SG&A reduction is driving the 20, 30 basis points over the next 5 years. So anything we get from price productivity in the field? Some material productivity will be additive to that framework or are there some offsets that we need to consider?

So I think on the material costs, we did say that we've kind of assumed the fact that, that is offset right? That's the -- and to Judy's point, the fact is that we are not seeing the market pricing pressure today. Other than North America, I think our price and mix was favorable in all other major regions of world, especially in China, with 7 straight quarters of price mix favorability. So we're not seeing that. But in the medium-term outlook, we've assumed the fact that, okay, we will drive material cost productivity that is offset by the pricing pressure that we face. So that's the assumption. And you are right. The fact is we will drive SG&A by 100 -- between 100 to 150 basis points over the medium term, which is, call it, and then the service productivity will flow through as well. So yes, I think we've kind of -- we don't really -- have not overpromised, but if all these things that we're kind of putting in place continue delivering results, we should do better than what we've laid out here today.

And then on the tax rate. So obviously, matching the debt -- offshore and the debt, I imagine that with the cash flow is an important driver of those tax rates. What's the kind of the framework for getting -- to being a foreign issuer of debt? What needs to happen and what sort of time frame?

So we should be able to do some of that in 2020. At least start the process this year. We had to -- the reason we didn't do it at the outset was because the only place that is rated is the U.S. The oldest worldwide corporation, as Judy introduced, the business. The other companies are not rated right now. So we should be able to do that starting this year, and then we'll kind of do more next year.

Yes.

But they should -- the process should start this year.

I think we focused rationally to be able to pull this -- the dual spin and merge that United Technologies has gone through in one would -- of a record time. We really did focus on ensuring we would all be ready. And with that, we didn't have the opportunity to rate from a debt -- a rating agency perspective any of our other activities and legal entities because we've been going through so much legal entity separation work appropriately to be able to separate the 3 companies. So we've got it on our list. You are looking at the 2 people who looked across at the rating agencies and made these commitments. We intend to meet these commitments with our capital strategy, and we were -- tax is #1 on our list for EPS.

Steve?

Steve Tusa from JPMorgan. Last year, on that earnings bridge you guys gave for Otis, there was negative $50 million from investments. I don't know how that ultimately ended up. That was at the beginning of the year. You said your R&D is at a comfortable level, but you have a bit of a headwind dialed in for next year. What's the kind of the rough number on that investments part of the bridge for 2020?

So our investments are kind of steady state. There's a little bit of step-up in R&D. It's about 10 basis points, Stacy, between the -- I mean you saw that on Judy's shot. There's a little bit of we're going from like 1.5% to 1.6-ish percent of revenue. Stacy, you can correct me if I'm wrong here. But so that's -- so but we are reaching kind of steady state investment levels. And the fact is we're expecting big tailwind, Steve, but the fact is we feel that we should maintain this level.

And then back to Nigel's question, I think, on kind of the -- what is the kind of commodity cost? Is that a headwind or a tailwind? Or it seems like with your productivity, it actually could be a bit of a tailwind on its own, commodity costs?

So commodity is long -- difficult to predict, and I will -- Todd or Perry, he can jump in. For 2020, commodities are kind of flat. At this point, we have not assumed a tailwind or a headwind for 2020. Commodities are behaving themselves. But as we go into the medium term, we don't know that, but the 3% that we are targeting is growth. So if there is commodity headwind, that will eat into that, and if there's tailwind, it will contribute to that.

So you guys guided last year to, like, I think, $25 million to $75 million. You beat that. You were above that, I think, $90 million-plus. I think that's...

$97 million.

Right. So I'm just struggling with $60 million to $90 million this year. Like, what's worse year-over-year in this bridge? Because it's not investments. It's not necessarily commodities. Is there something that we're missing that's actually more of a headwind? And I know there's a little bit of corporate cost that's going up a little bit. But like, it doesn't seem like there is much that's going really against you relative to 2019?

The new equipment growth, Steven, is lower. I mean, last year, our new equipment growth was up 4%. This year, we guided -- with China getting flat, we're guiding to about 1% growth on new equipment, or it's kind of low single digits. So that's the difference between going -- so that's what -- that's working against us. So new equipment is not going to contribute as much as it did last year. So...

So it's the volume side which is -- that created whatever-million bucks.

It's the volume side that's kind of working against us.

Yes, okay. Great.

But I think this -- again, last year, we started with $25 million to $75 million. We did better. This year, we're starting with $60 million to $90 million, so we'll see where that goes.

And is that SG&A target back-end loaded? Or are you pretty consistently going to be able to work that down?

We'll keep guiding to that as we go through, but it should be -- we should keep working it every year. I don't know if Judy is going to...

No, I agree. I mean we've talked this as we set this out and as we briefed our new Otis Board that we are talking 20 to 30 basis points of margin expansion every year reliably and SG&A going the opposite every year reliably to get to that 100 to 150 basis points. [ Nathan ] is there so...

It's Sheila Kahyaoglu from Jefferies. Judy or Rahul. Rahul, you mentioned the margin expansion in your comments, and you talked about field productivity, SG&A rationalization and commodity costs. Those are some things we have known about Otis for a long time, and they have been standard. But what do you think are undiscovered opportunities as a stand-alone organization that we didn't know within UTX as a parent company...

On material costs, Sheila?

No, on...

All 3 of the opportunities you mentioned.

