Q1 2020 Earnings Call

Good morning, and welcome to odis's first quarter 2020 earnings conference call. This call is being carried live on the internet and recorded for replay presentation materials are available for download from our website at ww.w. Now. Turn the call over to Stacy vice president of investor relations.

Go on listening across all of our stakeholders is safe and well, we're glad that you could join us today. Ah notices first earnings call post-spin another important milestone for us in this new job as an independent company before I discuss our first quarter results and notices Outlook. Let me share some insights into our people our business our management through this crisis and more importantly our commitment to our long-term strategy and values employee health and safety. The core value is first and Paramount to us. I am proud of our 69,000 Catholics who are supporting our customers and the writing public during these unprecedented times.

And providing the proper PPE and guidelines for safe and hygienic working conditions for our colleagues in the field and our manufacturing operations.

Elevator cab air purifiers to several hospitals and lastly we pledged to match employee contributions to covid-19 relief funds and our colleagues continue to volunteer local communities in many ways as the world reopens. We will continue to innovate and Lead our industry. We're leveraging technology to allow smartphones to interact with elevators for remote floor selection and providing disinfectants and fans to assist in a cleaner environment of services for elevators and escalators. We're working closely with many customers who have requested elevator adaptations as their buildings reopen and people return to work locations, and we will do all of this while investing for the long-term.

Early in q1, we made critical decisions to ensure business continuity and this helped us navigate the covid-19 impacts first in China and any countries throughout the World Cup today. All fourteen of our principal factories are open our supply chain team has done an excellent job locally and globally in minimizing disruptions to our factories in a field sites while meeting customer demands our decision to Airship critical Parts early during this outbreak has enabled us to protect the supply chain and we're confident that Otis factories around the world are ready to manufacture at full capacity as soon as job site demand resumes and businesses start to return to normal.

Thank you, Angela. Good morning to everyone. Welcome to odis's first quarter 2020 earnings call on the call with me today are Judy marks president and chief executive officer and Raul guy executive chef Financial Officer. Please note except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and other significant items. The company will also refer to adjusted results where I made as a notice was a stand-alone company in the current period and prior-year a Reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners at the present.

And what are you doing maintenance and repair was deemed in a central service in most countries and cities and we continue to service the largest global.

Now, let me turn to our first quarter results on slide for as you've seen from our earnings release yesterday. The first quarter was a solid start for Otis in spite of the initial covid-19 outbreak in Chicago and the subsequent Global spread on April 3rd. We successfully separated from United Technologies returning to Our Roots as an independent company while exemplifying various elements. This is culture our Innovation empowerment and collaboration over 200. It systems were replicated more than 600 procurement and I T contracts re-sign wage and almost 500 processes cut over we created several new departments, including tax treasury investor relations and executed nearly 50 facility moves in eighteen countries. I'd be remiss if I didn't once again thank our team for this historic undertaking rising to the occasion and setting us off on the right foot as an independent notice.

During this time, we've extended support to our vendors where necessary providing advances to limit Supply disruptions. Let's discuss the new equipment segment by region China a substantial recovery within the quarter at this point china factories are returned to full capacity and access to China new equipment job site says returning at varying paced by City to pre covid-19 bulb in asia-pacific were installing new equipment in several areas including Japan Korea and Hong Kong while the currently hardest-hit areas are India and certain countries in Southeast Asia off where access to job sites is limited and there are labor shortages due to government imposed measures North America and emea continue to experience job site closures in certain areas of cities that are preventing the installation of new equipment and we are monitoring the situation closely as job sites reopen.

In terms of liquidity, we had approximately one point four billion dollars of cash at the time of separation and have an undrawn 1 and 1/2 billion dollar revolver which serves as a backstop to our commercial paper program during the first quarter. We placed over six billion dollars of debt at favorable rates that led to a $30 million dollar reduction in interest expense from our initial expectations. We announced a dividend yesterday of $0.20 per share and plan to return two hundred and sixty million dollars to shareholders through dividends in the balance of the year.

Moving to Service as I mentioned earlier elevator maintenance and repair was deemed essential in most areas allowing notices service professionals to provide critical maintenance for our customers month maintenance and repair made up 80% of notices Services sales in 2019 and our maintenance business remains resilient while we are experiencing some pressure on our repair business where buildings are shoved down our field professionals continue to support round-the-clock service and hospitals across the Gloom in North America and emea. We have seen a greater need to support a few limited customers within the harvested verticals with delayed payment terms and concessions during building closures. We will continue to strengthen our long-term customer relationships.

