Rahul Ghai
Executive Vice President and Chief Financial Officer at Otis Worldwide
Thank you, Judy, and good morning, everyone. Starting with fourth quarter results on slide 6. Net sales were up 2.2% to $3.6 billion. Organic sales grew for the fifth consecutive quarter and were up 2.8% with growth in both segments. Adjusted operating profit was up $11 million and up $21 million at constant currency, as higher volume, productivity in both segments, and favorable service pricing was partially offset by commodity inflation and the absence of temporary cost actions taken in the prior year to alleviate the impact of COVID-19. Fourth quarter adjusted EPS was up 9.1% or $0.06, driven by $0.02 of operating profit growth and $0.02 cents from a lower adjusted tax rate. Benefit from share repurchases done earlier in the year and reduced interest expense from the repayment of debt contributed the balance. Adjusted EPS was $0.06 ahead of the prior outlook, including the favorability from better-than-expected operating profit growth and tax rate that ended at the low end of prior expectations.
Moving to slide 7. New equipment orders were up 7.3% at constant currency. Orders momentum remained strong in Asia, up mid-single digits, including the seventh consecutive quarter of growth in China. Orders were up high teens in the Americas and awards, which precede order booking, were up mid-single digit in North America, signaling continued recovery in the booking trends heading into '22. EMEA was flat versus the prior year as mid-single digit growth in Europe was offset by decline in the Middle East from a tough compare on major orders. Proposal volumes in the quarter also continue to show signs of robust demand globally, up double digits, driven by strength in China. Total company backlog increased 1% and 3% at constant currency with growth in all regions, including approximately 5% growth in Asia. Booked margin in the quarter was down slightly more than 0.5 point from a decline in the Americas, partially due to customer mix, but the year-over-year trends in the region showed substantial improvement from Q3. This was partially offset by almost 1 point of improvement in booked margins in Asia with EMEA being about flat. Overall, our pricing on new orders was slightly better than our prior expectations. The backlog margin trend adjusted for mix was about flat sequentially and down about 1 point versus the prior year.
Full year new equipment orders were up 13.2%, with growth in all regions with Americas up 14%, EMEA up 4%, and Asia up 17% with high-teens growth in China. In the fourth quarter, new equipment organic sales were up 1.2% from growth in Asia up approximately 12%, including mid-teens growth in China. Growth in Asia was partially offset by decline in the Americas and EMEA driven by tough compares from strong recovery from COVID-19 in the fourth quarter of the prior year. Adjusted operating profit was down $7 million. Commodity inflation of $35 million that was in line with our prior expectations was largely mitigated by installation productivity and favorable performance on projects.
Service segment results on slide 8. Maintenance portfolio was up 3% from broad-based improvements in retention, recapture, and conversion rates. Conversion rate in 2021 was up 3 points globally and up 5 points in China to 45%. This improvement in conversion contributed to high-teens portfolio growth in China for the second consecutive quarter. In addition, our retention rate in 2021 continued to improve and is now above 94%. Modernization orders returned to growth in the quarter and were up 18.3% at constant currency with growth in EMEA and the Americas. Overall, modernization backlog was up 6% at constant currency. Service organic sales grew for the fourth consecutive quarter up 4% with growth in all lines of business. Maintenance and repair grew 4.3% with continued robust recovery in repair and low-single-digit growth in the contractual maintenance sales. Modernization sales were up 2.2%, slightly below our expectations due to continued supply chain challenges. Service-adjusted operating profit was up $20 million with 50 basis points of margin expansion, the eighth consecutive quarter of margin improvement. Profit growth was driven by higher volume, favorable pricing and mix, partially offset by higher cost from the absence of COVID-19 cost containment actions taken in the prior year. Service portfolio pricing was up more than 1%, mainly due to price increases in Americas and EMEA.
