Q2 2020 Otis Worldwide Corp Earnings Call

July 28, 2020

Operator: Welcome to Otis Q2 2020 Earnings Conference Call. Today's call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis website at www.otis.com. I will now turn the call over to Stacy Laszewski, Vice President of FP&A and Investor Relations.

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Good morning in both two oldest <unk> second quarter 2020 earnings conference call.

Today's call is being carried live on the Internet and recorded for replay.

Presentation materials are available for download from Otis website at Www Dot oldest dot com I'll now turn the call Liberty Stacy lives as President Vice President of S., DNA and Investor Relations.

Judy Marks: Thank you, Chris, and good morning, everyone. Welcome to Otis' Q2 2020 Earnings Conference Call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Rahul Ghai, Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant non-recurring items. The company will also refer to adjusted results where adjustments were made as though Otis was a 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 that the presentation contains forward-looking statements which are subject to risks and uncertainties. Otis SEC filings, including our Form 10 and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

Stacy Laszewski: Thank

Thank you grants and good morning, everyone welcome to Odessa second quarter 2020 earnings conference call on the call with me today, our Judy Mark President and Chief Executive Officer, and Rahul Ghai Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and music.

Stacy Laszewski: you, Chris, and good morning, everyone. Welcome to Otis' Q2 2020 Earnings Conference Call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Rahul Ghai, Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant non-recurring items. The company will also refer to adjusted results where adjustments were made as though Otis was a 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 that the presentation contains forward-looking statements which are subject to risks and uncertainties. Otis SEC filings, including our Form 10 and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

Nonrecurring item. The company will also refer to adjusted results were adjustments were made as our own. It was a standalone company in the current period and prior year. A reconciliation of these measures can be found in the appendix has a webcast. We also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties Otis is SEC filings and.

Putting our form 10 and quarterly reports on form 10-Q provide details on important factors that could cause actual results to differ materially with that I'd like to turn the call over to duty. Thank you Stacy and good morning, everyone. We're glad that you could join US today and hope that everyone listening is safe and well I'm very pleased with our results in grateful for the dedication.

Judy Marks: With that, I'd like to turn the call over to Judy. Thank you, Stacy, and good morning, everyone. We're glad that you could join us today and hope that everyone listening is safe and well. I'm very pleased with our results and grateful for the dedication of our colleagues who provided essential services and supported our customers in efforts to safely reopen job sites and buildings during these unprecedented times. To briefly update you on the status of operations in this environment, today all Otis factories are operating and approximately 90% of new equipment job sites are open, up from a low point of about 65% in the quarter. Otis field professionals provided essential services and our maintenance business remained resilient. However, the shutdown of buildings put understandable pressure on our repair and modernization business.

With that, I'd like to turn the call over to Judy.

Judy Marks: Thank you, Stacy, and good morning, everyone. We're glad that you could join us today and hope that everyone listening is safe and well. I'm very pleased with our results and grateful for the dedication of our colleagues who provided essential services and supported our customers in efforts to safely reopen job sites and buildings during these unprecedented times. To briefly update you on the status of operations in this environment, today all Otis factories are operating and approximately 90% of new equipment job sites are open, up from a low point of about 65% in the quarter. Otis field professionals provided essential services and our maintenance business remained resilient. However, the shutdown of buildings put understandable pressure on our repair and modernization business.

One of our colleagues, who provided essential services and supported our customers in efforts to safely reopened job sites in buildings. During his unprecedented times to briefly update you on the status of operations in this environment today, all Otis factories are operating and approximately 90% of new equipment job sites are open.

From a low point of about 65% in the quarter Otis field professionals provided essential services and our maintenance business remained resilient. However, the shutdown of buildings put understandable pressure on our repair and modernization business by June we saw encouraging signs of improvement in many regions.

Judy Marks: By June, we saw encouraging signs of improvement in many regions in the new equipment business. We experienced substantial recovery in China during the second quarter, while North America, EMEA, and Asia Pacific continued to experience job site closures in certain areas. Our management team has done an excellent job to proactively contain costs and mitigate the impact from COVID-19. That was reflected in our results reported this morning, especially encouraging in our service business in terms of liquidity. We ended Q2 with $1.9 billion of cash on hand and have a $1.5 billion undrawn revolving credit facility, a strong position for us to run the business. This environment has not slowed our progress in executing on our strategies. We continue to introduce new and innovative products with our touchless elevator technologies, traffic flow solutions, purification products, or remote monitoring and predictive maintenance services.

By June, we saw encouraging signs of improvement in many regions in the new equipment business. We experienced substantial recovery in China during the second quarter, while North America, EMEA, and Asia Pacific continued to experience job site closures in certain areas. Our management team has done an excellent job to proactively contain costs and mitigate the impact from COVID-19. That was reflected in our results reported this morning, especially encouraging in our service business in terms of liquidity. We ended Q2 with $1.9 billion of cash on hand and have a $1.5 billion undrawn revolving credit facility, a strong position for us to run the business. This environment has not slowed our progress in executing on our strategies. We continue to introduce new and innovative products with our touchless elevator technologies, traffic flow solutions, purification products, or remote monitoring and predictive maintenance services.

In the new equipment business, we experienced substantial recovery in China during the second quarter, while North America, EMEA and Asia Pacific continued to experience job site closures in certain areas.

Our management team has done an excellent job to proactively contain costs and mitigate the impact from coded 19 that was reflected in our results reported this morning, especially encouraging and our service business.

In terms of liquidity, we ended Q2 with $1.9 billion of cash on hand, and have a $1.5 billion undrawn revolving credit facility, a strong position for us to run the business.

This environment has not slowed our progress in executing on our strategies, we continue to introduce new and innovative products with our touchless elevator technologies traffic flow solutions purification products or remote monitoring and predictive maintenance services, we are partnering and bringing solutions to our customers to promote and support.

Judy Marks: We are partnering and bringing solutions to our customers to promote and support the health and safety of their tenants and passengers. We continue to expand our product offerings, launching the Gen2 Prime in India, a low-rise entry-level elevator. This product brings a combination of safety, performance, themed aesthetics, and price competitiveness to our India low-rise market with applicability to other developing markets. We continue to build momentum on the deployment of IoT, and we recently launched a new release that added several new features for our customers and to drive productivity in our organization. This new release also improves the scalability of our solution. We have a clear roadmap to continue to enhance the capability of our IoT solution over the next several months despite the challenges introduced by the pandemic.

We are partnering and bringing solutions to our customers to promote and support the health and safety of their tenants and passengers. We continue to expand our product offerings, launching the Gen2 Prime in India, a low-rise entry-level elevator. This product brings a combination of safety, performance, themed aesthetics, and price competitiveness to our India low-rise market with applicability to other developing markets. We continue to build momentum on the deployment of IoT, and we recently launched a new release that added several new features for our customers and to drive productivity in our organization. This new release also improves the scalability of our solution. We have a clear roadmap to continue to enhance the capability of our IoT solution over the next several months despite the challenges introduced by the pandemic.

The health and safety of their tenants and passengers we continued to expand our product offerings launching the gen. Two prime in India, a low rise entry level elevator. This product brings combination of safety performance themed aesthetics and price competitiveness to our India low rise market with applicability to us.

They're developing markets, we continue to build momentum on the deployment of Aiotv and we recently launched a new release that added several new features for our customers and to drive productivity in our organization. This new release also improves the scalability of our solution. We had a clear roadmap to continue to enhance the capability of our eyes.

T solution over the next several months.

Despite the challenges introduced by the pandemic, we continue to deploy units in us Europe and China in the first half and expect to place the pace of Aiotv deploying to increase substantially in the second half.

Judy Marks: We continue to deploy units in US, Europe, and China in the first half and expect the pace of IoT deployment to increase substantially in the second half. And we've driven both service and material productivity through our continued IoT technology, our suite of mobility tools via iPhone, apps for our field professionals, and our global supply chain activities this quarter. These are just a handful of examples that led to 90 basis points of new equipment share gain during the first half. This progress shows the strength of our strategy. As leaders here at Otis, we're proud of our company's long commitment to diversity and inclusion. Yet we also know there's more to be done if we are to become the company we want to be an equal opportunity employer of choice for people of all cultures, genders, races, and generations.

We continue to deploy units in US, Europe, and China in the first half and expect the pace of IoT deployment to increase substantially in the second half. And we've driven both service and material productivity through our continued IoT technology, our suite of mobility tools via iPhone, apps for our field professionals, and our global supply chain activities this quarter. These are just a handful of examples that led to 90 basis points of new equipment share gain during the first half. This progress shows the strength of our strategy. As leaders here at Otis, we're proud of our company's long commitment to diversity and inclusion. Yet we also know there's more to be done if we are to become the company we want to be an equal opportunity employer of choice for people of all cultures, genders, races, and generations.

And we've driven both service and material productivity through our continued Aiotv technology, our suite of mobility tools via iPhone apps for our field professionals and our global supply chain activities this quarter.

These are just a handful of examples that led to 90 basis points of new equipment share gains during the first half. This progress shows the strength of our strategy.

As leaders Herodotus, we're proud of our company's long commitment to diversity and inclusion yet we also know theres more to be done if we're to become the company we want to be an equal opportunity employer of choice for people have all cultures genders races and generations.

Judy Marks: To ensure we live up to these aspirations, our leadership team and I launched our Commitment to Change, which is a framework to help us identify and prioritize the actions we need to take. We continue to demonstrate our commitment as Otis joined the Paradigm for Parity Coalition and committed to closing our global leadership gender gap by 2030. People are at the heart of everything we do at Otis, and I'm proud of these important steps. Otis will lead our industry for inclusion and diversity. Turning to Slide 4, Q2 results and 2020 outlook. New equipment orders were down 6.8% at constant currency with double-digit declines in the Americas and EMEA partially offset by growth in Asia as China recovers from COVID-19. China orders were up high single digits including several infrastructure awards on a rolling 12-month total. Otis orders were flat.

To ensure we live up to these aspirations, our leadership team and I launched our Commitment to Change, which is a framework to help us identify and prioritize the actions we need to take. We continue to demonstrate our commitment as Otis joined the Paradigm for Parity Coalition and committed to closing our global leadership gender gap by 2030. People are at the heart of everything we do at Otis, and I'm proud of these important steps. Otis will lead our industry for inclusion and diversity. Turning to Slide 4, Q2 results and 2020 outlook. New equipment orders were down 6.8% at constant currency with double-digit declines in the Americas and EMEA partially offset by growth in Asia as China recovers from COVID-19. China orders were up high single digits including several infrastructure awards on a rolling 12-month total. Otis orders were flat.

To ensure we live up to these aspirations our leadership team and I launched our commitment to change, which is a framework to help us identify and prioritize the actions we need to take.

We continued to demonstrate our commitment is Otis joined the paradigm for parity coalition and committed to closing our global leadership gender gap by 2030.

People are at the heart of everything we do it Otis and I'm proud of these important steps Otis will lead our industry for inclusion and diversity.

Turning to slide for Q2 results in 2020 outlook.

New equipment orders were down 6.8% at constant currency with double digit declines in the Americas and EMEA, partially offset by growth in Asia as China recovers from Covidien 19.

China orders were up high single digits, including several infrastructure rewards on a rolling 12 months total Otis orders were flat.

Judy Marks: New equipment backlog was up 2% versus the prior year. In the second quarter, organic sales were down 6.5% driven by double-digit decline in the new equipment segment and low single-digit decline in the service segment. Adjusted operating profit was down $24 million at constant currency and margin expanded 30 basis points driven by continued expansion in the service segment and the swift cost containment actions we implemented. Free cash flow was robust at $628 million with 280% conversion of net income reflecting strong working capital performance in the quarter. These swift cost actions and our organization's commitment to serving customers allowed us to mitigate the bottom line impact from a year-over-year decline in sales and I'm pleased with the second quarter and first half performance despite the difficult environment we're operating in globally.

New equipment backlog was up 2% versus the prior year. In the second quarter, organic sales were down 6.5% driven by double-digit decline in the new equipment segment and low single-digit decline in the service segment. Adjusted operating profit was down $24 million at constant currency and margin expanded 30 basis points driven by continued expansion in the service segment and the swift cost containment actions we implemented. Free cash flow was robust at $628 million with 280% conversion of net income reflecting strong working capital performance in the quarter. These swift cost actions and our organization's commitment to serving customers allowed us to mitigate the bottom line impact from a year-over-year decline in sales and I'm pleased with the second quarter and first half performance despite the difficult environment we're operating in globally.

New equipment backlog was up 2% versus the prior year.

In the second quarter organic sales were down 6.5% driven by double digit decline in the new equipment segment and low single digit decline in the service segment.

Operating profit was down $24 million at constant currency and margin expanded 30 basis points driven by continued expansion in the service segment and the Swift cost containment actions we implemented.

Free cash flow was robust at $628 million with 280% conversion of net income, reflecting strong working capital performance in the quarter.

These swift cost actions and our organizations commitment to serving customers allowed us to mitigate the bottom line impact from a year over year decline in sales and I'm pleased with the second quarter and first half performance. Despite the difficult environment, we're operating in globally.

Judy Marks: We are encouraged by the recovery we've experienced in China and are revising our 2020 outlook to reflect a solid first half performance and anticipated pace of recovery for our business in the second half. Across the world, we are increasing the organic sales range now expected to be down 2% to 4%. Adjusted operating profit is now expected in a range of flat to down $50 million at constant currency, a $75 million improvement versus the prior outlook at the midpoint, primarily from higher volume expectations. We now expect adjusted diluting earnings per share in a range of $2.20 to $2.30, up $0.20 at the midpoint versus prior expectations. This reflects our improved operating profit outlook, lower tax rate, and lower net interest costs.