Q1 results continued the strong operational momentum that you saw during 2019 new new equipment orders increased 5.6% at constant currency, excluding China with double-digit growth in the Americas and mid single-digit growth in emea. Organic sales declined slightly, excluding China or top-line growth was significantly impacted by the covid-19 a break adjusted operating profit increased $17 and we achieved margin expansion in both the new equipment and service segments with 120 basis points of margin expansion overhaul free cash flow conversion with 73% including the impact of spin related tax prepayments.

Modernization the other 20% of our service business is expected to see impacts from covid-19 as discretionary projects are put on hold especially in North America and Europe. However, often driven and technologically required modernizations are driving activity in asia-pacific and other regions.

Across our business we have responded with Cost Containment actions to address the evolving situation and Associated sales declines. Our China team was focused on immediate actions, which did not realize the first quarter Financial impact Cost Containment actions already underway include a global hiring freeze reduction and travel and other discretionary costs and salary deferrals reduce executive pay and furloughs in certain locations. These are difficult, but necessary actions and our team continues to assess and adjust to address the evolving situation.

I'm pleased with these.

Strong first-quarter results despite the impact from covid-19. However, we are not immune from the broader economic impact as this pandemic spreads across the globe with this in mind. We are updating our 2020 Outlook.

We now expect organic sales to be down 3 to 7 % reflecting recovery beginning an early Q3 at the high end and Adelaide second-half recovery is the lowest adjusted operating profit is expected to decline 25 to 175 million dollars at constant currency reflecting volume declines partially offset by Cost Containment actions. I previously described app. We expect adjusted net income to be in the range of $840 to $940 this net income Outlook reflects the reduction in interest expense and a $1 adjustment tax rate improvement from our expectations in February. And lastly. We expect free cash flow conversion to remain strong between 110 and 120% of net off with that I'll turn it over to her hold or walk through our results and Outlook and more details. Thank you Judy. Good morning. Everyone starting with q1 results on flight five.

this crisis has also shown us that are absolutes safety ethics and Quality Drive are

Net sales for 3 billion dollars down 4.4% with slightly less than half of the decline coming from organic sales and the rest from the impact of Foreign Exchange and net divestitures in 1590 strong organic sales growth of 3.3% in the service segment was more than offset by a 9.8% decline in new equipment due in part to covid-19. It just the operating profit was up approximately 4% or $17 and up 27 million dollars at constant currency.

Operating profit growth that constant currency was driven by approximately 45 million dollars of operational improvement from higher service volume strong material and service productivity lower sg&a and transactional foreign-exchange favorability.

This was partially offset, but they backed up covid-19 that reduced operating profit by an estimated 17 million dollars due to lower volume and under absorption of costs.

Adjusted operating profit margin expanded 120 basis points to 15.2% with margin expansion in both new equipment and service segments are a b as a perfect. Angel sales was flat versus prior year and adjusted sg&a expense improved by about thirty million dollars in the quarter.

Adjusted EPS was down $0.02 as a $0.04 improvement from operating process and lowered net interest cost was more than offset a sixth sense of headwind from college. You can unfavorable year-over-year computer in the quarter and higher non-controlling interest costs.

Moving to slide six new equipment orders crew 5.6% at constant currency, excluding China and reflect overall rotors new equipment orders. Go double digits of the Americas mid single-digits in Europe and the Middle East and declined low teens in Asia including China.

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Order growth was delivered in a global market that was down mid-single digits, excluding China and down mid-teens globally the China Market declined and estimated 20% in q1 new coupon share continue to grow and was up an estimated twenty five basis points in the quarter.

While the overall bookings were down in Asia, we continue to see progress in the infrastructure segment and received several key orders including for the Chongqing and non-metro project in China as we discussed on investigate. This is one of the key Target segments and our infrastructure bookings grew High Teens in a segment that was down low double digits.

We also saw pricing stability in most parts of the world with 80 basis points of booked margin expansion booked margin expanded in and China and was offset slightly by the pressure off Aja outside of China America. Spoke margins was flat back up was up 3% at constant currency in the quarter with growth in America than offset by a single digit decline in China organic sales are down 9.8% double-digit declines in Asia, including China primarily from the impact of covid-19.

Field in America declined 9% reflecting a tough compare and the impact of lower-order intake in q1 of 2019.

sales in Europe were up low single-digits, but this was more than offset by week results in Middle East due to Market softness overall new equipment sales in emea were down three.

