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Otis CEO: connected elevators are the future

Otis Worldwide Corporation CEO Judy Marks joins Yahoo Finance Live to discuss the building boom, trends driving elevator sales and upgrades, materials inflation, and labor agreements.

Video Transcript

BRIAN SOZZI: Big investor day is wrapping up for elevator giant, Otis, where it outlined its long-term growth plans. Joining us now in a Yahoo Finance exclusive is Otis CEO, Judy Marks. Judy, nice to see you. Busy day for you. Thanks for taking the time here. How wrong is it for one to assume that Otis is just a return to office play?

JUDY MARKS: Yeah, Brian, thanks. It's great to see you. And it was an exciting morning for us where we got to share with investors the progress we've made in two years since our last investor day and since we've spun. I think what people don't understand is with urbanization, buildings of all types need elevators. And almost 60% of our 2.1 million unit leading service portfolio is residential. So multifamily apartments, condos, and while office is very important globally, it's certainly not one of our largest markets.

BRIAN SOZZI: The pandemic, of course, Judy, is still raging on, something you and I talked about when you reported earnings a couple of weeks ago. How is that impacting your pipeline of development here in the United States?

JUDY MARKS: Actually, in North America, the pipeline is strong. We're seeing kind of the Omicron impact more in Eastern Europe and now heading towards Asia, actually, the reverse of what we saw in early 2020 in terms of COVID spread. So job sites are open.

We're seeing all the economic indicators, and more importantly, the building indicators, the Dodge Momentum Index, the Architects Building Index, and frankly, the bids themselves growing here. You can barely go to any city, small, medium, or large, and not see a crane these days. So we're excited about America's growth. Had a really strong fourth quarter in orders both in new equipment and modernization, where people are going to really modernize the elevators, and whether it's aesthetics or machines, bring them up after about 20 years of service.

BRIAN SOZZI: Well, let's stay on the elevators. I do want to get a feel for what's happening overseas, but I took an elevator in my building this morning. It's not too fancy. It had some buttons that got me down the floor. That was great. It worked fine. What does the elevator of the future look like to you?

JUDY MARKS: This is-- we're really at an inflection point in this industry that that we had the innovation and the privilege of starting almost 107 years ago. You know, as the industry leader, innovation is what we're all about. And the future of elevators is all about being connected, connected from electronics, connected from data, connecting the passenger to information, and letting us be more predictable and more quick in terms of repairing elevators, but more importantly, being able to make them even safer and more predictable for building owners and residents alike.

So being connected is all about having information at your fingertips, actually being able to call the elevator with your iPhone or your Samsung phone. So when you leave your apartment or condo in the morning, it's really the first and last stop everyone makes in their day-- most of their days if you don't live in a single family home, whether you're in a hospital, a school, or an office building. So being connected is going to give us more information. It's going to reduce entrapments.

And we introduced two new elevators last year, our Gen 3 and our Gen 360, that have automatic data sensors in them that communicate with us regularly, with customers regularly. And we'll add in the future-- actually, this year-- multimedia to it. So it's a full range of offerings that, most importantly, Brian, besides the passenger experience, give us critical data to service. And as you know, service is the name of our business. Last year, 55% of our revenue, 80% of our profits. And it's that resilient and recurring service model that make this such an attractive industry and make Otis such an attractive investment.

BRIAN SOZZI: I mentioned there was a slide in the investor day deck today, Judy, noting that 33% of your units are, in fact, connected. Over time, where do you see that number going? And how does it impact your service business?

JUDY MARKS: So over the medium term, we see that 33 going to about 60% of our 2.1 million units, although those units are growing. There was another slide that said we'll be at 2.5 million units by 2026, which is great growth. Our service portfolio growth has been fantastic. '19, we grew 1%. '20, we grew 2%. Last year, 3%.

So being connected is going to make a difference because it gives us that stickiness with customers. They're getting added value. They have the ability to see the heartbeat of the customer-- of the elevator, to know the elevator's operational. And most importantly, we know that there's an issue with the elevator before the customer even knows or calls our Otis Line Help Desk. So we get better retention, which, again, just compounds our service portfolio, which is the name of our business.

BRIAN SOZZI: How big a profit hit, Judy, this year is inflation to Otis?

JUDY MARKS: So we witness inflation, Brian, two ways. One in the new equipment business, we issue-- experience it mainly through commodities, where only 30% of our new equipment business is labor. We're going to see still some commodity headwinds to the first half of the year. We've targeted that at about $90 million. In our service business, it's just the opposite with 70% labor because we have 34,000 field service mechanics throughout the globe in 200 countries and territories.

But for us, we also have the benefit of a significant amount of collective bargaining, not just here in the US, but in Europe with works councils and in the mature countries in Asia. So we have predictable wages. We're getting ready. We actually have some early agreements with the National Elevator Bargaining Association that we're part of has reached a tentative agreement with the International Union of Elevator Contractors here in North America.

We'll wait for that to get ratified. I won't share more data, but that'll give us five years of predictability. And that's what we look for in wages across the globe for our 70,000 colleagues-- being fair and having predictability, so we can manage everything else through productivity, through pricing, and obviously return to our shareholders.

BRIAN SOZZI: There's been a real slowdown in economic activity in China. Hearing that from a lot of companies. Do you anticipate-- is there another shoe to drop here? And how is that impacting your business?

JUDY MARKS: So we-- China's the largest elevator market in the globe. And of the about a million units in the market segment last year, over 650,000 in '21 were in China. We are basically predicting this year, or planning, I should say, that the China book and build business for us, that segment will be down about 5% to 10%, which gets you back to 2020 levels.

So it's still a tremendous market. We're growing our service business in China. We grew it-- our portfolio grew high teens last year. This is really-- there's going to be 7 million installed units in China out of 20 million in the globe. China's an important market, but it's going to be just as important as a service market. And we're experiencing high growth there and good returns. It's a great [INAUDIBLE] to our margin.

BRIAN SOZZI: I'll have to give you my address, Judy. I need one of those elevators with a big screen in it. You know, I'm just saying. I'm just saying. But always good to get some time with you. Otis CEO, Judy Marks, we'll talk to you soon.