We are encouraged by the recovery we've experienced in China and are revising our 2020 outlook to reflect a solid first half performance and anticipated pace of recovery for our business in the second half. Across the world, we are increasing the organic sales range now expected to be down 2% to 4%. Adjusted operating profit is now expected in a range of flat to down $50 million at constant currency, a $75 million improvement versus the prior outlook at the midpoint, primarily from higher volume expectations. We now expect adjusted diluting earnings per share in a range of $2.20 to $2.30, up $0.20 at the midpoint versus prior expectations. This reflects our improved operating profit outlook, lower tax rate, and lower net interest costs.

We are encouraged by the recovery, we've experienced in China, and our revising our 2020 outlook to reflect the solid first half performance and anticipated pace of recovery for our business in the second half across the world.

We are increasing the organic sales range now expected to be down 2% to 4%.

Adjusted operating profit is now expected in a range of flat to down $50 million at constant currency, a $75 million improvement versus the prior outlook at the midpoint, primarily from higher volume expectations.

We now expect adjusted diluted earnings per share in a range of $2.20 to $2 in 30 cents up 20 cents at the midpoint versus prior expectations.

This reflects our improved operating profit outlook lower tax rate and lower net interest costs.

Judy Marks: Lastly, we expect free cash flow to be robust between $1.0 and $1.1 billion with full year free cash flow conversion levels between 130 and 140% of GAAP net income. With that, I'll turn it over to Rahul to walk through our results and the outlook in more detail.

Lastly, we expect free cash flow to be robust between $1.0 and $1.1 billion with full year free cash flow conversion levels between 130 and 140% of GAAP net income. With that, I'll turn it over to Rahul to walk through our results and the outlook in more detail.

Lastly, we expect free cash flow to be robust between 1.0 and $1.1 billion with full year free cash flow conversion levels between 130, and 140% of GAAP net income with that I'll turn it over to our goal to walk through our results and the outlook in more detail.

Rahul Ghai: Thank you, Judy, and good morning, everyone. Starting with Q2 results on slide 5, net sales were $3 billion, down 9.6%, with a 6.5% decline in organic sales, and the rest from foreign exchange and net divestitures in 2019. As we anticipated and communicated during the Q1 earnings call, both the new equipment and service segments declined organically in Q2 primarily from the impact of COVID-19. Adjusted operating profit in the quarter was down approximately 8%, or $39 million, and down $24 million at constant currency. Operating profit declined at constant currency from the impact of lower volume, temporary price concessions that we offered to our customers to support them during these difficult times, and a small increase in year-over-year bad debt expense. We were able to partially offset this by strong productivity in both new equipment and service segments.

Thank you Julie and good morning, everyone, starting with second quarter results on slide five.

Net sales were $3 billion down, 9.6% with a 6.5 plus and decline in organic sales and the rest from foreign exchange and net divestitures into NT 90.

As we anticipated and communicated during the first quarter earnings call, both the new equipment and service segments declined organically in the second quarter.

Primarily from the impact of forward 19.

Adjusted operating profit in the quarter was down approximately 8%, our $29 million and down $24 million at constant currency.

Operating profit declined at constant currency from the impact of lower volume temporary price concessions that we offered to our customers to support them. During these difficult times and a small increase in Italy your bad debt expense.

We were able to partially offset this by strong productivity in both new equipment and service segments.

Rahul Ghai: In the new equipment segment, our material productivity in the factories of 3% for a second quarter in a row, and in the service segment, maintenance hours per unit continued to trend down. Cost containment efforts that we launched in Q1 of 2020 also helped alleviate the pressure from lower volume, and our adjusted SG&A expenses were down close to $40 million year-over-year. At the same time, we maintained the investment in the business, and R&D expense as a percentage of sales was flat versus the prior year. Our strong focus on operational execution and a favorable segment mix drove 30 basis points of margin expansion. With continued margin expansion in the service segment, second quarter adjusted EPS was down $0.03, as a $0.05 decline from operating profit was partially offset by a $0.02 increase primarily from favorable tax rate and lower interest costs.

In the new equipment segment, our material productivity in the factories of 3% for a second quarter in a row, and in the service segment, maintenance hours per unit continued to trend down. Cost containment efforts that we launched in Q1 of 2020 also helped alleviate the pressure from lower volume, and our adjusted SG&A expenses were down close to $40 million year-over-year. At the same time, we maintained the investment in the business, and R&D expense as a percentage of sales was flat versus the prior year. Our strong focus on operational execution and a favorable segment mix drove 30 basis points of margin expansion. With continued margin expansion in the service segment, second quarter adjusted EPS was down $0.03, as a $0.05 decline from operating profit was partially offset by a $0.02 increase primarily from favorable tax rate and lower interest costs.

In the new equipment segment, our material productivity in the factories.

All three plus and for a second quarter in our role and did the service segment maintenance hours per unit continued to trend down.

Cost containment efforts that we launched in Q1 of Twentytwenty also helped alleviate the pressure from lower volume and our adjusted SDMA expenses were down close to $40 million year over year.

At the same time, we maintains the investment in the business and R&D expense as a percentage of sales was flat versus the prior year.

Our strong focus on operational execution and a favorable segment mix drove 30 basis points of margin expansion with continued margin expansion into service segment.

Second quarter adjusted EPS was down three cents as a five cents declined from operating profit was partially offset by two cents increase primarily from favorable tax rate and lower interest costs.

These results were better than we had expected in the previous outlook provided during Q1 earnings call driven by the resiliency of our service business model and our focus on productivity and proactive management of costs and customer concessions.

Rahul Ghai: These results were better than we had expected in the previous outlook provided during Q1 earnings call, driven by the resiliency of our service business model and our focus on productivity and proactive management of cost and customer concessions. Moving to slide 6, new equipment orders were down 6.8% at constant currency and were flat on a rolling 12-month basis. Our order intake continues to outperform the market that was down high single digits, resulting in 110 basis points increase in global market share in the quarter. Booked margins were down 70 basis points in the quarter and were flat year-over-year. For the first half in the quarter, booked margins were down in Asia and parts of Europe and were partially offset by improvement in the Americas and the Middle East.

These results were better than we had expected in the previous outlook provided during Q1 earnings call, driven by the resiliency of our service business model and our focus on productivity and proactive management of cost and customer concessions. Moving to slide 6, new equipment orders were down 6.8% at constant currency and were flat on a rolling 12-month basis. Our order intake continues to outperform the market that was down high single digits, resulting in 110 basis points increase in global market share in the quarter. Booked margins were down 70 basis points in the quarter and were flat year-over-year. For the first half in the quarter, booked margins were down in Asia and parts of Europe and were partially offset by improvement in the Americas and the Middle East.

Moving to slide six.

New equipment orders were down 6.8% at constant currency and are flat on a rolling 12 month basis.

Our order MP continues to outperform the market that was down high single digit, resulting in a 110 basis points increase in global market share in the quarter.

Booked margins were down 70 basis points in the quarter and were flat year over year for the first half.

In the quarter will come margins were down in Asia, and parts of Europe and were partially offset by improvement in the Americas and the middle East.

Rahul Ghai: New equipment backlog was up 2% at constant currency from growth in the Americas, and backlog margin was up slightly over prior year. Organic sales were down 10.4% with double-digit declines in the Americas and EMEA reflecting the impact of job site closures in April and May. Sales in Asia were up 1.6% as decline in Asia Pacific was more than offset by strength in China. China new equipment sales were up high single digits as job sites reopened and business returned to pre-COVID levels at constant currency. New equipment adjusted operating profit was down $46 million, and margin contracted 230 basis points as strong material productivity and cost containment in the field was more than offset by the impact from lower volume and under absorption of costs.

New equipment backlog was up 2% at constant currency from growth in the Americas, and backlog margin was up slightly over prior year. Organic sales were down 10.4% with double-digit declines in the Americas and EMEA reflecting the impact of job site closures in April and May. Sales in Asia were up 1.6% as decline in Asia Pacific was more than offset by strength in China. China new equipment sales were up high single digits as job sites reopened and business returned to pre-COVID levels at constant currency. New equipment adjusted operating profit was down $46 million, and margin contracted 230 basis points as strong material productivity and cost containment in the field was more than offset by the impact from lower volume and under absorption of costs.

New equipment backlog was up 2% at constant currency from growth in the Americas and backlog margin was up slightly over prior year.

Organic sales were down 10.4, glisten with double digit declines in the Americas and EMEA, Inc.

Reflecting the impact of job site closures in April and May.

Sales in Asia was up 1.6% as decline in Asia Pacific was more than offset by strength in China.

China, New equipment sales were up high single digit as job sites reopened and business returned to pre cold levels.

At constant currency, new equipment, adjusted operating profit was down $46 million and margin contracted 230 basis points, a strong material productivity and cost containment in the fee was more than offset by the impact from lower volume and under absorption of costs.

Service segment results on slide seven remained strong in the quarter number of units under maintenance contracts increased by 1% with units in China up more than 5%.

Rahul Ghai: Service segment results on Slide 7 remained strong in the quarter. Number of units under maintenance contracts increased by 1%, with units in China up more than 5%. Modernization orders were down 4%, as strong orders growth in China, driven by mandated regulatory upgrades in certain markets, was offset by lower order intake in the Americas and EMEA. Organic sales were down 3.3% as maintenance demand remained strong while the building shutdowns impacted the discretionary repair and modernization sales. Adjusted operating profit margin expanded 170 basis points, and profit grew by $14 million at constant currency. A strong contribution from productivity and cost containment actions more than offset the impact from volume decline. Temporary price concessions and an increase in bad debt. Pricing environment, excluding the impact of price concessions, was modestly favorable.

Service segment results on Slide 7 remained strong in the quarter. Number of units under maintenance contracts increased by 1%, with units in China up more than 5%. Modernization orders were down 4%, as strong orders growth in China, driven by mandated regulatory upgrades in certain markets, was offset by lower order intake in the Americas and EMEA. Organic sales were down 3.3% as maintenance demand remained strong while the building shutdowns impacted the discretionary repair and modernization sales. Adjusted operating profit margin expanded 170 basis points, and profit grew by $14 million at constant currency. A strong contribution from productivity and cost containment actions more than offset the impact from volume decline. Temporary price concessions and an increase in bad debt. Pricing environment, excluding the impact of price concessions, was modestly favorable.

Modernization orders were down 4% as strong orders growth in China, driven by mandated regulatory upgrades in certain markets was offset by lower order intake in the Americas add EMEA.

Organic sales were down 3.3% admin tenant demand remains strong while the building shutdowns impacted discretionary to pit and modernization sales.

Adjusted operating profit margin expanded 170 basis points and profit grew by $14 million at constant currency.

As strong contribution from productivity and cost containment actions more than offset the impact from volume decline temporary price concessions and an increase in bad debt.

Pricing environment, excluding the impact of price concessions was modestly favorable.

Overall, we close out a solid first half enrich our organic sales were down slightly more than 4%.

Rahul Ghai: Overall, we closed out a solid first half in which our organic sales were down slightly more than 4% with flat year-over-year service revenue and a 70 basis points margin expansion. We are maintaining the execution momentum in the business and continue to make progress on key strategic initiatives, gaining share in new equipment, driving material and service productivity, and containing SG&A costs, and while we face a challenging business and economic environment, our operational metrics are recovering from the lows of April and May. Turning to slide 8, China has shown a swift recovery as business returns to normal, and the rest of the world is following suit at varying paces. We have seen improvement in access to new equipment job sites throughout Q2 in every region.

Overall, we closed out a solid first half in which our organic sales were down slightly more than 4% with flat year-over-year service revenue and a 70 basis points margin expansion. We are maintaining the execution momentum in the business and continue to make progress on key strategic initiatives, gaining share in new equipment, driving material and service productivity, and containing SG&A costs, and while we face a challenging business and economic environment, our operational metrics are recovering from the lows of April and May. Turning to slide 8, China has shown a swift recovery as business returns to normal, and the rest of the world is following suit at varying paces. We have seen improvement in access to new equipment job sites throughout Q2 in every region.

With flat year over year service revenue and a 70 basis point margin expansion.

We are maintaining the execution momentum in the business and continue to make progress on key strategic initiatives.

Gaining share in new equipment, driving material and so as productivity and containing SDMA costs.

And while a challenging while we face a challenging business economic environment, our operational metrics are recovering from the low as of April and May.

Turning to slide eight.

China has shown a swift recovery as business returns for normal and the rest of the world is following suit at Radian basis.

We have seen improvement and access to new equipment job site throughout Q2 in every region.

Rahul Ghai: Access has largely returned to normal in the Americas and EMEA, while Asia Pacific has shown improvement but is still facing some challenges in India and Southeast Asia due to government-imposed measures. The maintenance business was resilient in the quarter and considered essential in most areas. Access where it was limited has returned to normal levels toward the end of June and early Q3. Lastly, overall repair volumes are still below last year and Q1, but trends are heading in the right direction with the number of service requests from our customers continuing to increase, and we expect to see recovery to pre-COVID levels in the balance of the year as buildings reopen. We are improving our 2020 outlook to reflect strong progress in the first half and these encouraging trends.

Access has largely returned to normal in the Americas and EMEA, while Asia Pacific has shown improvement but is still facing some challenges in India and Southeast Asia due to government-imposed measures. The maintenance business was resilient in the quarter and considered essential in most areas. Access where it was limited has returned to normal levels toward the end of June and early Q3. Lastly, overall repair volumes are still below last year and Q1, but trends are heading in the right direction with the number of service requests from our customers continuing to increase, and we expect to see recovery to pre-COVID levels in the balance of the year as buildings reopen. We are improving our 2020 outlook to reflect strong progress in the first half and these encouraging trends.

Access has largely returned to normal in the Americas and EMEA.

While Asia Pacific has shown improvement, but it's still facing some challenges in India and southeast Asia due to government imposed measures.