New equipment adjusted operating profit margin expanded 80 basis points a strong material productivity and a small benefit from lower commodity prices was more than offset the impact of volume decline material productivity in the quarter, exceeded our long-term Target of 3% reflecting the benefit of the actions that we are taking.

service segment results on slide seven remain strong in the first quarter modernization orders grew 2.5% with High Teens growth in Asia outside of China and Europe primarily offset by a high single-digit decline in the Americas are maintenance portfolio grew by 1% organic sales increased 3.3% with modern Asian sales up 6.8% and maintenance and repair seals up 2.5%

adjusted operating profit margin expanded twenty basis points and profit group at fourteen million dollars at constant currency as strong productivity favorability in price and makes and lower expense was partially offset by higher labor costs so this contribution extended for the 7th straight quarter with growth in all major regions

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We close out the first quarter our operational agenda remains on track and we are pleased with the progress and key initiatives.

Driving sure gain a new equipment.

Making continuous progress and service contributions material cost productivity and containing estimate cost. However as the economic activity slows globally from the spread of covid-19. We are seeing the impact on our business activity in the second quarter, which is highlighted on slide 8 with a new equipment orders and Factory shipments both down in April outside of China wage is relatively strong start in the first couple of months of the year. We are also seeing reduction service sales in April due to the challenges created by closure of buildings impacting our modernization repair business.

Why China activity is recovering. It is clear for the business in China will not be immune to the global Slowdown.

And as we look at the balance of the year, we need to adjust our revenue and earnings growth expectations that we had communicated in February while taking incremental costs actions to offset the impact to earning money from sales shortfall.

Let me start with sales on flight night. We now expect overall organic sales to be down three to 7% for the year with a five to 10% decline in new equipment. And if those missiles they did decline in service the low end or a 10% decline in new equipment reflects continuation of the first half Trends into second half while the high end or a 5% decline wage like the recovery in the second half of 2020 to 2019 levels.

We do expect continued stability in a contractual maintenance business. However, the range of service sales Outlook reflects varying degrees of delay and push out discretionary repair and modernization project to continue in the back half of the Year, depending on the overall macroeconomic environment and the occupancy level of buildings.

Adjusted operating profit as expected to be down between 25 million and 175 million dollars at constant currency and between $85 and 235 million dollars that actual correct add the midpoint. This reflects nearly three hundred million dollars of Cost Containment actions that you really wanted to earlier. Most of these actions are already announced and our wedding stages of implementation.

At the midpoint of a sales Outlook, we would expect operating margins to be relatively flat.

Adjusted net income is expected to be the range of $840 to $940 driven by A reduced operating profits partially offset by lower tax rate and not controlling interest costs.

We introducing our tax rate guidance for 2022 approximately 32% from 23% at investor day and are working on additional projects to continue to reduce the rate over time.

Cash flow would remain strong between 110 and 120% of net income as production and profit and higher restructuring costs will be partially offset by reduced Capital expenditures.

Taking a further look at our organic growth assumptions on flight ten in the new equipment segment. America is is expected to be down mid-single digits to 10% reflecting the shop line. We are seeing in Q2 with job site closures.

The high end or a 5% decline contemplates work resuming in Q3 and growth in the back half of the year in the significant delays and limited access to job site in South Shore of the UK parts of Russia and the Middle East. I mean you meant business is continued. It is expected to be down high single-digits to 10% off with the high end of the range of reflecting job sites reopening in Pre covered levels in Q3 in North Europe and a gradual recovery in South Europe and the Middle East in China new cooking business is recovering in Q2 and investors Asia activity in Japan and South Korea has held up relatively well.

But we continue to face challenges in India and Southeast Asia from government-imposed locked on measures we expect the Asia new equipment business to be down mid-to-high single-digit depending on the pace of recovery in India and Southeast Asia and the extent of impact the Japanese and South Korean economies from the pandemic.

In the service segments are contractual maintenance business has been resilient and we anticipate this business to continue to be stable. However that have been delays and discretion a repair and modernization products as these projects push into twenty Twenty-One. And we now expect modernization sales to be down mid-to-high single-digits and maintenance and repair to be down low single-digits for the year.

Silver all the high end of the three to 7% organic sales decline reflects an early Q3 recovery globally and the low-end assumes first have conditions to continue into the second half of the year.

Switching to profit outlook on slide eleven as constant currency adjusted operating profit is expected to be down between 25 million and $175 a year over year perfecting the impact of reduce volume from the covid-19 pandemic incremental under absorption of costs higher bad debt expense due to deteriorating credit Outlook and an impact too. Especially at the higher end of the sales decline.