I'll let Judy comment and Todd here. I honestly feel like -- it just keeps coming back, and I talking with some people at the break, I just think it's a question of focus. I mean I really do believe that as we are spinning to become our own independent public company, there is greater focus, and there's a greater need to drive performance. So you're right. The opportunities have always been there except the fact that it hasn't been as much of a need, I would say, to deliver. Now there are certain things that we have worked on. One thing we did talk about today is like taking our manufacturing to lower cost because the fact is that 25% to 30% of our manufacturing is in high-cost areas, and that's very deliberate. But -- so that's not a huge opportunity for us. So that is something we'd work on. So I think everybody has worked on these things over the years. But I think there is lots more to go.

Yes. I think it's of this balance between what we do globally and what we do regionally that gives us opportunity. First, we have looked at every process we inherited from UTC and said, what do we need as an agile stand-alone company to implement for ourselves? And let's not decrement from where we started with it, an absolute world-class company as UTC. Let's start from we're a start-up. What's the minimal we need to drive our business processes globally? So I think you're going to see that as well. And then as we look around the globe, just our -- what does our branch of the future look like? So we talk about 1,400 branches. What excites our team is they were all created, I'll just say it, in an analog world decades ago, right? This is where we set up the territories. And while there's always an opportunity in real estate management, these are not large offices in the most elite locations. You will find us in industrial parks where you would expect us to be. But the challenge is, what is the role of all those personnel when we move to a more digital world? If we don't need to bring our field professionals in to train them because we have the ability to do that with our apps and with Yammer and with all the modern technology available; if we want our sales reps, again, 2,700 service, direct sales reps and about 1,500 new equipment sales reps, we want them to be with customers. We don't want people gathering. And if we are truly driving a shared service in a back office hub in Bangalore, a tremendous amount of the work that's happening in countries won't need to be done in countries in terms of payments, in terms of collections, et cetera. So we actually think there is tremendous opportunity. We'll share more with you as we go. But we are going to, as we reinvent Otis, really reinvent how we can be more customer focused, drive more shareholder value and engage and empower our employees by doing all of that.

Did we answer your questions, Sheila? I'm not sure we addressed you. Carter has been trying to go, Stacy.

Okay, Carter, go ahead.

Carter Copeland, Melius Research. Just to expand on that a little bit, Judy. You emphasized this point of pace. And several of these initiatives are not new, we've heard of them before, but they take a considerable amount of time to really impact the business. And I wondered if you thought that there's an opportunity to transform that. If so, how should we think about that? Is it truly going to be different than what we've seen over the last several years?

Well, I think over the last several years, you've seen some pace. I mean, for us to deploy to 25,000 mechanics who never had e-mail previously, who never had access to technology at their fingertips at the job site, that's a huge difference. Now we're not finished there for our service mechanics. But to be able to do that country by country, language by language at the same time we're driving a new supply chain and doing everything else, I think you've started to see that. We're still not -- I'm not satisfied that we're at the pace we need. The challenge -- one of the challenges, we think it's a great opportunity to have the scale and reach, but you also have to, obviously, win change management and win the hearts and minds of all of our personnel throughout the organization. So I think we can -- you'll see, again, with 100,000 units going out in addition to the 400,000 we already have connected, that doesn't count the customers who actually want to compensate us for the multimedia Otis ONE solution that will become a subscription service. I mean we are ready to turn the page and to really drive the pace. Now we're not going to risk life safety, let me be really clear. We understand the business we're in. And when there's a decision that drives performance of our equipment, absolutely, I have to -- I don't care how many decimal points, every decision is going to be taken with the right speed. But so much of what we do doesn't take that same approach and doesn't require that same level of real discipline and rigor. So we're going to try. We're going to do value propositions, we're going to try pricing where we can and see what the market will take. We've come up with these modernization solutions because the mod market moves at a different pace. So I think you're going to see a lot more when we are focused. And I can tell you we're focused.

Just a little bit, so one soundbite out there, which to me was just fascinating. So I was just like looking at this tune app that Robin shared earlier. So our use of tune app went from 16,000 users in 2018 to 266,000 users in 2019. So you can think of the -- talk about pace. And Judy spoke about the deployment. So as you're deploying that, I mean, if you think -- if this app saves 10 minutes every time a technician uses it, you can just multiply that by hours and the dollar. So there is pace. I mean the fact that's it's up -- the same thing with the parts app or the upgrade app, right? The upgrade app, I mean, it's -- the revenue is up 2x. I mean it's 100,000 -- $100 million a year now that is coming through this upgrade app.

Justin Bergner from G. Research. Two questions on the service economic model. Thinking about your retention rate of 93% on 2 million units, you are sort of losing 140,000 units per year; 16% share on 1 million units, you're gaining 160,000, so that's plus 20,000. That suggests, at the current rate, your installed base is growing 1% per year. To get to that 5% service revenue growth, maybe you could help me dissect the drivers between lower -- or I guess, better retention, increased conversion and higher service dollars per unit which are sort of the most important in that stack.

Yes, I'd like to tell the team we actually start the year out neutral. With your math, you gave us 20,000 extra. But I like to tell the team, when you look at what we lose versus what we gain, so we convert, and then obviously, we have people take off of our portfolio, they take some units. Some buildings get demolished. I mean there's some of that but not significant amounts of that. So we have to step up our portfolio gain, and we recognize that as a business. The single largest place we can do that are the 6 million units in China. And so Perry has a focused strategy on making sure we add profitable units to those portfolios. Some of the sales force additions that Robin spoke about, they will be in China. They will be very focused. As well as our relationship, you saw the 50% with the key developers, we see that changing as everything does in China, fairly rapidly. Let me -- Perry, are you on the line?