Maintenance business was resilient in the quarter and considered essential in most areas.

Axis Wedded was limited has returned to normal levels towards the end of June and early Q3.

Lastly, overall repair volumes are still below last year and Q1, what trends are heading into right direction with a number of service requests from our customers continuing to increase and we expect to see recovery to pre covered levels in the balance of the year as buildings reopening.

We are improving twentytwenty outlook to reflect strong progress in the first half and viiv encouraging trends.

Rahul Ghai: On Slide 9, we now expect overall organic sales to be down 2 to 4% for the year, up from prior expectations of down 3 to 7%. With improvement in both new equipment and service versus prior guidance. We now expect new equipment sales to be down mid- to high-single digits and service sales to be flat to down low single digits. In the new equipment segment, we are assuming varying rates of recovery, with the high end reflecting a slight growth in the second half of the year. In the service segment, maintenance business has proved to be resilient in this environment, and the range reflects differing degrees of delay in discretionary repair, and modernization projects in the back half of the year depending on the overall macroeconomic environment and the occupancy level of buildings.

On Slide 9, we now expect overall organic sales to be down 2 to 4% for the year, up from prior expectations of down 3 to 7%. With improvement in both new equipment and service versus prior guidance. We now expect new equipment sales to be down mid- to high-single digits and service sales to be flat to down low single digits. In the new equipment segment, we are assuming varying rates of recovery, with the high end reflecting a slight growth in the second half of the year. In the service segment, maintenance business has proved to be resilient in this environment, and the range reflects differing degrees of delay in discretionary repair, and modernization projects in the back half of the year depending on the overall macroeconomic environment and the occupancy level of buildings.

On slide nine we now expect overall organic sales to be down 2% to 4% for the year.

From prior expectations down 3% to 7%.

With improvement in both new equipment and service versus prior guidance.

We now expect new equipment sales to be down mid to high single digits and service sales to be flat to down low single digits.

In the new equipment segment, we're assuming varying rates of recovery with the high end, reflecting a slight growth in the second half of the year.

In the service segment maintenance business has proved to be resilient in this environment and the range reflects differing degrees of delay in discretionary repair and modernization projects in the back half of the year.

Depending on the overall macroeconomic environment and the occupancy level buildings.

Adjusted operating profit is expected to be flat to down $50 million at constant currency and down 40 $200 million at actual currency.

Rahul Ghai: Adjusted operating profit is expected to be flat to down $50 million at constant currency and down $40 to $100 million at actual currency. At constant currency, the outlook increased by $75 million at the midpoint, reflecting the higher revenue versus prior guidance, strong progress on cost containment actions, and a small improvement in service pricing outlook. We expect operating margin expansion in a range of 10 to 30 basis points. Adjusted EPS is now expected to be in a range of $2.20 to $2.30, up $0.20 at the midpoint, driven by improved operating profit outlook, lower net interest costs, lower tax rate, and a reduced share count. We are lowering our full year tax rate guidance to 31.5% from 32% in May and down from 33% on investor day.

Adjusted operating profit is expected to be flat to down $50 million at constant currency and down $40 to $100 million at actual currency. At constant currency, the outlook increased by $75 million at the midpoint, reflecting the higher revenue versus prior guidance, strong progress on cost containment actions, and a small improvement in service pricing outlook. We expect operating margin expansion in a range of 10 to 30 basis points. Adjusted EPS is now expected to be in a range of $2.20 to $2.30, up $0.20 at the midpoint, driven by improved operating profit outlook, lower net interest costs, lower tax rate, and a reduced share count. We are lowering our full year tax rate guidance to 31.5% from 32% in May and down from 33% on investor day.

At constant currency the outlook increased by $75 million at the midpoint, reflecting the higher revenue versus prior guidance strong progress on cost containment actions and a small improvement and service pricing outlook.

We expect operating margin expansion in a range of 10 to 30 basis points.

Adjusted EPS is now expected to be in a range of $2.20 to 2030 cents up 20 cents at the midpoint.

Driven by improved operating profit outlook, lower net interest costs lower tax rate and a reduced share count.

We are lowering our full year tax rate guidance with 31.5% from 32% in may and down from 33% on Investor day.

We expect the tax planning work that we're doing to continue to yield benefits and the tax rate to trend down to between 25% to 28% over the medium term.

Rahul Ghai: We expect the tax planning work that we're doing to continue to yield benefits and the tax rate to trend down to between 25% to 28% over the medium term. Taking a further look at our organic growth assumptions on Slide 10 in the New equipment segment, Americas is expected to be down mid single digits to 10% reflecting the sharp decline we saw in Q2. The high end or a 5% decline, contemplates a rapid recovery in Q3 and growth in the back half of the year while the lower end reflects continuing challenges in accessing the job sites. The EMEA new equipment business is expected to be down high single digits, reflecting business recovering to pre-COVID levels during Q3 in North Europe and a gradual recovery in South Europe and the Middle East.

We expect the tax planning work that we're doing to continue to yield benefits and the tax rate to trend down to between 25% to 28% over the medium term. Taking a further look at our organic growth assumptions on Slide 10 in the New equipment segment, Americas is expected to be down mid single digits to 10% reflecting the sharp decline we saw in Q2. The high end or a 5% decline, contemplates a rapid recovery in Q3 and growth in the back half of the year while the lower end reflects continuing challenges in accessing the job sites. The EMEA new equipment business is expected to be down high single digits, reflecting business recovering to pre-COVID levels during Q3 in North Europe and a gradual recovery in South Europe and the Middle East.

Taking a further look at our organic growth assumptions on slide 10.

In the new equipment segment Amedicas is expected to be down mid single digits grew 10%, reflecting the sharp decline we saw in Q2.

The high end or a 5% decline contemplate on rapid recovery in Q3 and growth in the back half of the year.

One of the lower end reflects continuing challenges in accessing the job sites.

The EMEA and yield recruitment business is expected to be down high single digits, reflecting business recovering to pre covered levels. During Q3 in north Europe, and a gradual recovery in south Europe and the middle East.

Rahul Ghai: We are improving the Asia new equipment outlook due to strong recovery we experienced in China during Q2, and now expect Asia to be down mid-single digits. This reflects the continuing recovery in China, with varying pace of recovery across Asia Pacific, with challenges in India and Southeast Asia, while the rest of Asia holds up well in the service business. We anticipate the maintenance business to remain stable into the back half of the year, with continued pressure on discretionary repair early in Q3 and recovery in the later months of the year, and expect the overall maintenance and repair business to be flat to down slightly for the year. While our modernization sales grew in the first half, there is potential for modernization projects to push out into 2021, and we now expect modernization sales to be flat to down low-single digits. Overall.

We are improving the Asia new equipment outlook due to strong recovery we experienced in China during Q2, and now expect Asia to be down mid-single digits. This reflects the continuing recovery in China, with varying pace of recovery across Asia Pacific, with challenges in India and Southeast Asia, while the rest of Asia holds up well in the service business. We anticipate the maintenance business to remain stable into the back half of the year, with continued pressure on discretionary repair early in Q3 and recovery in the later months of the year, and expect the overall maintenance and repair business to be flat to down slightly for the year. While our modernization sales grew in the first half, there is potential for modernization projects to push out into 2021, and we now expect modernization sales to be flat to down low-single digits. Overall.

We are improving the Asia, new equipment outlook due to strong recovery, we experienced in China during Q2.

And now expect Asia to be down mid single digits.

This reflects the continued recovery in China with rating pace of recovery across Asia Pacific with challenges in India, and Southeast Asia, while the rest of Asia holds up well.

In the service business, we anticipate the maintenance business to remain stable into the back half a year with continued pressure on discretionary repair early in Q3 and recovery in the later months of the year.

And expect the overall maintenance and repair business to be flat to down slightly for the year.

While our modernization sales grew in the first half that has potential for modernization projects to push out into 2021.

And we now expect modernization sales to be flat to down low single digits.

Overall, the high end of the 2% to 4% organic sales decline reflect an early Q3 recovery globally and the low end as the world's first tough conditions to continue into the second half per year.

Rahul Ghai: The high end of the 2 to 4% organic sales decline reflects an early Q3 recovery globally, and the low end assumes first half conditions to continue into the second half of the year. Switching to operating profit on slide 11 at constant currency, adjusted operating profit improved by $75 million from the May guidance at the midpoint and is now expected to be flat to down $50 million versus the prior year, reflecting the impact of reduced volume from the COVID-19 pandemic, incremental under-absorption of costs, and an impact on pricing, including some temporary price concessions in our service business. We will continue to offset these impacts through strong material and service productivity, and cost containment actions that are tracking as per prior expectations.

The high end of the 2 to 4% organic sales decline reflects an early Q3 recovery globally, and the low end assumes first half conditions to continue into the second half of the year. Switching to operating profit on slide 11 at constant currency, adjusted operating profit improved by $75 million from the May guidance at the midpoint and is now expected to be flat to down $50 million versus the prior year, reflecting the impact of reduced volume from the COVID-19 pandemic, incremental under-absorption of costs, and an impact on pricing, including some temporary price concessions in our service business. We will continue to offset these impacts through strong material and service productivity, and cost containment actions that are tracking as per prior expectations.

Switching to operating profit on slide 11.

At constant currency adjusted operating profit improved by $75 billion for the May guidance at the midpoint and is now expected to be flat to down 50 million, what's as the prior year.

Reflecting the impact of reduced volume from the covered 19 pandemic.

Incremental under absorption of costs.

And that impact on pricing, including some temporary price concessions in our service business.

We will continue to offset these impacts through strong material and service productivity and cost containment actions that are tracking as the prior expectations.

Rahul Ghai: Foreign exchange is now expected to be a headwind of $40 to 50 million for the year, an improvement from the $60 million of headwind that we had expected in May due to strengthening of the euro against the US dollar. An update on capital deployment on slide 12, we started 2020 with about $1.4 billion of cash on hand and expect to generate between $1 to $1.1 billion of free cash flow in 2020 and now plan to pay down $350 million of debt instead of the original placeholder of $250 million in 2020. We still expect to return $260 million to shareholders through dividends in Q2 through Q4 at about 40% of adjusted net income and spend approximately $200 million between non-controlling interest and M&A.

Foreign exchange is now expected to be a headwind of $40 to 50 million for the year, an improvement from the $60 million of headwind that we had expected in May due to strengthening of the euro against the US dollar. An update on capital deployment on slide 12, we started 2020 with about $1.4 billion of cash on hand and expect to generate between $1 to $1.1 billion of free cash flow in 2020 and now plan to pay down $350 million of debt instead of the original placeholder of $250 million in 2020. We still expect to return $260 million to shareholders through dividends in Q2 through Q4 at about 40% of adjusted net income and spend approximately $200 million between non-controlling interest and M&A.

Foreign exchange is now expected to be a headwind of $40 million to $50 million for the year, an improvement from the $60 million of headwind that we had expected in may year with strengthening of the euro against the U.S. dollar.

And update on capital deployment on slide 12.

We started twentytwenty with about $1.4 billion of cash on hand, and expect to generate between $1 billion to $1.1 billion of free cash flow and twentytwenty.

And now plan to pay down $350 million of debt instead of the original plates order of $250 million in Twentytwenty.

We still expect to return $260 million for shareholders to dividend in Q2 Q4 at about 40% of adjusted net income.

And spent approximately $200 million between non controlling interests and M&A.

These actions will allow us to maintain sufficient liquidity and will enable us to increase the cash on the balance sheet by the end of the year, which depending on the overall liquidity conditions in the market can potentially allow us to stock share buyback in twentytwenty. One after we complete our previously disclosed $500 million of debt free.

Rahul Ghai: These actions will allow us to maintain sufficient liquidity and will enable us to increase the cash on the balance sheet by the end of the year, which, depending on the overall liquidity conditions in the market, can potentially allow us to start share buyback in 2021 after we complete our previously disclosed $500 million of debt repayment. With that, I'll turn it over to Julie for some closing remarks.

These actions will allow us to maintain sufficient liquidity and will enable us to increase the cash on the balance sheet by the end of the year, which, depending on the overall liquidity conditions in the market, can potentially allow us to start share buyback in 2021 after we complete our previously disclosed $500 million of debt repayment. With that, I'll turn it over to Julie for some closing remarks.

Payment.

With that I'll turn it over to Julie for some closing remarks.

Judy Marks: Thanks Rahul. I'm pleased that Otis delivered a solid second quarter despite current COVID challenges while driving our long-term strategy, and as the world begins to reopen over the medium term, we expect sustainable growth and global share gain in new equipment up 90 basis points year to date. To continue to expand on our leading service portfolio, we'll continue to make progress on service transformation, deploying IoT and the digital tools that drive productivity and margin expansion. Although these are unusual times, we will continue to invest at a sustainable level to ensure we stay at the forefront of this industry and adjust our costs structurally to align with our medium-term sales outlook. We will continue to drive EPS growth, use our robust cash generation, and leverage our balance sheet to create shareholder value. With that, I'd like Chris to open up the line for questions.

Thanks for whole I'm pleased that Otis delivered a solid second quarter. Despite current Kobe challenges, while driving our long term strategy as the world begins to reopen over the medium term, we expect sustainable growth and global share gain new equipment up 90 basis points year to date to continue to expand on.

Leading service portfolio will continue to make progress on service transformation deploying aiotv and the digital tools that drive productivity and margin expansion. Although these are unusual times, we will continue to invest in a sustainable level to ensure we stay at the forefront of this industry and adjust our cost structure.

To align with our medium term sales outlook and we will continue to drive EPS growth use our robust cash generation and leverage our balance sheet to create shareholder value with that I'd like Chris to open up line for questions.

Thank you and as reminds us of course need to per store one of your telephone to draw. Your question. Please press the pound key please stand by we compared to any roster.