This will be partially offset by the cost actions we have taken and will take in the balance of the year.

Foreign exchange is now expected to be a headman of sixty million dollars for the year versus the twenty million that we were expecting in February due to the strength of the US dollar moving a 2020 Capital deployment on flight 12 Aspen our net debt-to-ebitda was about two point four x with one point four billion in cash during 2020. We expect to generate between 925 million to 1.025 billion of cash and plan to pay down two hundred and fifty million dollars of debt and returned 260 million to shareholders age difference between you two and two four at about 40% of adjusted net income.

approximately 2

Will be spent between non-controlling interests and m&a we believe these Capital deployment plans are prudent during these uncertain times as they allow us to increase the cash on the balance sheet cake the end of the year and a consistent with what we announced in February reflecting a confidence in a cash flow generation capacity of this business with that. I'll turn it over to Judy for some closing remarks. Thanks for holding great start to the year. And while the pace of recovery is not known yet q1 results illustrate that we are on track to support our investment thesis and long-term strategy. We're confident that Otis will endure and succeed despite today's current challenges and I want to close by reminding you of the strong fundamentals behind this fantastic business office.

This is truly an iconic brand in this large industry where we have been the leader over the medium-term. We expect sustainable growth and Global share gain and new equipment to continue to expand on our way into million units service portfolio the heart of our recurring business model where we've continued to focus on margin expansion through productivity and in these difficult times, we're going to continue to invest for group maintaining a sustainable level of R&D and capital expenditures to ensure that when we all returned to our normal lives. We are still at the Forefront of Technology package arriving digital Innovations providing new solutions for our customers and empowering or field professionals with tools to make them more effective. You have our commitment that we use our robust cash generation in excess of 100% of net income to create shareholder value and you saw that with our dividend announcement yesterday.

With that, I'd like Angela to open up the line for questions. Ladies and gentlemen. If you have a question at this time, please press the star and the number one key on your touch-tone telephone if your question has been answered. Are you wish to remove yourself from the queue, please press the pound key.

Our first question is from the line of Jeff spray with credible research, please go ahead sir.

Thank you. Good morning. Everyone morning congrats on a great start out of the gate a couple from me. If I could please fax Judy oral. Could you come in a little bit more on what you're seeing on pricing and and the potential pressure on bad debts and it's the pricing comment essential new equipment issue or are you seeing that across the service business also?

All right, just so right pricing. Actually, we had a good start to the year. I mean as I mentioned in my prepared remarks the new equipment the book margin actually in a standard, you know, we saw that and it was pretty strong across the globe but small, you know slight pressure in Asia, but outside of that it was it was fairly good to really really good start to the year off in America where we saw some pricing last year. The pricing was tabled this year. You know, Europe is all good pricing and same thing even in China where the markets are down. You know, we were all booked margins actually went up over there. So good start the year on the new side and same thing on Service pricing as well under Service pricing has up really well in q1 and we gained over the price in q1 and we implemented our regularly scheduled pricing of his that we had planned having said that I mean the situation in Q2 is different and you're working with our customers in the hardest hit sectors in Hospitality in detail cetera that you read mentioned. Yep.

But not prepared comments these actors make up about less than 10% of our service installed base. And these are temporary concessions and therefore a very specific period of time and we do not expect a long-term impact from these also most of our customers do understand that

That we do have fixed costs like our oldest call center and we need to maintain an address service issues. And even when the buildings are only partially occupied so that is why the concessions requests have been wage be limited and we've addressed each one of them individually, but as we gave guidance, we obviously factored in that, you know, they these concession request might increase again, as I said, I've not seen a lot of these they have been a few and the address them at one at a time but you know guidance resume some impact at and especially at the higher end of the range and same thing on New Year's Eve assume that there is a little bit of pricing pressure in the back end of the year, especially on the new orders. Now most of that will not affect this year. But on the Service pricing the concessions that we are talking about. Well, we'll come through our age, you know our our results this year. So that's what you've kind of kind of idea to same thing on the back at the results were okay. If you want is not a lot of incremental p&l expense we did take you know, not a lot of incremental piano. Yep.