Moving to slide 9. Overall for the full year, we carried the momentum from 2020 into 2021 and gained 115 basis points of new equipment share gain, accelerated the rate of maintenance portfolio growth. Organic sales were up almost 9% with new equipment and service up 15.5% and 4.1%, respectively. This sales growth, our focus on execution, and FX tailwind resulted in $272 million of adjusted operating profit growth. New equipment operating profit was up $105 million versus the prior year at constant currency, driven by higher volume and installation productivity that was more than doubled what we achieved in 2020. This, combined with our ongoing focus on material productivity, more than offset the unfavorable price/mix and headwinds from commodity price increases of approximately $90 million. Margins in the second expanded 100 basis points, more than offsetting the decline in 2020 and are now above 2019 levels. Service adjusted operating profit was up $104 million versus the prior year at constant currency, driven by higher volume, productivity initiatives, and favorable pricing that more than offset return of costs in the business to support higher activity. Service margins expanded 30 basis points, building on the expansion in 2020 and are now 140 basis points above 2019 levels.
Corporate segment costs were about flat for the year, despite the step up in public company expenses from disciplined cost management. Adjusted EPS was up 19% for the year from operating profit increase and a reduction in the tax rate that was down 190 basis points for the year. Adjusted EPS was up about 35% from 2019 for a two-year CAGR of 16%, substantially ahead of our prior medium-term growth expectation. We generated close to $1.6 billion in free cash flow, from earnings growth and a rigorous focus on working capital. Working capital is now down more than 50% from 2019 levels. As we look forward to 2022 on slide 10, we expect service industry growth rates to be consistent with 2021 across all regions, and new equipment end markets to show solid growth outside of China. This, combined with higher starting new equipment backlog, strength of the maintenance portfolio, and our relentless focus on operational excellence gives us the confidence to improve across all key metrics in 2022 with organic sales up 2.5% to 4.5% and overall margin expansion of approximately 30 basis points. We expect sales, operating profit, and margins to improve in both segments at the midpoint. Adjusted EPS is expected to be in a range of $3.20 to $3.30, up 8% or $0.24 at the midpoint. We expect free cash flow of approximately $1.6 billion, between 115% and 120% of GAAP net income. This free cash flow outlook reflects the strong earnings growth expectation, partially offset by an approximately $55 million dollar headwind from a one-time tax related payment that was previously expected in 2021 and $20 million in incremental capital expenditures to support digital connectivity initiatives. Our capital deployment plans remain on track, and we have already repaid $400 million dollars of debt in January with the remaining deleveraging expected to be completed in the first half. Once our target leverage metrics are met, we plan to recommence share repurchases.
Taking a closer look at our organic sales outlook on slide 11. The new equipment business is projected to be up 0.5% to 3%, supported by the backlog that was up 3% at constant currency in 2021. Americas organic sales growth is expected to be up low-single digits, EMEA up mid-single digits. Asia is expected to be up or down slightly, with mid-to-high single digits growth in Asia pacific. China is expected to be flat-to-down low-single digits as growth from higher starting backlog is offset by decline in the book and ship business. Service segment growth is broad based and is expected to be up in all regions, with maintenance and repair up 4% to 6%, benefiting from a 3% higher starting portfolio, favorable service pricing environment, and a continued recovery in repair. Modernization is expected to be up 4% to 6% from 6% higher starting backlog and easing of 2021 supply chain challenges. Overall, organic sales are expected to be up 2.5% to 4.5%, building on the approximately 9% organic growth in 2021.
Switching to EPS bridge on slide 12. We expect EPS growth of 6% to 10% with operating profit growth of $95 million to $165 million at constant currency, contributing $0.16 to $0.27 to the EPS growth. Operating profit will benefit from increased volume in both segments, service pricing tailwinds, and continued savings from material, installation, and service productivity initiatives. This will be partially offset by commodity headwinds of approximately $90 million foreign exchange translation is expected to be a $0.07 EPS headwind, mainly from the strengthening of the euro and the yen against the U.S. dollar. Non-controlling interest expense from increased profit in China and other JVs will reduce EPS by $0.02 to $0.04. FX translation impact and increase in non-controlling interest expenses are mostly offset by accretion from the Zardoya transaction. We now have more visibility into the approval process and are increasingly optimistic in the timing of the delisting and expect the transaction to be about $0.10 accretive in 2022. Lastly, we expect to reduce our adjusted tax rate by an additional 50 basis points to 100 basis points this year, adding $0.02 to $0.03 to the EPS. This outlook represents fourth consecutive year of strong earnings growth as we continue to build on strong execution, mitigate the macro challenges, leverage the investments that we have made, and benefit from a continued end market recovery.
And with that, I'll request Catherine to please open the line for questions.
And with that, I'll request Catherine to please open the line for questions.