Operator: Thank you. And as a reminder to ask a question, you'll need to press Star one on your telephone. To withdraw your question, please press the pound key. Please stand by. We compiled the Q and A roster and our first question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

And our first question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Oh, thanks, Thanks, good morning.

Nigel Coe: Thanks. Good morning. You covered a lot of ground in the prepared remarks, but I just wanted just to go back to the pricing comments. One of your major competitors, I think, mentioned price pressure about 17 times on their call. Not that I was counting, but maybe just comment on what you see in sort of right now in terms of some of the bidding pressure that they referred to. Would you agree with that comment and maybe touch on these price concessions you've been offering to customers on the service side? Is that tracking in line with your expectations and when would you expect that to taper off?

Couple of ground in the prepared remarks, but.

Good to go back to the pricing comments.

One of the major competitors I.

I think mention price pressure about 17 times on that coal.

Nothing, but maybe just comment on what you've seen sort of.

Right now in terms of the some of the business pressure that the they referred to.

Would you agree with that comment and then maybe.

Touch on these price concessions have been offering to.

On the service side.

Kind of is that tracking in line with your expectations on when would you expect that too.

Taper off.

Judy Marks: Sure. Thanks, Nigel. So we have seen about 70 basis points of booked margin impact in the second quarter. That was mainly in EMEA and Asia Pacific. China itself was flattish, and the Americas actually had improved booked margin. As you understand, this flows through to our revenue primarily in 2021. We do expect some pressure. We expected it this quarter. We expect some in the remaining half of the year on pricing because pricing follows macroeconomic trends, and this is really why we have focused so hard on cost containment and on our productivity initiatives. The only part we don't have in our outlook is any additional activities driven by stimulus, and that could also impact pricing probably favorably. Our service pricing is holding up well outside of the price concessions. We did get our normal price increases throughout the first half of the year.

Sure. Thanks, Nigel So we have seen about 70 basis points of booked margin impact in the second quarter.

That was mainly in EMEA and Asia Pacific China itself was flattish any Americas actually had improved booked margin and as you understand this flows through to our revenue primarily in 2021.

We do expect some pressure we expected it this quarter, we expect some in the remaining half a year on pricing has pricing followers macroeconomic trends and this is really why we have focused so hard on cost containment and our productivity initiatives.

The only part we don't have in our outlook is any add additional activities driven by stimulants and that could also impact pricing probably favorably.

Our service pricing is holding up well outside of the price concessions, we did get our normal price increases throughout the first half of the year. The price concessions themselves were a little less than we anticipated primarily in the hospitality space hospitality and retail and we have included those.

Judy Marks: The price concessions themselves were a little less than we anticipated, primarily in the hospitality space, hospitality, and retail, and we have included those in our outlook for the remainder of this year. So service pricing is holding up well. Booked margin is down 70 basis points on new equipment. But again, China flattish, and we understand what we need to do to drive cost out and drive productivity up.

The price concessions themselves were a little less than we anticipated, primarily in the hospitality space, hospitality, and retail, and we have included those in our outlook for the remainder of this year. So service pricing is holding up well. Booked margin is down 70 basis points on new equipment. But again, China flattish, and we understand what we need to do to drive cost out and drive productivity up.

In our outlook for the remainder of this year, So service pricing is holding up well.

Booked margin is down 70 basis points on new equipment, but again, China flattish in.

And we understand what we need to do to drive cost out and drive productivity.

Nigel Coe: Great. Thanks, Judy. And then on the tax rate, obviously moving in the right direction, and I'm just curious if we have a line of sight on issuing the foreign debt to further maybe optimize that tax rate.

Great. Thanks, Thanks, Judy and then.

The tax rate, obviously moving into right direction Im just curious if we have a line of sites on.

Issuing the phone debts.

Further than maybe optimize our tax rate.

Yeah, Nigel full we guided to in our in our prepared remarks, we kind of mentioned that we expect the medium term tax outflow to be about 25% to 28%.

Rahul Ghai: Yeah, Nigel. So we guided to in our prepared remarks we kind of mentioned that we expect the medium term tax outlook to be about 25% to 28%. So and that is over the next three to four years. It's not going to be all back-ended. We expect measured progress over this time period. We're working on several projects. We're evaluating our entire business and understanding okay, where should things fit from a right business perspective and what impact does that have the tax rate? So we're working extremely hard. And I think we've shown good progress since, you know, since 2019. We are now expecting this year to be about 31.5%. So 3.5% decline over where we were in 2019. So that's really good progress. And then we see paths to between 25% to 28% over the next three to four years. Okay, great.

Okay and that is over the next three to four years, it's not going to be all back in order to we expect measured progress.

Over this time period, we working on several projects evaluating our entire business and understanding what the awareness ratio things fit from a REIT business perspective, and what impact does that after tax rate. So we are working extremely hard and I think we've shown good progress since since 2019, we're now expecting this year could be it out 31.5%.

So create a hospitals in decline over where we were in 2019. So thats really good progress on NBC view of cost to between 25 28, plus it over the next three to four years.

Okay, great. Thanks Lucas.

Nigel Coe: Okay, great.Thanks a lot, guys.

Nigel Coe: Thanks a lot, guys.

Thank you.

Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open. Hi, good morning. Maybe, you know, a first question around the overall new install market. You know, one of your peers had mentioned that market getting back to 2019 levels by 2022. Just wondered if you thought that was a realistic assessment, if it differs from your own perspectives at all. And also maybe how that sales outlook for the medium term, you know, what's that informing your actions on the cost base in new equipment. What are you doing there?

Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Your next question comes from Alon, Julian Mitchell with Barclays. Your line is now.

Julian Mitchell: Hi, good morning. Maybe, you know, a first question around the overall new install market. You know, one of your peers had mentioned that market getting back to 2019 levels by 2022. Just wondered if you thought that was a realistic assessment, if it differs from your own perspectives at all. And also maybe how that sales outlook for the medium term, you know, what's that informing your actions on the cost base in new equipment. What are you doing there?

Hi, good morning.

[music].

Maybe.

First question around the overall new in store markets.

One of your peers had mentioned that market getting back to 2019 levels by Twentytwenty too.

Just wondered if you saw that was a realistic assessment if it differs from your own perspectives at all.

And also maybe how that sales outlets for medium term, what's that informing you'll actions on the cost space in new equipment, what are you doing that.

Yeah, Julien let me, let me try and talk to both of those and I'm sure Rahul will add.

Judy Marks: Yeah, Julian, let me try and talk to both of those, and I'm sure Rahul will add. We have seen the job sites reopening at a fairly strong pace. Globally, it's over 90%. In April, we were at about a 65% global. Again. The current restricted areas are more so in India and Southeast Asia. So the job sites are reopening. In North America, we are almost totally reopened. But as we reopen, we're seeing some different behaviors due to health and safety concerns. So we're making sure we do initial safety startups. And obviously we have to separate some of the workforce in terms of how the construction crews are coming back as well. In terms of what we're seeing on buying behaviors, the orders, especially in North America in this last quarter were damp.

We have seen the job sites reopening had a fairly strong pace globally at over 90% in April we were at about a 65% global.

Again, the current restricted areas are more selling in the in southeast Asia.

For the job sites are reopening pricing North America, we are almost totally reopened but as we reopened we're seeing some different behaviors due to health and safety concerns. So we're making sure. We do initial safety startups and obviously, we have to separate some of the workforce in terms of how the.

Construction crews are coming back as well in terms of what we're seeing on buying behaviors.

The orders in especially in North America in this last quarter, our damp and the reason there were a lot of the reason they were down was that the decisions. We're just not being made and well being delayed when we speak to the customers, they're optimistic and they still plan on on moving forward with their projects.

Judy Marks: And the reason they were, a lot of the reason they were down was that the decisions were just not being made and were being delayed. When we speak to the customers, they're optimistic and they still plan on moving forward with their projects. Additionally, when you look at our end market exposure, we are, and we shared this in the appendix, we are far more than 50% driven by residential and we're seeing residential projects grow strongly. So our outlook really does anticipate that we get back to new equipment levels sometime in 2021. And that is that we will obviously modulate our costs based on what we see both the orders coming in second half of this year and then as we see the new equipment business coming back as well.

And the reason they were, a lot of the reason they were down was that the decisions were just not being made and were being delayed. When we speak to the customers, they're optimistic and they still plan on moving forward with their projects. Additionally, when you look at our end market exposure, we are, and we shared this in the appendix, we are far more than 50% driven by residential and we're seeing residential projects grow strongly. So our outlook really does anticipate that we get back to new equipment levels sometime in 2021. And that is that we will obviously modulate our costs based on what we see both the orders coming in second half of this year and then as we see the new equipment business coming back as well.

Additionally, when you look at our end market exposure, we are entering share. This in the appendix, we are far more than 50% driven by residential and we're seeing residential product projects.

Grow strongly so our outlook really does anticipate that we get back to his new equipment levels sometime in 2021.

And that is that we will obviously marginally our costs based on what we see post the orders coming in second half and this year and then as we see the new equipment business coming back as well right now.

Rahul Ghai: No, I think you covered it, Judy. You know, it's overall. We've seen, you know, our proposals are kind of holding through the first half. It's been, you know, as you would expect, Q2 is a little bit softer. But over the first half our proposals are holding. China activities is being really, really strong, both across infrastructure and the other sectors. And if you look at the market in China that was up in for the first half, it was pretty much up across all sectors with Q2 being especially strong. So I mean it's overall, it's an uncertain environment, definitely fluid. But so far the business seems to be recovering well. And as Julie mentioned, the job sites are coming back and that's what we kind of focused on right now is just making sure that we are executing in the backlog that we have.

Now I think you covered a duty.

So overall, we've seen in our proposals out kind of holding up through the first half extreme utilize you would expect Q2 is a little bit softer, but over the first half our proposals are holding China activities is being really really strong both across infrastructure and the other sector that if you look at the market in China that was up.

In total for the first half those pretty much up across all sectors of Q2, being especially strong. So I mean its overall, it's the it so it's an uncertain environment definitely for with but so far the business seems to be recovering well and.

Our Judy mentioned the job site, the coming back and Thats, what we kind of focus from right. Now is just making sure that we are executing in the backlog that we have and what what will drive our revenue in the near term is obviously the backlog, which is good to see that a backlog of victory up 2%, Italy, yet for the second half and then as we look forward into 2021 will save or.

Rahul Ghai: What, what will drive our revenue in the near term is obviously the backlog, which is good to see that a backlog is actually up 2% year-over-year through the second half. Then as we look forward into 2021, we'll stay focused on maintaining this backlog growth that you've seen accelerating the pace of conversion from backlog into new equipment, revenue driving cost out to ensure that we can stay competitive on margins and, and deliver strong margins. So that's what we are focused on internally.

What, what will drive our revenue in the near term is obviously the backlog, which is good to see that a backlog is actually up 2% year-over-year through the second half. Then as we look forward into 2021, we'll stay focused on maintaining this backlog growth that you've seen accelerating the pace of conversion from backlog into new equipment, revenue driving cost out to ensure that we can stay competitive on margins and, and deliver strong margins. So that's what we are focused on internally.

Just on maintaining this backlog growth if you've seen accelerating the pace of conversion from backlog into new equipment revenue driving cost out to ensure that we can stay competitive on margins and delivered strong margins. So thats, what we are focused on internally.

Thank you and then my second question.

Operator: Thank you. Then my second question just around maybe the revenue splits. Thank you for that split on Slide 18 on the end markets. But maybe geographically, 10 years ago, you know, five to 10 years ago in that European slump, there was a bifurcation between Southern European trends and the north, perhaps we're seeing a similar bifurcation starting now. Just wondered if you could clarify, you know, how large is that Southern Europe exposure within the overall EMEA sales split and how different you think the recovery slope might be between that Southern Europe piece and the rest of the EMEA region.

Julian Mitchell: Thank you. Then my second question just around maybe the revenue splits. Thank you for that split on Slide 18 on the end markets. But maybe geographically, 10 years ago, you know, five to 10 years ago in that European slump, there was a bifurcation between Southern European trends and the north, perhaps we're seeing a similar bifurcation starting now. Just wondered if you could clarify, you know, how large is that Southern Europe exposure within the overall EMEA sales split and how different you think the recovery slope might be between that Southern Europe piece and the rest of the EMEA region.

Just around maybe the the revenue splits. Thank you for that splits on slide 18 on the end markets, but maybe geographically.

10 years ago, five to 10 years ago in that European slump, there was a bifurcation between southern European trends and the lower.

Perhaps we're seeing a similar bifurcation starting now.

Just wonder if you could clarify how large is that southern Europe exposure within the overall EMEA.

Sales split.

And how different you think the recovery slow might be between that southern Europe piece and the rest of the EMEA region.

Rahul Ghai: Yeah, Southern Europe is definitely, Julian, as you know. Southern Europe is definitely a bigger market for us. You know, we are, we have number one position in France, Spain, and Italy. So we have definitely a strong presence in Southern Europe. But, you know, the recovery has been stronger in Northern Europe. Our business in Germany did really well in Q2. So we are seeing the Nordics, the German market, Switzerland come back strongly. And Southern Europe is a little bit slower as you would expect given what you saw happen with the pandemic. So that is definitely the case. But even if you look, you know, we did provide some color on the overall industry. But if you look at our European business as well, Europe especially, the fact is that close to 70% of our business in Europe, cumulatively EMEA, is residential.

Yes, the southern Europe is definitely Jordan as you note Southern Europe is definitely a bigger market for us.

We are we have number one position and France, Spain, and Italy is will be have definitely a strong presence in southern Europe.

But even with the and the recovery has been stronger in northern Europe business in Germany did really well.

The second quarter. So that we are seeing the nordics, Joe and market outcome, Switzerland come back strongly.