Thank you one but we have factored some in our Outlook at the back end of the year. Yes. Yes. This is the long-term relationships we have with these customers are that were there for them when times are challenging as well as her whole said the hospitality retail segment is is just under 10% for us. I don't really was pleased China price mix up for the 7th straight quarter off the new equipment again, although it was up book margin was up everywhere China again delivering, especially in a covid-19 or and then on our Service pricing our Revenue per unit was off as well for another fax order. So there's indications again strong performance in q1. And you know, we're going to continue to watch pricing q-24 great. It may be just a an updated second question just on on tax with a little bit more time under your belt. Do you have a kind of better idea of what the maybe the two or three-year trajectory of the tax rate might be dead.

You know, it's early days yet, right, you know overall they feel that you're making progress. I mean our last year tax rate was 34% He guided to 33% on investor day. Now, we had a 32% off and the the Improvement that you see in between investor day and now is coming from reduction in the taxes that we have to pay on repatriation of cash. If you recall at investor day, we had mentioned that we have like two or three points of tax Headland because we need to we need to pay tax when they repatriate cash into the us and that we've been able to work on certain projects to reduce that and we are either implementing actions, you know in the 20 21 to maybe take some for dollar-denominated debt and convert that into Euro denominated debt. So we taking incremental actions and beyond that. I'm working on several initiatives to structure a business letter and to reduce the tax that we pay on high tax jurisdictions will keep updating you as we learn more but we are in early stages, but I'm confident as wage.

We'll come down and what time?

Right, that's the luck. Thanks. Thank you, Jeff.

And your next question is from the line of Julian Mitchell with Barclays, please go ahead.

Hi, good morning. And I'd like to have the congrats on getting a tricky first quarter out of the way. Maybe you know one thing that might be helpful is what I'm talking about. The recovery slope is just a bit more color on the End Market split Judy if you'd be willing to provide that understood that hospitality and retain the sub temperature sense, but perhaps if you could flesh out maybe some of the other splits or if not at least give us some context as to how your split right differ from the fact that konei provided a couple of weeks ago just directionally sure Julian good morning. So, you know the residential Market which obviously is not single family homes residential Market is north of 50% for us in both of our segments and that tracks the industry overall. That's really where the strength has been coming from birth.

Usage has been coming from that. We've been seeing the demand as well on on repair is in the residential segment. Other than that, we really don't break these out below that but as long and we are talking to a lot of customers as they do rebound and more importantly reopen and come off pause as to how they want. Their buildings to be utilizing especially in the office and commercial space whether that's malls or or more importantly Office Buildings. So we've got lots of requests to help with with limited spacing we've often helps to request to help with additional products, but I think what it does is it reinforces, you know, our Compass product our destination dispatch product, which does allow touch-free utilization as well as improved utilization of elevators. So it's early days to see where when when the recovery happens and how the world reopens but we're insignificant dialogue with lots of our customer.

across all segments on that

Thank you for that. And then maybe just a follow-up question for Rahul on the the free cash flow. Maybe just help us understand. You know that free cash flow pressure in the first quarter and how quickly the free cash flow recovers. And also I guess I was a bit confused cuz if I look at the material, I think you have about nine seventy-five million of concrete S. No guide at the midpoint. I guess excluding NCI about eight $90 million of adjusted net income at the midpoint. So it's maybe about a hundred 10% conversion on adjusted net. But I think the the conversion you present is versus gaap Net Income. So just wanted to to check that and does that mean that Gap net income and adjusted net income monthly similar for the year even with that big Delta in q1.

Yeah, let me.

Yes, let's start with you one cashew Lyon. So, you know, we filled we had a good start to be here despite the covid-19 situation. So in our q1 cash, we put forward about seventy billion of tax payments from June for and that was primarily due to the spin. So that's that's that's in our q1 results. Again. Judy had it and prepare your box. Also, we did extend support to our vendors especially in China and you see that our tables are down about two hundred million dollars from December to March. So and part of this decline was to support getting a supply chain up and ready in China and this cash going back should get between Q2 and Q3, but despite the fact that we saw in China are working as the Catholics they came down by about thirty million dollars in the quarter and then we had about forty seven months separation costs. So overall they feel that they had a very strong performance operationally given the full-forward of tax payments the impact that we saw in China given the support of the month.

Tends to our vendors and then you know the separation costs. So working capital coming down. So overall you feel really good about how our business performed on cash given the overall environment own. Now what you will see in going back to your second question on how this kind of translates into, you know, the rest of the year now Q2 is going to be a little bit challenging in Europe and China Europe and the US China is going to recover but we will see some pressure in Q2 in Europe and the US and then to a cash, a little bit more skewed towards Q3 and Q4 than it typically is but you would expect that given birth of macroeconomic environment, but we feel good about our guidance. I think the we've done is taken good steps to offset and mitigate some of the impact that is coming through from the drop in net income from our previous guide to divorce. I mean, if you look at the guide to guide on our net income is probably down at the midpoint at about a hundred and fifty million dollars, and we've indicated that, you know lower capex. We've reduced certain phone number.