And southern Europe is little bit slower as you would expect given what you saw have them with the pandemic. So that is definitely the case, but even if you look.

We did provide some color on the overall industry, but if you look at a European businesses, well Europe, especially the factors that close to 70, plus number but your business in Europe cumulatively EMEA in residential Tobey I was little bit more heavily skewed in on the residential side in EMEA.

Rahul Ghai: So we are a little bit more heavily skewed on the residential side in EMEA versus the rest of the world. So that obviously helps the overall mix and how the various sectors recover. And the residential market matters more to us in Europe and probably in some other parts of the world.

So we are a little bit more heavily skewed on the residential side in EMEA versus the rest of the world. So that obviously helps the overall mix and how the various sectors recover. And the residential market matters more to us in Europe and probably in some other parts of the world.

Versus the rest of the world. So that obviously helps the overall mix and how the radio sectors recover and the residential market matters more towards in Europe, and probably in some other bottled water.

Very helpful. Thank you.

Operator: Very helpful, thank you. Thank you. The next question comes from the line of Cai von Rumohr with Cowen. Your line is now open.

Julian Mitchell: Very helpful, thank you.

Operator: Thank you. The next question comes from the line of Cai von Rumohr with Cowen. Your line is now open.

Thank you.

Our next question comes from a line of Cai von Rumohr with Cowen. Your line is now open.

Yes, thank you very much.

Cai von Rumohr: Yes, thank you very much. And good quarter. So going back to Nigel's question, I don't know whether it was 15 times, but certainly KONE hammered on pricing being an issue. Schindler sort of mentioned it, and you don't seem like it's a big, big issue. Is part of that because of the success? I think your target was to reduce material costs 3% per year. Is that part of it? And maybe give us some color on how you're doing in terms of those cost targets.

Good quarter so.

Going back to Nigels question, I don't know, whether it was 15 turns but certainly coma hammered on pricing being an issue schindler's sort of mentioned.

And you don't seem like its with the big issue is part of that because of the.

Success I think your target was to reduce material costs, 3% per year is that part of that and maybe give us color on how you're doing in terms of those cost targets.

Rahul Ghai: No. So Kai, listen, we are again, we gave you the numbers that we are seeing. We saw our booked margin, and Judy repeated this in response to Nigel's question. I mean, we've seen the pressure, I think, like the book margins were down 70 basis points, and you would expect that, I mean, Asia Pacific, given what's happening in India, given what's happening in Southeast Asia, and the Indian economy still hasn't opened up. And in terms of units, that's the second largest economy in the world, the elevator market. So it's clearly an issue. Right. And we are not hiding from that. And as Judy said, rightfully so, the pricing will depend on the overall macroeconomic environment.

No its who've listened VR game, we gave you the numbers that we have seen we saw our book margin than Judy Repeatability and extended into response Nigels question. I mean, we've seen the pressure it's like the book much the down 70 basis points as you would expect Adam in Asia Pacific given what's happening India, given what's happening in southeast Asia, and they need an economy still hasn't opened.

And in terms of unit Thats, the second largest economy in the world the anyway to market. So it's clearly an initial right have you not hiding from that.

And as Judy said rightfully so the pricing will depend on the overall macroeconomic environment. What if you go back to right from the Investor day, what you're seeing in what we did not built into our medium term outlook that we acquired at Investor Day, We did not building any margin increase on the new equipment side of the business and the reason we did not.

Rahul Ghai: But if you go back to right from the investor day, what we're seeing and what we did not build into our medium term outlook that we have provided investor day, we did not build in any margin increase on the new equipment side of the business. And the reason we did not is we expected the pricing pressures to manifest themselves over this time period. We did not know that would be the second half of 2020 versus 2021, but we knew that they were going to come at some point. And that's why starting last year we have been so focused on driving material productivity. And we set a target for us for 3% over this medium term every year over the next three to four years.

But if you go back to right from the investor day, what we're seeing and what we did not build into our medium term outlook that we have provided investor day, we did not build in any margin increase on the new equipment side of the business. And the reason we did not is we expected the pricing pressures to manifest themselves over this time period. We did not know that would be the second half of 2020 versus 2021, but we knew that they were going to come at some point. And that's why starting last year we have been so focused on driving material productivity. And we set a target for us for 3% over this medium term every year over the next three to four years.

As we expected the pricing pressures to manifest themselves over this time period, we did not know that will be the second half twentytwenty versus 21, what we knew that they're going to come at some point and Thats why starting last year, we are being sold focused on driving material productivity and we set a target for us for 3% over this medium term every year over the next.

A couple years and if you look at the first half it's great to see that we've done. This now two quarters in a row and that is helping I mean, if you look at our margin trajectory this quarter and even for the first off we basically falling through our earnings are falling through at the contribution margin that means we are able to absorb all the underabsorption any pricing pressure back.

Rahul Ghai: If you look at the first half, it's great to see that we've done this now 2 quarters in a row, and that is helping. I mean, if you look at our margin trajectory this quarter and even for the first half, we're basically following through. Our earnings are falling through at the contribution margin. That means we are able to absorb all the under absorption, any pricing pressure, bad debt, expense, all throughout material productivity, and cost containment. So we knew it's going to happen; we didn't know when. And I think internally we were focused on taking cost out. So we'll deal with pricing as it happens, and yes. Is it worry? Absolutely it's a worry.

If you look at the first half, it's great to see that we've done this now 2 quarters in a row, and that is helping. I mean, if you look at our margin trajectory this quarter and even for the first half, we're basically following through. Our earnings are falling through at the contribution margin. That means we are able to absorb all the under absorption, any pricing pressure, bad debt, expense, all throughout material productivity, and cost containment. So we knew it's going to happen; we didn't know when. And I think internally we were focused on taking cost out. So we'll deal with pricing as it happens, and yes. Is it worry? Absolutely it's a worry.

Bad debt expense, all two of material productivity and cost containment. So we knew it's going to happen. We didn't know when and I think internally dealer focused on taking cost out. So we will deal with will be with pricing as it happens and.

Yes. It is a great absolutely its away, but we are focused on things that we can control and making sure that we won't be the mistakes of the boss when we gave up share because we didn't want to compete on price. So we'll we'll keep dealing with the pressures as they as they come into market, Yes, hi, the share is really really important and.

Rahul Ghai: But we are focused on things that we can control and making sure that we don't repeat the mistakes of the past when we gave up share because we didn't want to compete on price. So we'll keep dealing with the pressures as they come in the market.

But we are focused on things that we can control and making sure that we don't repeat the mistakes of the past when we gave up share because we didn't want to compete on price. So we'll keep dealing with the pressures as they come in the market.

Judy Marks: Yeah, Cai, the share is really, really important and you know we prepared for this. All four of our regions went up in share and you know, significantly up in the Americas and in China. And in general we were up for the quarter 110 basis points and then for the half of the year 90 basis points. So in a declining market where the segment itself was going down last quarter, high single digits, we took share everywhere.

We prepared for this.

All four of our regions went up in share and significantly up in the Americas and in China and in General we were up for the quarter 110 basis points and then for the half the year 90 basis points. So in a declining market, where the segment itself was going down last year last quarter high single digits.

We we took share everywhere.

And so a follow up everyone talks about share and.

Cai von Rumohr: And so, a follow-up, everyone talks about share, and how do you define share? If you talk about picking up 90 bps, what are you talking about? New elevators, organic constant currency sales. How are you defining share?

How do you define share you talk about picking up to 90 bips.

What are you talking about new elevators organic constant currency.

Sales.

Defining share.

Well its and what do we have this industry track share Cai is based on the number of units in the market. So that's how it's done and I think everybody pretty much does at the same way. So redefined shared based on the number of units we booked in the quarter versus what we estimated the markets to be in the full in second quarter versus.

Rahul Ghai: Well, the way this industry tracks share, Kai, is based on the number of units in the market. So that's how it's done. And I think everybody pretty much does it the same way. So we define share based on the number of units we booked in the quarter versus what we estimated the markets to be in Q2 and the first half.

And the first half.

Terrific and last one service units you mentioned that you are up 1% and yet.

Cai von Rumohr: Terrific. And last one, service units. You mentioned that you were up 1% and yet you were high at 3 in China, lost 1% because of divestitures. Maybe give us a little bit more color in terms of how you're doing and how those numbers compare with the industry as a whole.

As a percent China.

Last 1% because of divestitures, maybe give us a little bit more color in terms of how you're doing.

Those numbers.

There is true.

Yes, I am I cant report on the industry as a whole certainly for this year, but I can tell you we have an intense focus on growing our service portfolio. We understand that is the foundation of our business model and we have we are focused on getting our Otis units back in.

Judy Marks: Yeah, I can't report on the industry as a whole, certainly for this year, but I can tell you we have an intense focus on growing our service portfolio. We understand that is the foundation of our business model, and we have, we are focused on getting our Otis units back, in addition to recapturing other units, driving our conversion rates up, driving our cancellation rates down. So the biggest move we made in the portfolio this quarter was China, which went up over 5% in terms of units under maintenance. That's the largest growing market for the portfolio. So we've challenged the team to outgrow what they've done in the past in every region, but especially in China.

Addition to recapturing other units driving our conversion rates are driving our cancellation rates down. So the biggest moved we made in the portfolio. This quarter was China, which went out over 5% in terms of units under maintenance, that's the largest growing market for the portfolios. So we've challenged.

Team to outgrow what they've done in the past in every region, but especially in China.

Okay. Thank you very much.

Cai von Rumohr: Okay, thank you very much.

Thank you.

Operator: Thank you. And our next question comes from the line of Steve Tusa with J.P. Morgan. Your line is now open.

And our next question comes from the line of Steve Tusa with JP Morgan Your line is open.

Hey, guys good morning.

Steve Tusa: Hey guys, good morning. Can you just clarify whether the interest expense guidance reflects all the kind of recent and planned moves on, you know, on debt in the balance sheet and capital structure?

Steve.

Can you just clarify whether the interest expense guidance reflects all the kind of reset and plan moves on.

You know on debt.

The balance sheet capital structure.

Yes, it does the season so.

Rahul Ghai: Yeah, it does, Steve. So yeah, I mean, we increased the debt repayment from $250 to $350 million this year, and we're still holding our long-term total debt prepayment to around $500 million. So we did, we plan to do $350 million this year and $150 million next year.

Yes, we increased the debt repayment from 250 $350 million this year and we still holding our long term total debt repayment around 500. So we did with bank group 350, this year and 150 next year.

Okay, Great and is there anything in the second half when it comes to kind of the profit comps that we have to keep in mind from last year for kind of sequencing third quarter in fourth quarter or should things be kind of pretty smooth on a year over year basis, Yes, no I think even few.

Steve Tusa: Okay, great. And is there anything in the second half when it comes to kind of the profit comps that we have to keep in mind from last year for kind of sequencing Q3 and Q4 or should things be kind of pretty smooth on a year-over-year basis?

Rahul Ghai: Yeah, no, I think if you look at Q3 versus Q4, Steve, on the new equipment side, Q4 will be; we expect Q4 to be marginally stronger than Q3. You know, the activity slow in some of the larger markets in Asia Pacific like you mentioned, you know, India, Southeast Asia, and in the US while the job sites are open, the number of, you know, COVID-19 cases is still rising and that sometimes impacts, you know, the number of people we have available to job site, on job site or certain job sites shut down temporarily. So there's a little bit of still fluidity in the market. But this will be counterbalanced by China to some extent because we are catching up in certain areas in China and we do expect China to be strong in Q3.

If you look at Q3 versus Q4, Steve on the new equipment side Q4 will be we expect Q4 will be marginally stronger than Q3, there'll be activity to a little bit slow and some of the larger markets in Asia Pac like you mentioned, India Southeast Asia.

And in the U.S., while the job site that opened the number of.

I would banking cases until rising and that sometimes impacts you know the number of people be capital available to a job site owed on site or southern job sites shutdown temporarily so there's a little growth still fluidity of into market, but this will be counterbalanced by China, we had to some extent because we are catching up in certain areas in China and we do it.

That China will be strong in Q3, so overall youll, maybe on the new equipment side slight skew towards Q4 and on the service side as we mentioned in the prepared remarks I referred activity is still subdued due to the lower billing occupant. These little buildings are not fully open yet and we expect gradual improvement as we go through the through the year. So on.

Rahul Ghai: So overall, maybe on the new equipment side, slight skew towards Q4. And on the service side, as we mentioned in the prepared remarks, our repair activity is still subdued due to the lower building occupancy. Some of the buildings are not fully open yet, and we expect gradual improvement as we go through the year. So on the service side, we'll definitely have a stronger Q4 than Q3, and that's the higher margin business. So some of the profit will kind of follow similar trajectory.

So overall, maybe on the new equipment side, slight skew towards Q4. And on the service side, as we mentioned in the prepared remarks, our repair activity is still subdued due to the lower building occupancy. Some of the buildings are not fully open yet, and we expect gradual improvement as we go through the year. So on the service side, we'll definitely have a stronger Q4 than Q3, and that's the higher margin business. So some of the profit will kind of follow similar trajectory.

The service side, you will definitely have a stronger Q4 than Q3, and that's the highest margin business. So some of the profit to kind of although similar trajectory.

Steve Tusa: And then one last quick one. I think you guys have some pretty good visibility into, you know, what's going on in the, in the elevators that you know, your buildings are installed in. You mentioned lower occupancy. Any early reads on kind of any surprising utilization trends of your assets within those buildings despite the lower occupancy due to social distancing? Like you know, for example, if you know you're fitting less people in the elevator it's, you know, it's going to go up, up and down more times to carry the same amount of people. I mean, and any read into kind of into that utilization dynamic there.

Alright, and then one last quick one I think you got some pretty good visibility into.

What's going on in the in the elevators that Youre buildings are installed then you mentioned lower occupancy any any early reads on kind of any surprising utilization trends of your assets within those buildings. Despite the lower occupancy due to social distancing like for example, if you're getting less people in the elevator its.

It's going to go up up and down more time to carry the same amount of people I mean, and any read into kind of into that utilization dynamic there.

Judy Marks: Yeah, it's still early, but as you know, Steve, we had a tremendous amount of remote information from our remote monitoring systems. And these are early days. The residential elevators are getting tremendous usage because most elevators, people are only stepping in if no one else is in that, in condominiums and apartments throughout the world. So the residential usage we know is up in the more commercial space and office space. We're working with our customers to understand that. We're adjusting some traffic flow algorithms. Our destination dispatch system is being tuned based on customer requests. But as long as a building is open, it's certainly the elevator's getting used and maintained and eventually will need repair work as well. So early days, hopefully. We'll have some more data for you on the next call.

Yes, it's still early but as you know, Steve we had a tremendous amount of remote information from our remote monitoring systems and these are early days.

The residential elevators are getting tremendous usage because most elevators people are only stepping in if no. One else is in that condominiums and apartments throughout the world. So the residential usage. We know is out in may the more commercial space in office space, we're working with our customers to understand.

We are adjusting some traffic flow algorithms are destination dispatch system is is being tuned based on customer request, but as long as a building is open it certainly the elevators getting used and maintained and eventually will need misty and repair work as well so early days.

Yes, hopefully we'll have some more data free on the next next call.

Steve Tusa: Great. That's great. Thanks a lot.

Great that's great. Thanks, a lot.

Thank you and our next question comes from a line of John Walsh with Credit Suisse. Your line is now open.

Operator: Thank you. And our next question comes from the line of John Walsh with Credit Suisse. Your line is now open. If your phone is on mute, John, please unmute it.

It performs on mute John Please UN mute.

Hi, good morning, everyone sorry for that.

John Walsh: Hi, good morning, everyone. Sorry for that.

Judy Marks: Hi, John.

Hi, John.

John Walsh: Hi. Just wanted to dig a little bit into your comments around the modernization market. Obviously held in there better than we expected. You called out Asia Pacific. Just wanted to know if it was kind of a return to normal you were seeing with activity or if there was something else that was driving that expected growth in modernization on a regulatory front or anything else there.

Hi.

Just wanted to dig a little bit into your comments around the modernization market.

Obviously held in there better than we expected you called out Asia Pacific just wanted to know if it was kind of a return to normal you were seeing with activity or if there was something else that was driving that expected growth in modernization on a regulatory front or anything else.

There.

Judy Marks: Yeah, John, the major regulatory front activity is a safety regulatory program that's driving significant modernization in South Korea, and it's going very well for us. But it is a regulatory program that's going to be multiple years. In Q1, our sales were up 7%, down 1.5% in Q2, but orders for the first half are only down 70 basis points. So our modernization business is actually holding up better than we had anticipated through the first half. And we, you know, we've tried to put some of that, you know, that revision into our assumptions for our, you know, for our revised outlook, but it's Asia Pacific between Japan and Korea; modernization is healthy. Korea is primarily regulatory.

Yes, Johnny the major regulatory front activity is a safety regulatory program, that's driving significant modernization in South Korea.

And it's going very well for us, but it is a regulatory program, it's going to be multiple years.

Our ours in Q1, our sales were up 7% down 1.5% in Q2.

But orders for the first half are only down <unk> 0.7, 70 basis points.

So our modernization business is actually holding up better than we had anticipated to the first half and we've we've tried to put some of that.

Revision into our assumptions for from revised outlook, but it's in the Asia Pac between Japan, and Korea, Modernizations healthy Korea is primarily regulatory.

Great. Thank you for that and then.

John Walsh: Great. Thank you for that. Then, you know, I guess maybe going back to Steve's question, you know, as you talk to your customers, what is the appetite for them to move to more of a touchless solution and actually upgrade? Is it? Are we still in kind of the early stages of having conversations with those facility managers or are you actually seeing them kind of pull the trigger and wanting to move forward with some of those kind of post-COVID-19 investments as they prepare for people coming back.

I guess, maybe going back to to Steves question.

You know as you talk to your customers what is the appetite.

For them to move to more of a touchless solution and actually upgrade is it are we still in kind of the early stages of having conversations with those facility managers or for you actually seeing them trying to pull the trigger and wanting to move forward with some of those kind of.

Post covert 19.

Investments as they prepare for people coming back.

Judy Marks: So I think we're seeing, and I'll start with China where we've seen the biggest pull to start from purification fans and you know, being ordered in the thousands to touchless technologies, whether those are using our app for an iPhone or Android to be able to call the elevator or you know, we're piloting some hand gesturing technologies as well as just better traffic flow. So you see early adopters following both the technology early adopter curve, but also we're seeing it earlier in places that have recovered earlier. So China, it's already, it's being installed. We're seeing good pickup. Where we're seeing on the early adopters in EMEA, the rest of Asia Pacific in the Americas are those building managers who really are trying to figure out how not to queue in the lobbies and how to really create a safe and healthy building environment.

So I think we're seeing and I'll start with China, where we've seen the biggest pull to start.

From purification fans and Thats being ordered in the thousands.

Touchless technologies, whether those are using our app for an iPhone or Android to be able to call the elevator or where we're piloting some jester hand gesturing technologies.

As well as just better traffic flows. So you see early adopters following both the technology early adopter curve, but also we're seeing it earlier in places that have recovered earlier, so China. It's already it's being installed we're seeing good pick up.

Where we're seeing on the early adopters in EMEA the rest of Asia Pac in the Americans are those building managers, who really are trying to figure out how not to Q in the lobbies and how to really create a safe and healthy building environment and it's early but we're starting to see it's not much.

Judy Marks: It's early, but we're starting to see it's not material in terms of revenue yet. But a lot of people are interested. Some are doing short-term activities, but others are looking at major modernizations. And I think, you know, it's still to be determined if that modernization budget is going to replace some other modernization they were planning in their capital plans. I think we'll see that come out over the rest of 2020 and into 2021.

It's early, but we're starting to see it's not material in terms of revenue yet. But a lot of people are interested. Some are doing short-term activities, but others are looking at major modernizations. And I think, you know, it's still to be determined if that modernization budget is going to replace some other modernization they were planning in their capital plans. I think we'll see that come out over the rest of 2020 and into 2021.

Cereal in terms of revenue yet, but a lot of people are interested some are doing short term.

Activities, but others are looking at major Modernizations and I think it's still to be determined if that modernization budget is going to replace some other modernization. They were planning in the capital planners I think we'll see that come out over the rest of 20 to 21.

Great. Thank you for the color.

John Walsh: Great. Thank you for the color.

Judy Marks: Thank you.

Thank you.

Operator: Thank you. Our next question comes from the line of Carter Copeland with Melius Research. Your line is now open.

Our next question comes from a line of Carter Copeland with nucleus Research. Your line is no.

Hi, good good morning, and and great numbers.

Steve Tusa: Hey, good morning. Great numbers. I wondered if you might expand a little bit, Judy. Maybe there's not enough passage of time and data here, but do you see differences in service quality differentials across the market, and do you see that having an impact on retention and cancellation rates? I mean, it may be too early to say, but is there going to be any impact there that you think is measurable?

Carter Copeland: Hey, good morning. Great numbers. I wondered if you might expand a little bit, Judy. Maybe there's not enough passage of time and data here, but do you see differences in service quality differentials across the market, and do you see that having an impact on retention and cancellation rates? I mean, it may be too early to say, but is there going to be any impact there that you think is measurable?

I wondered if you might expand a little bit Judy.

And maybe theres not enough passage of time and data here, but do you see any differences in service quality differentials across the market and do you see that having an impact on.

Retention and yet and cancellation rates I mean, it maybe too early to say, but is there going to be any impact there that you think is measurable.

I think it will be but I think it's early days Carter and the rational reasons because as we look at a lot of our maintenance activities. We did not have all the same quantity of call backs as rule showed its growing again.

Judy Marks: I think it will be, but I think it's early days, Carter. And the reason is because as we look at a lot of our maintenance activities, we did not have all the same quantity of callbacks as Rahul showed. It's growing again as we go month to month, but it's hard to find that kind of comparison between 2020 and 2019 and 2018 and before that. IoT is going to make a significant difference. Digital adoption is going to make a significant difference. And we're seeing customers now really having discussions with us on, you know, what can we know when from a data access from a remote, from an API perspective.

As we go month to month, but it's hard to find that kind of compare between 20, and 19 and 18 and before that IR team is going to make a significant difference digital adoption is going to make a significant difference and we're seeing customers now really having discussions with us on.

What can we know when from on a data access from a remote from an apiay perspective, and so we see that's why we're going full steam on Otis one.

Judy Marks: And so we see that's why we're going full steam on Otis ONE and really picking up the pace in the second half of the year to make up for the first half where we didn't have access to all the buildings we needed to install the sensors and the gateway to our cloud. But you're going to see that pick up and we're going to hit that 100,000 units on Otis ONE throughout the globe in the countries we've identified by year end. That is going to drive service quality. Absolutely.

And so we see that's why we're going full steam on Otis ONE and really picking up the pace in the second half of the year to make up for the first half where we didn't have access to all the buildings we needed to install the sensors and the gateway to our cloud. But you're going to see that pick up and we're going to hit that 100,000 units on Otis ONE throughout the globe in the countries we've identified by year end. That is going to drive service quality. Absolutely.

I am really picking up the pace in the second half a year to make up for the first half where we didnt have access to all the buildings, we needed to install the sensors in the gateway to our cloud, but you're going to see that pick up and we're going to we're going to hit that 100000 units on Otis one throughout the globe in the countries. We've identified by year end and that is going to drive.

Service quality absolutely.

And just as a follow up the the demand on modernization and that the flat to down there does that represent sort of a step.

Steve Tusa: Just as a follow-up, the demand on modernization and the flat to down there, does that represent sort of a step down, that we stay there or is there a pent-up demand dynamic there as we look into 2021 and 2022?

Carter Copeland: Just as a follow-up, the demand on modernization and the flat to down there, does that represent sort of a step down, that we stay there or is there a pent-up demand dynamic there as we look into 2021 and 2022?

Down that we stay there or is there a pent up demand dynamic there as we look into 21 and 22.

I am I'm convinced there is pent up demand I mean in in the install base in the segment itself five and a half million elevators are over 20 years old and are either need a static upgrades or technology insertion and major upgrades and modernization in M&A alone.

Judy Marks: I'm convinced there's pent-up demand. I mean, in the installed base, in the segment itself. 5.5 million elevators are over 20 years old and are either in need of aesthetic upgrades or technology insertion and major upgrades and modernization. In EMEA alone, you know, there's 3 million units that are over 20 years old. So every year they age, they're all getting usage, especially the residential units. And the China modernization opportunity is emerging as well. So I think all of those converge, and the challenge is going to be, you know, when does that budget reemerge for the customers to engage and when do they see this not as discretionary but really as mandatory for their own usage, for their own, you know, technology insertions.

There's 3 million units.

That are over 20 years old so every year they age they're all getting usage, especially in the residential lawn units.

And the China monetization opportunity is emerging as well so I think all of those converge and the challenge is going to be when Ken when does that budget, we emerge for the customers to engage and when do they see this not as discretionary but really as as mandatory for their own usage for their own checked.

LNG insertions.

Great. Thanks for the color.

Steve Tusa: Great, thanks for the color.

Carter Copeland: Great, thanks for the color.

Thank you and our last question comes from alone Jeff Sprague with vertical research. Your line is now open.

Operator: Thank you. Our last question comes from the line of Jeff Sprague, Vertical Research. Your line is now open.

Thank you good day everyone.

John Walsh: Thank you.

Jeff Sprague: Thank you.Good day everyone.

Rahul Ghai: Good day everyone.

Judy Marks: Jeff.

Jeff or pager.

Rahul Ghai: Hey Jeff, I wonder if we could.

Rahul Ghai: Hey Jeff,

Jeff Sprague: I wonder if we could.Come back to the booked margin discussion. Kind of a two-pronged question around that. First, Rahul, you responded, I think it was to Cai's question and on your productivity and other actions that you're taking. So to be clear, is that booked margin kind of a gross booked margin or is that net of everything you're trying to do to counter price and pressure?

Well, there if we could come back.

John Walsh: Come back to the booked margin discussion. Kind of a two-pronged question around that. First, Rahul, you responded, I think it was to Cai's question and on your productivity and other actions that you're taking. So to be clear, is that booked margin kind of a gross booked margin or is that net of everything you're trying to do to counter price and pressure?

The margin discuss them kind of a two pronged question around that.

Role you responded.

It was the cause question.

On your productivity and other actions that you are taking so to be clear is that books margin kind of.

Gross.

Margin or or is that net of everything you're trying to do the counter pricing pressure.

Judy Marks: No, it's clearly gross. It's the margin we take when we record the order, and then everything else we do is obviously to drive that down with productivity offsets and other cost actions.

Now, it's clearly growth since it's the margin we take when we when we record the order and then everything else. We do is obviously to drive that down with productivity offsets and other cost actions.

And then.

John Walsh: And then obviously you're just talking about the core quarter with that number. Do you have a sense of kind of total margin and backlog, how that's sitting right now?

Jeff Sprague: And then obviously you're just talking about the core quarter with that number. Do you have a sense of kind of total margin and backlog, how that's sitting right now?

Obviously, you're just talking about the quarter with that number do you have a sense of.

Kind of total margin in backlog, how thats sitting right now.