And some you know tax payments that you try to manage, you know, saw that coming through the case that but we try to put all that in and yet right 975 moved out of the cash have come at the midpoint. So it's it's the feel good about our backend recovery in cash flow. Now on the conversion question, you're right. It is about a hundred and 10% on a reported net income basis. But the guy that you took I did you include some of the cash outflow on the separation cost of the PSA payments that you have to make to UTC. So we factor that in and some of the fact that we've taken the destruction has actually gone up year-over-year as well. So if that reflects some of the impact on that so you just enforce of a one-time expenses we will have the number is between 1:10 to 1. Thursday. I believe excluded any non-cash one-timers like the asset right of that we had with you one is excluded that from the calculation. So it is purely on the you know, the Gap net worth.

adjusting

For any non-cash charges that we will have so that's the guy that that's the range of 110 to 120 and at the adjusted net income, which will speak to that 110% as a midpoint. That's perfect. Thank you for the reply.

And your next question is from the line of Steve to still with JP Morgan, please go ahead good morning just to clarify that 70 million dollar tax payment is kind of part of the is that part of the the separation and you're including that in the 975? No, it's not part of the separation Steve it is it got pushed forward into q1 because of certain spin related consequences of spin the people that way so that's what it was working on some things. It's complicated but you know, but the reality is worth going back to full year. It got full forward into q1 due to the spin. So that's right. I say so I guess like your cash tax rate is kind of consistent this year with what you would expect going forward is the point with any of the moves. You're going to make strategically on on your Gap tax rate. If for a full year it will have no impact to our cash taxes, right so that right, right so so it won't be a Tailwind. Next year is your point. Yep.

It won't be available. Okay, that that makes sense when when you talked about the pricing Dynamics. So you kind of bounced back and forth between services and a new equipment, How should we think about that that you know breakout? Is there a heavier waiting to one or the other? I mean you talked about kind of helping some customers out that seems like it would be more of a Services Dynamic. Maybe you could just like flash out if there is more of a waiting to one of the other.

Yeah, so in terms of the the the concessions we've made those are for services mainly in the hospitality industry mainly in the USC. Just so you understand. Our China team was able to really work through this very rapidly. And obviously these are the long-term Partnerships and we're being a responsive partner and supplier. But as we look at the book margin on the service side, it was up fairly significantly mainly in emea in China and then it was a more significantly than the new phone not charging was up. But the new equipment book margin, obviously, it drives are 16 and 1/2 billion dollar backlog fairly substantively over the ensuing 24 months. So long time we can get that that book margin up on orders being in China or anywhere else in the world. It's it's a nice, you know rolling tail win for us as we look into the next year sales.

Got it. And then one just class question on you know, the second quarter. If you look back to last year, you know pretty Punchy number for new equipment margins. Yeah, you know pretty significant. Am I think mix kind of tail winds maybe that was China, you know flowing through so the year-over-year comp their looks kind of tough. Maybe if you could just give us some kind of sequential colors on, you know to kind of calibrate everybody for what's coming here in the second quarter acknowledging that you know, things will kind of bounced back or bounced around in the second half or are we from a rep perspective can we be down, you know as much as kind of thirty to forty percent sequentially one Q to Q. Yeah. So we you know, we don't want to comment on specific numbers Thursday, but you're right. I'm the Q2 is probably going to be part of a squadron without a doubt and you see what's what's happened in April and seeing some recovery email that we have things begin to open up, but April was at home.

tough month for us and you saw that some of the data that people

Out there. So we do expect a fairly sharp decline in in organic Revenue. Either way. It's going to be more so on the new equipment side and then that's on the on the service and then the service is down maybe on modernization and repair but the new equipment side is going to be you know, impacted substantially in Q2. So that that is what we are expecting. So you right in terms of modeling, you know, we had a good start to the year to you too should kind of you know, maybe kind of offset some of that and then we see recovery, you know in in on the new side starting to happen in the back of the Year. Stephen King. Yeah. So so so so so new equipment margins will be down quarter-to-quarter or can you hold those flat?