Rahul Ghai: Yeah, overall. So the first half. So a couple of points there, Jeff, on the second quarter our booked margin was down 70 basis points. It's about flat for the first half because if you remember first quarter our booked margin was actually up. So if you average the two quarters it's kind of flat. So on the booked margin side, on the backlog margin, our backlog margin was actually up slightly. So that was good to see that, you know, not only is the backlog up 2% but the backlog margin is also up. So that's a good sign for us clearly.

Yes, the overall for the full top so fix a couple of couple of points there Jeff on the second quarter are booked margin was down 70 basis points. It's about flat for the first half because if you remember first quarter are booked module was actually up. So if you average the grew quarter, that's kind of flat. So on the books margin side on the backlog margin our backlog.

Module is actually up slightly so that was good to see that but not a modeling as is the backlog up to put them, but the margin in backlog is also up.

So that's a good sign for us.

Clearly and then just on the back on the capital deployment.

John Walsh: Then just on the backlog and the capital deployment, you know, I guess kind of it almost looks like completing the debt reduction, you say 2021. It almost looks like it could be January 2021. So given kind of the exit cash balance you're going to have here, just maybe a little more color on what your appetite is to kind of institute share repurchase and/or step up kind of the M&A activity. And I guess on M&A it's more of a question of kind of availability versus desire. But any other color you have there would be appreciated.

Jeff Sprague: Then just on the backlog and the capital deployment, you know, I guess kind of it almost looks like completing the debt reduction, you say 2021. It almost looks like it could be January 2021. So given kind of the exit cash balance you're going to have here, just maybe a little more color on what your appetite is to kind of institute share repurchase and/or step up kind of the M&A activity. And I guess on M&A it's more of a question of kind of availability versus desire. But any other color you have there would be appreciated.

I just kind of it almost looks like completing the debt reduction you say 2021, it almost looks like it could be January of 2021.

So that the given kind of the exit cash balance youre going to have here.

Just maybe a little more color on what your appetite is too high.

Kind of institute share repurchase and door step up kind of the M&A activity in.

I guess on M&A, it's more of a question of kind of availability.

Versus desire, but any other color you have there would be appreciated.

Judy Marks: We have a desire for MA as we've always shared, and it's a matter of the right properties coming up, you know, especially to add to our service portfolio in regions where we can achieve the synergies and have the ability to integrate effectively and gain those units on the portfolio. We continue to look at those niche properties, and as they come up, you know, you know, we've got a deal book that's live and always, always looking. We think that $50 million a year that we shared at Investor Day is still the right placeholder for us, and we continue to do very small ones that are obviously of some private, privately held companies that wouldn't show up. Noel, do you want to.

We have a desire for M&A as we've always shared and it's a matter of the right properties coming up.

You know, especially to add to our service portfolio in regions, where we can achieve the synergies and have the ability to integrate effectively and gain news units on the portfolio and we continue to look at those.

Theres niche properties and as they come up we've got a deal book, that's live and always always looking we think that 50 million a year that we shared at Investor day is still the right place holder for us.

And we continue to do very small ones that are obviously, some small up some private privately held companies that wouldnt shell, nor do you want to yeah. So our plan and Jeff on the share buyback. Our plan was ollie's upstart share buyback Bulls debt repayments. So if you accelerate the debt repayment share buyback and also get potentially accelerated.

Rahul Ghai: Yeah. So our plan, Jeff, on the share buyback, our plan was always to start share buyback post debt. So if you accelerate the debt repayment, you know, share buyback can also get potentially accelerated. But the situation is fluid. Obviously we're going to watch the overall liquidity in the markets; we don't want to repeat or what we saw back in March, April when you know, the access to CP markets got severely restricted. So we've got a strong credit rating. We're not expecting a repeat of that scenario. But to the extent that the liquidity markets, the liquidity stays stable in the market and we accelerate our debt repayment, we're absolutely looking at accelerating the share buyback as well.

But endless attrition of fluid, obviously going to watch the overall market liquidity in the markets. We don't have repeat or what we saw back in March April then the access for CP markets got severely restricted so we've got a strong credit rating, we're not expecting a repeat of that scenario, but to the extent that the liquidity markets.

The liquidity stays stable in the market and the accelerate our debt repayment will absolutely looking at accelerated the share buyback as well.

Judy Marks: Yes, great working capital this quarter. We're obviously going to keep driving the team to drive that free cash flow. Really pleased with that performance, and obviously, the more we generate and our liquidity situation, we will continue to focus on how we can benefit our shareholders.

Great working capital this quarter, we're obviously going to keep driving the team to drive that that free cash flow really pleased with that performance and obviously, we the more we generate.

And our liquidity situation, we will continue to focus on how we can benefit our shareholders.

On slide maybe just one follow up on that.

John Walsh: Sorry, maybe just one follow up on that. Is the near term tax rate reduction that you're seeing and realizing more a function of the delever or is it more kind of the structural things that you're working on?

Jeff Sprague: Sorry, maybe just one follow up on that. Is the near term tax rate reduction that you're seeing and realizing more a function of the delever or is it more kind of the structural things that you're working on?

In the near term tax rate reduction that youre seeing in realizing more a function of the de lever or is that more kind of the structural things that you're working on.

Rahul Ghai: No, it's nothing. It's not. The deleverage part is not the reason why we took our tax rate down from 32% to 31.5%, part reduction from 33% to 32% that we guided to in Q1 earnings call that was related to reducing the rate of finding ways to reduce the tax that we need to pay on repatriation of cash. So we worked on that. That led to about a 1 point reduction back in Q1 on the Q1 earnings call. This reduction of a half a point is not nothing to do with finding out ways to reduce the tax on repatriation of cash. This is more structural.

No. It's nothing it's not the de leverage spot is not.

Is not the reason why we took are actually down from 30 to 31.5 bonfire production from 33% to 32% when the that the guided two in Q1 earnings call that was related to reducing the rate of finding ways to reduce the that accept any to be on VPG.

Additional cash so we work on that that led to about a one point production back in in Q1 on the Q1 earnings call. This reduction for how the point is not nothing to go with.

Finding out ways to reduce the facts on repatriation of cash to suit. This is more structural and we're going to continue that structural focus as a whole shared in the comments, we see a 25% to 28%.

Judy Marks: Yeah. And we're going to continue that structural focus. As Rahul shared in the comments, you know, we see a 25% to 28% effective tax rate in the midterm. Lots of structural activities going on, and we view opportunities to get there over the midterm.

Effective tax rate in the mid term.

Loss, a structural activities going on and we view opportunities to get there over the midterm.

Great. Thank you for the color.

Operator: Great.

Jeff Sprague: Great.Thank you for the color.

John Walsh: Thank you for the color.

Thank you and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one.

Operator: Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question, please press star one. If you would like to remove your question, please press the pound key. And this does conclude today's question and answer session. I would now like to turn the call back to Judy Marks for closing remarks.

If you would like to move your question. Please press the pound key.

In this does conclude today's question and answer session I will now, let's turn the call back to Judy much for closing remarks.

Judy Marks: Well, thanks again everyone for joining the call this morning. We remain focused on executing our strategy, managing the risks, and driving value for Otis shareholders while supporting our customers and efforts to safely reopen job sites and buildings. I want to once again thank our colleagues for their dedication as well as those on the front line fighting COVID-19. Stay safe and well. Thank you.

Thanks again, everyone for joining the call. This morning, we remain focused on executing our strategy managing the risks and driving value for shareholders, while supporting our customers in F efforts to safely reopen job sites and buildings I want to once again, thank our colleagues for their dedication as well as those on the frontline fighting Cobot 90.

I mean stay safe and well thank you.

Ladies and gentlemen. This concludes today's conference call could you for participants you may now disconnect.

Operator: Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect. SA.

Operator: Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Good morning, bulky two oldest <unk> second quarter 2020 earnings conference call.

Operator: Good morning and welcome to Otis second quarter 2020 earnings conference call. Today's call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis website at www.otis.com. I will now turn the call over to Stacy Laszewski, Vice President of FP&A and Investor Relations.

Todays call is being carried live on the Internet recorded for replay.

Indication materials are available for download from Otis website at Www Dot oldest dot com.

I'll now turn the call Liberty Stacy.

<unk> Vice President of as you made an investor relations.

Thank you Christine good morning, everyone welcome to Odessa second quarter 2020 earnings conference call on the call with me today, our Judy Mark President and Chief Executive Officer.

Judy Marks: Thank you, Chris, and good morning, everyone. Welcome to Otis Q2 2020 Earnings Conference Call. On the call with me today are Judy Marks, President and Chief Executive Officer, and Rahul Ghai, Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant non-recurring items. The company will also refer to adjusted results where adjustments were made as though Otis was a standalone company in the current period and prior year. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties. Otis SEC filings, including our Form 10 and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially.

Guy Executive Vice President and Chief Financial Officer. Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring item. The company will also refer to adjusted results were adjustments were made.

The onus on a Standalone company in the current period prior year. A reconciliation of these measures can be found in the appendix on the webcast. We also remind listeners that the presentation contains forward looking statements, which are subject to risks and uncertainties. Oh. This is actually be filings, including our form 10 in quarterly reports on form 10-Q.

My details on important factors that could cause actual results to differ materially with that I'd like turn the call over to Judy. Thank you Stacy and good morning, everyone. We're glad that you can join us today and hope that everyone listening is safe and well I'm very pleased with our results. They grateful for their dedication of our colleagues who provided essential services.

Judy Marks: With that, I'd like to turn the call over to Judy. Thank you, Stacy, and good morning, everyone. We're glad that you could join us today and hope that everyone listening is safe and well. I'm very pleased with our results and grateful for the dedication of our colleagues who provided essential services and supported our customers in efforts to safely reopen job sites and buildings during these unprecedented times. To briefly update you on the status of operations in this environment, today all Otis factories are operating, and approximately 90% of new equipment job sites are open, up from a low point of about 65% in the quarter. Otis field professionals provided essential services, and our maintenance business remained resilient. However, the shutdown of buildings put understandable pressure on our repair and modernization business.

Boarded our customers in efforts to safely reopened job sites and building stories unprecedented times to briefly update you on the status of operations in this environment today, all Otis factories are operating at approximately 90% of new equipment job sites are open up from a low point of about 65%.

In the quarter oldest field professionals provided essential services and our maintenance business remained resilient. However, the shutdown of buildings put understandable crusher on our repair and modernization business by Jim we saw encouraging signs of improvement in many regions in the new equipment business, we experienced substantial.

Judy Marks: By June, we saw encouraging signs of improvement in many regions in the new equipment business. We experienced substantial recovery in China during Q2, while North America, EMEA, and Asia Pacific continued to experience job site closures in certain areas. Our management team has done an excellent job to proactively contain costs and mitigate the impact from COVID-19 that was reflected in our results reported this morning, especially encouraging in our service business in terms of liquidity. We ended Q2 with $1.9 billion of cash on hand and have a $1.5 billion undrawn revolving credit facility, a strong position for us to run the business. This environment has not slowed our progress in executing on our strategies. We continue to introduce new and innovative products with our touchless elevator technologies, traffic flow solutions, purification products, or remote monitoring and predictive maintenance services.

Sure recovery in China during the second quarter, while North America, EMEA and Asia Pacific continued to experience job site closures in certain areas.

Our management team has done an excellent job to proactively contain costs and mitigate the impact from Cobiz 19 that was reflected in our results reported this morning, especially encouraging and our service business.

In terms of liquidity, we ended Q2 with $1.9 billion of cash on hand, I'd have a 1.5 billion dollar undrawn revolving credit facility, a strong position for us to run the business.

Judy Marks: We are partnering and bringing solutions to our customers to promote and support the health and safety of their tenants and passengers. We continue to expand our product offerings, launching the Gen2 Prime in India, a low-rise entry-level elevator. This product brings a combination of safety, performance, themed aesthetics, and price competitiveness to our India low-rise market with applicability to other developing markets. We continue to build momentum on the deployment of IoT, and we recently launched a new release that added several new features for our customers and to drive productivity in our organization. This new release also improves the scalability of our solution. We have a clear roadmap to continue to enhance the capability of our IoT solution over the next several months, despite the challenges introduced by the pandemic.

The health and safety of their tenants and passengers we continue to expand our product offerings watching the gen. Two prime in India, a low rise entry level elevator. This product brings combination of safety performance seemed to statics and price competitiveness to our India low rise market with a click ability to us.

They're developing markets, we continue to build momentum on the deployment of I O T and we recently launched a new releases that added several new features for our customers and to drive productivity in our organization. This new release also improves the scalability of our solution. We have a clear roadmap to continue to enhance the capability of our eyes.

He solution over the next several months.

Despite the challenges introduced by the pandemic, we continue to deploy units in U.S., Europe, and China in the first half and expect to place the pace of wire t. deployment to increase substantially in the second half.

Judy Marks: We continue to deploy units in US, Europe, and China in the first half and expect the pace of IoT deployment to increase substantially in the second half. We've driven both service and material productivity through our continued IoT technology, our suite of mobility tools via iPhone apps for our field professionals, and our global supply chain activities this quarter. These are just a handful of examples that led to 90 basis points of new equipment share gain during the first half. This progress shows the strength of our strategy. As leaders here at Otis, we're proud of our company's long commitment to diversity and inclusion. Yet we also know there's more to be done if we are to become the company we want to be, an equal opportunity employer of choice for people of all cultures, genders, races, and generations.

And we've driven service and material productivity through our continued higher T. technology, our suite of mobility tools to the I phone apps for our field professionals and our global supply chain activities this quarter.

These are just a handful of examples that led to 90 basis points of new equipment share gain during the first half. This progress shows the strength of our strategy.

As leaders Herodotus, we're proud of our company's long commitment to diversity and inclusion yes. We also know there's more to be John if we're to become the company we want to be an equal opportunity employer of choice for people have all cultures genders races and generations.