New equipment margins could be down quarter-to-quarter be not going to give me guidance. But yet they got him and given what you see and all depends on, you know, the reason we are hesitating steal. That is it all depends on how the recovery is in June if we coming out of the gate if the job site begin to open up and we are able to get quickly to work and we will resume activity. It could be you know, it could be a little bit better. So that's where we Thursday because it just says the the near-term Outlook is kind of, you know, not very clear at this point. So that's where we kind of heading out a little bit. Yeah. It makes it worse case it which job sites are opening very carefully and we're monitoring it almost on a daily basis in the regions. But when you look at you know, a company a country that was in lockdown like Italy off the job sites are now almost 35% open in Spain or almost 90% open and so we're really seeing the construction part of the you know, which is the main page.

A new equipment obviously other than the manufacturing is the installation and construction piece. It's that it's that speed of recovery that we're trying to watch and calibrate monitor for two Q yep makes a lot of sense. Thanks a lot. Appreciate detail.

And your next question is from the line of Carter Copeland with Millis research, please go ahead. Hey. Thanks for the time and welcome to the independent World your first conference calls great great set of results. Thanks for calling just a couple of quick ones one roll. I wondered if you could give us a little bit more color on the wage cost out actions. And how much of that is is temporary things like perlo's versus anything that might be run, you know run rate as we look further into the future and then one for Judy just walk, you know wondering about the the impact of this whole thing and you know, the the change that it may bring on the competitive landscape on the service side just you know, given, you know, your scale benefits versus you know, I mean, I would assume you can bring you know much more to bear in terms of service performance and reliability. I just wondered if you might give us some thoughts on that. Thanks. Yeah morning, So, yep.

Obviously as you would expect that at the midpoint of three hundred million dollars of cost takeout actions that we have planned for. You know, it's it's a

Combination of both I mean it's a combination of structural actions. It's also a lot of short-term actions that you think in the jury you mentioned here including fir Lo Mera deferral. So it's a combination of the two we end if you would be our restructuring number the up that to seventy to eighty dollars we sent about you know fifty to sixty last year. So it's incrementally higher. We are looking at are structural cost a very very hard way looking at each location of work is happening pulling that out. So we are taking a lot of hard restructuring actions as you would expect us to so that's the that's a piece of the the cost takeout. But you took all of these actions may have more limited impact in twenty twenty and probably help us in 20 21 more than they help us in 20 20 in 20/20. A lot of its benefit that you will see come true is going on the short-term action that we are taking so that includes married deferral that includes, you know furloughs and you know, exactly pay reductions all the things that you would expect us to do and you're going to watch this thing very careful.

It depends on whether or not you know, how to translate into 20-21 depends on how the revenue comes back and our goal will be to ensure that we take enough structural cost out to mitigate the impact of any time had been that you get from these actions that we taking. Let me let me address your second question Carter on impact to service, you know, we've looked back and modeled the global financial crisis to understand what transpired there. And for those of you that covered Otis as part of back then you'll recall we had a 10 percentage-point not just 10 basis-point ten percentage Point higher Ross that our local nearest competitors, the two biggest differences that we're seeing coming with covid-19 right now in June 29th, 2020, are are the precipitous building closures which are having an impact not just on that construction side, but on our access for repairs, especially the birth

Scenario repairs we did not see this, you know during during the global financial crisis and the other key element is there's no oversupply right now of the skilled technicians and field professionals, which we did have back in the global financial crisis. So we have worked extremely hard to maintain. I mean a 40,000 service a field professional 33,000 service to make sure that working with our workers councils are unions that we have retained and are engaged with with our field Workforce cuz this is a labor business and there are the strength of our company to drive all of our service and globally we have the liquidity as well which some of the isps won't have. So we see that Dynamic changing we started or recapture campaign while our sales forces are mainly working from home to be able to grow our portfolio and to get some of our customers back who may have left us for isps over the years.

And then we have sustained our investment in our oldest one iote offering so that will continue to have both technological as well as transparent and predictive information off to be able to provide service in in a more productive way and a better way for our customers. So I actually see service coming out of this once we get through the discretionary delays. I don't think their demand issue. It's really a delay issue and and once we get through those we see service having the potential to accelerate.

Great.

Thank you for the caller.

And your next question is from the line of call Yvonne remore with Cowan, please go ahead terrific. Thank you for taking the question. So you mentioned, you know, sixty percent of your base resy and and Retail Hospitality. What's the other 40? How's it split between infrastructure hospitals and Commercial office and Ed. Are you seeing any weakness there specifically commercial office? Thank you. This is Judy. We don't we don't disclose that the segments that way the end markets that way I can tell you our infrastructure business is continuing. Obviously. It's a broad-based business great success in China as well as the rest of the world, but obviously linkage to what's happening in the aviation Market because not only do we support, you know metros and Rail and it's and stadiums. We also obviously support airports dead.

All that maintenance work is continuing in our service business, but there are several large bids that are still underway for airport modernization that we we think it's going to be demand delay as well. But again, we don't break those out specifically.

Great and then a second one concessions. I mean given that you're the strongest service population in the Americas where you know, there have been a request for concessions, you know in the hospitality section and Retail. Are you seeing that Trend getting worse in in what does that imply for service margins in the second quarter relative to the first the trends are not getting worse guy. We did as you would expect that we've been working with our customers to make connections where they're applicable where the industries are protein you reset. We do believe in long-standing relationships with customers. So we have to react and share some of the pain that they are they are suffering. That's that was the that was where we came out and we made certain concessions that are tied and limited to a certain price a certain time. So that's where we are. We worked now, it's dead.

Getting worse you'll see something back from that in Q2 and sound that makes it over into Q3 depending on when those concessions started, but it's for a very very limited period of time and it's going to be spread between Q2 and Q3 off.

Terrific. Thank you very much.

And your final question is from the line of Nigel cool with wolf research, please go ahead. Thanks. Good morning last question. So Nick is good one, huh. So look turn to the proper Bridge the you know, that that covid-19, you know buckets the the to 7 the 2:50 the 3 to 5:50. I mean, obviously that includes your price bad debts and absorption and of course volumes, but when you think about the the rule volumes, you know decremental margins, we should expect the new equipment wage and so Civics, how do we think about that? I mean, how does that break out between the two segments to the way I would think about this module and the question your question is always good, right? It doesn't matter whether it's last on the first one so long

you know the income so

Look at the disclosures that we have made our contribution margin on new equipment averages between you know, depending on the court about $17 18% right? So that's our overall contribution on new equipment and the service side effects, obviously higher and so the overall if you look across the entire business that averages out to about twenty-five twenty-six percent contribution margin wage, but then they there is some under absorption of cost when the revenue decline is as sharp and what we've seen this year, especially on the service side because the fact is I know in service we primarily use our own technicians to service the elevators and modernize those elevators. So that's where we use see some incremental pressure because under absorb the cost. So that's what it kind of model in that bucket. It's that contribution. Margin. Plus there's an incremental impact from under absorption of cost. Now, we are working to offset that and that you see some of that on the in the green. Yep.

You know we spoke about we have the you can actually whatever we could to reduce that under absorption through you know, whether it's through restructuring actions or super low. So we are taking actions to reduce the hundreds or thousands kind of, you know want them to left. The other one is in the middle of the page. So that's what that is. So is it overall you should think about you know, 25% of our contribution margin plus an additional impact from a number of great. That's that's good information. And then just a couple quick ones here. So the the outlook for for the service Outlets the the loading messages clients, you get some great original flavor there but you should expect that most of that. If not all of it lands in 2 Q or you assuming it that could be some declines in in three Q as well.

Yeah, I I think it depends Nigel on whether we're going to see the the high the high end or the low end. So, you know on the high end. We think the majority of it is in fact, too. But if it will continue for the repair it depending on how the our access to buildings are and then obviously on the on the low end we we do see it again that whole month second half of the Year being far more challenged and it rolling out throughout the whole year, right? And then just the quick one on Thursday China, you know the plums in China One Q. So just just wondering what drove that that higher in Q10, you know some process with some of those jobs you had in, you know in Spain and China was better. I mean you did better get over here in some of those businesses and that roll a higher, you know payment to our JV partners.

So China the income was actually higher year-over-year.

I gave you don't talk about China specifically but between China and Spain that makes up 75% of our overall income and that's what's driving. You know, that's what's driving our home incremental expense on MCI in q1, but a China business did very very well. Despite. The challenges on volume. Got it. Okay. Thanks guys, and congratulations on getting this off in the ship launched. Thanks.

Thank you. I am showing no further questions at this time. I will now turn the call back to Judy marks for closing remarks. Well, thanks again for joining the call this morning during these uncertain times. We remain focused on executing our strategy managing risks and driving value 402 shareholders. I want to thank our colleagues for their dedication as well as those on the front line fighting covid-19. Please stay safe and well, and we hope to hear from you all soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.

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