Judy Marks: To ensure we live up to these aspirations, our leadership team and I launched our Commitment to Change, which is a framework to help us identify and prioritize the actions we need to take. We continue to demonstrate our commitment as Otis joined the Paradigm for Parity Coalition and committed to closing our global leadership gender gap by 2030. People are at the heart of everything we do at Otis, and I'm proud of these important steps. Otis will lead our industry for inclusion and diversity. Turning to Slide 4, Q2 results and 2020 outlook. New equipment orders were down 6.8% at constant currency, with double digit declines in the Americas and EMEA, partially offset by growth in Asia as China recovers from COVID-19. China orders were up high single digits, including several infrastructure awards. On a rolling 12 months, total Otis orders were flat.

To ensure we live up to these aspirations our leadership team and I launched our commitment to change, which is a framework to help us identify and prioritize the actions we need to take we continued to demonstrate our commitment is otis joined the paradigm for parity coalition.

Committed to closing our global leadership gender gap by 23rd.

People are at the heart of everything we do at Otis and I'm proud of these important steps.

This will lead our industry for inclusion and diversity.

Turning to slide for Q2 results in 2020 outlook.

New equipment orders were down 6.8% at constant currency with double digit declines in the Americas and EMEA, partially offset by growth in Asia as China recovers from Covidien 19, China orders were up high single digits, including several infrastructure awards on a rolling 12 months total.

This orders were flat.

Judy Marks: New equipment backlog was up 2% versus the prior year, in the second quarter. Organic sales were down 6.5% driven by double-digit decline in the new equipment segment and low single-digit decline in the service segment. Adjusted operating profit was down $24 million at constant currency. Currency and margin expanded 30 basis points driven by continued expansion in the service segment and the swift cost containment actions we implemented. Free cash flow was robust at $628 million with 280% conversion of net income reflecting strong working capital performance in the quarter. These swift cost actions and our organization's commitment to serving customers allowed us to mitigate the bottom line impact from a year-over-year decline in sales, and I'm pleased with the second quarter and first half performance despite the difficult environment we're operating in globally.

New equipment backlog was up 2% versus the prior year.

In the second quarter organic sales were down 6.5% driven by double digit decline in the new equipment segment and low single digit decline in the service segment.

Adjusted operating profit was down $24 million at constant currency and margin expanded 30 basis points driven by continued expansion in the service segment and the Swift cost containment actions we implemented.

Free cash flow was robust at $628 million with 280% conversion of net income, reflecting strong working capital performance in the quarter.

These swift cost actions and our organizations commitment to serving customers allowed us to mitigate the bottom line impact from a year over year decline in sales and I'm pleased with the second quarter and first half performance despite difficult environment, we're operating in globally.

Judy Marks: We are encouraged by the recovery we've experienced in China and are revising our 2020 outlook to reflect the solid first half performance and anticipated pace of recovery for our business in the second half. Across the world, we are increasing the organic sales range now expected to be down 2% to 4%. Adjusted operating profit is now expected in a range of flat to down $50 million at constant currency, a $75 million improvement versus the prior outlook at the midpoint, primarily from higher volume expectations. We now expect adjusted diluted earnings per share in a range of $2.20 to $2.30, up $0.20 at the midpoint versus prior expectations. This reflects our improved operating profit outlook, lower tax rate, and lower net interest costs.

We are increasing the organic sales range now expected to be down 2% to 4%.

Adjusted operating profit is now expected in the range of flat to down $50 million at constant currency.

75 million dollar improvement versus the prior outlook at the midpoint, primarily from higher volume expectations.

We now expect adjusted diluted earnings per share in a range of $2 in 20 cents to $2.30 up 20 cents at the midpoint versus prior expectations.

This reflects our improved operating profit outlook lower tax rate and lower net interest costs.

Judy Marks: Lastly, we expect free cash flow to be robust between $1.0 and $1.1 billion with full year free cash flow conversion levels between 130% and 140% of GAAP net income. With that, I'll turn it over to Rahul to walk through our results and the outlook in more detail.

Lastly, we expect free cash flow to be robust between 1.0 and $1.1 billion with full year free cash flow conversion levels between 130, and 140% of GAAP net income.

With that I'll turn it over to our goal to walk through our results any outlook in more detail.

Rahul Ghai: Thank you, Judy, and good morning, everyone. Starting with Q2 results on slide 5, net sales were $3 billion, down 9.6%, with a 6.5% decline in organic sales, and the rest from foreign exchange and net divestitures in 2019. As we anticipated and communicated during the Q1 earnings call, both the new equipment and service segments declined organically in the Q2 primarily from the impact of COVID-19. Adjusted operating profit in the quarter was down approximately 8% or $39 million and down $24 million at constant currency. Operating profit declined at constant currency from the impact of lower volume, temporary price concessions that we offered to our customers to support them during these difficult times, and a small increase in year-over-year bad debt expense. We were able to partially offset this by strong productivity in both new equipment and service segments.

Thank you Julie and good morning, everyone, starting with second quarter results on slide five.

Net sales were $3 billion down 9.6% with a 6.5% decline in all regarding sales and the rest from foreign exchange and net divestitures into NT 90.

As we anticipated and communicated during the first quarter earnings call, both the new equipment and service segments declined organically in the second quarter.

Primarily from the impact of gold 19.

Adjusted operating profit in the quarter was down approximately eight plus and our $29 million and down $24 million at constant currency.

Operating profit declined at constant currency on the impact of lower volume temporary price concessions that we offered to our customers to support them. During these difficult times and a small increase in Italy your bad debt expense.

We've been able to partially offset by strong productivity in both new equipment and service segments in the new equipment segment aren't material productivity in the factories.

Rahul Ghai: In the new equipment segment, our material productivity in the factories of 3% for a second quarter in a row, and in the service segment, maintenance hours per unit continued to trend down. Cost containment efforts that we launched in Q1 of 2020 also helped alleviate the pressure from lower volume, and our adjusted SG&A expenses were down close to $40 million year over year. At the same time, we maintained the investment in the business, and R&D expense as a percentage of sales was flat versus the prior year. Our strong focus on operational execution and a favorable segment mix drove 30 basis points of margin expansion with continued margin expansion in the service segment. Second quarter adjusted EPS was down $0.03, as a $0.05 decline from operating profit was partially offset by a $0.02 increase primarily from favorable tax rate and lower interest costs.

Well of pre Boston for second quarter inaugural added the service segment maintenance outlets by unit continued to trend.

Cost containment efforts that we launched in Q1 off Twentytwenty also helped alleviate the pressure from lower volume and adjusted FCB expenses were down close to $40 million year over year.

At the same time, we maintain say investment into business and R&D expense as a percentage of sales was flat versus the prior year.

Our strong focus on operational execution and a favorable segment mix drove 30 basis points of margin expansion with continued margin expansion into service segment.

Second quarter adjusted EPS was down three cents as a five cents declined from operating profit was partially offset by two cents increase primarily from favorable tax rate and lower interest costs.

These results were better than we had expected in the previous outlook for why did during Q1 earnings call driven by the resiliency of service business model and our focus on productivity and proactive management of costs and customer concessions.

Rahul Ghai: These results were better than we had expected in the previous outlook provided during Q1 earnings call, driven by the resiliency of our service business model and our focus on productivity and proactive management of cost and customer concessions. Moving to slide 6, new equipment orders were down 6.8% at constant currency and were flat on a rolling 12-month basis. Our order intake continues to outperform the market that was down high single digit, resulting in 110 basis points increase in global market share in the quarter. Booked margins were down 70 basis points in the quarter and were flat year-over-year. For the first half in the quarter, booked margins were down in Asia and parts of Europe and were partially offset by improvement in the Americas and the Middle East.

Moving to slide six.

New equipment orders were down 6.8% at constant currency and are flat on a rolling 12 month basis.

Our order impede continues to outperform the market that was down high single digit, resulting in a 110 basis point increase in global market share in the quarter.

Book margins were down 70 basis points in the quarter.

Were flat year over year for the first half.

And the quarter welcome margins were down in Asia, and parts of Europe and were partially offset by improvement in the Americas and the middle East.

Rahul Ghai: New equipment backlog was up 2% at constant currency from growth in the Americas, and backlog margin was up slightly over prior year. Organic sales were down 10.4% with double digit declines in the Americas and EMEA, reflecting the impact of job site closures in April and May. Sales in Asia were up 1.6% as decline in Asia Pacific was more than offset by strength in China. China new equipment sales were up high single digits as job sites reopened and business returned to pre-COVID levels at constant currency. New equipment adjusted operating profit was down $46 million, and margin contracted 230 basis points as strong material productivity and cost containment in the field was more than offset by the impact from lower volume and under absorption of costs. Service segment results on slide 7 remained strong in the quarter.

New equipment backlog was up 2% at constant currency from growth in the Americas and backlog margin was up slightly over prior year.

Organic sales were down 10.4% with double digit declines in the Americas and EMEA, Inc.

Reflecting the impact of job site closures in April and May.

Sales in Asia were up 1.6 wasn't as decline in Asia Pacific was more than offset by strength in China.

China, New equipment sales were up high single digit as job sites reopened and business returned to pre cold levels.

As constant currency, new equipment, adjusted operating profit was down $46 million and margin contracted 230 basis points, a strong material productivity and cost containment in a few was more than offset by the impact from lower volume and under absorption of golf.

Service segment results on slide seven remained strong in the quarter number of units under maintenance contracts increased by one person would units in China up more than 5%.

Rahul Ghai: Number of units under maintenance contracts increased by 1%, with units in China up more than 5%. Modernization orders were down 4% as strong orders growth in China driven by mandated regulatory upgrades in certain markets was offset by lower order intake in the Americas and EMEA. Organic sales were down 3.3%, as maintenance demand remained strong while the building shutdowns impacted discretionary repair and modernization sales. Adjusted Operating Profit margin expanded 170 basis points and profit grew by $14 million at constant currency.

Modernization orders were down 4% as strong orders growth in China, driven by mandated regulatory upgrades in certain markets was offset by lower order intake in the Americas and EMEA.

Organic sales were down 3.3 person as Containments demand remains strong while the building shutdowns impacted this question for you to pit and modernization sales.

Adjusted operating profit margin expanded 170 basis points and profit grew by $14 million at constant currency.

Rahul Ghai: A strong contribution from productivity and cost containment actions more than offset the impact from volume decline, temporary price concessions, and an increase in bad debt. Pricing environment excluding the impact of price concessions was modestly favorable overall. We closed out a solid first half in which our organic sales were down slightly more than 4% with flat year-over-year service revenue and a 70 basis point margin expansion.

Strong contribution from productivity and cost containment actions more than offset the impact from volume decline temporary price concessions and an increase in bad debt.

Pricing environment, excluding the impact of price concessions was modestly favorable.

Overall, we closed out a solid first half enrich our organic sales were down slightly more than four button.

With flat year over year service revenue and a 70 basis point margin expansion.

Rahul Ghai: We are maintaining the execution momentum in the business and continue to make progress on key strategic initiatives, gaining share in new equipment, driving material and service productivity, and containing SG&A costs. While we face a challenging business and economic environment, our operational metrics are recovering from the lows of April and May, turning to slide 8. China has shown a swift recovery as business returns to normal, and the rest of the world is following suit at varying paces. We have seen improvement in access to new recruitment job sites throughout Q2 in every region. Access has largely returned to normal in the Americas and EMEA, while Asia Pacific has shown improvement but is still facing some challenges in India and Southeast Asia due to government-imposed measures. The maintenance business was resilient in the quarter and considered essential in most areas.

Yes, maintaining the execution momentum into business and continue to make progress on key strategic initiatives.

Gaining share in new equipment, driving material and so its productivity and containing assuming costs.

And while a challenging while we face a challenging business economic environment. Our operational metrics are recovering from the loads of April and May.

Turning to slide eight.

China is shown a swift recovery as business returns for normal and the rest of the world. It's following suit at rating basis.

We have seen improvement and access to new equipment job site throughout Q2 in every region.

Access has largely returned to normal in the Americas and EMEA.

While Asia Pacific has shown improvement, but it's still facing some challenges in India and southeast Asia due to government imposed measures.

Maintenance business was with a link in the quarter and consider essential in most areas.

Rahul Ghai: Access where it was limited has returned to normal levels towards the end of June and early Q3. Lastly, overall repair volumes are still below last year and Q1, but trends are heading in the right direction with the number of service requests from our customers continuing to increase, and we expect to see recovery to pre-COVID levels in the balance of the year as buildings reopen. We are improving our 2020 outlook to reflect strong progress in the first half and these encouraging trends. On slide 9, we now expect overall organic sales to be down 2% to 4% for the year, up from prior expectations of down 3% to 7%, with improvement in both new equipment and service versus prior guidance. We now expect new equipment sales to be down mid to high single digits and service sales to be flat to down low single digits.

Access when it was limited has returned to normal levels towards the end of June and early Q3.

Lastly, overall repair volumes are still below last year and Q1, what trends are heading into right direction with a number of service requests from our customers continuing to increase and we expect to see recovery pre colbert levels in the balance of the year as buildings reopened.

We are improving twentytwenty outlook to reflect strong progress in the first half and viiv encouraging trends.

On slide nine we now expect overall organic sales to be down to the for both in Colombia.

From prior expectations down 3% to 7%.

The improvement in both new equipment and so this was just broad guidance.

We now expect new equipment sales to be down mid to high single digits and service sales to be flat to down low single digits.

Rahul Ghai: In the new equipment segment, we are assuming varying rates of recovery, with the high end reflecting a slight growth in the second half of the year in the service segment. Maintenance business has proved to be resilient in this environment, and the range reflects differing degrees of delay in discretionary repair and modernization projects in the back half of the year, depending on the overall macroeconomic environment and the occupancy level of buildings. Adjusted operating profit is expected to be flat to down $50 million at constant currency, and down $4,200 million at actual currency. At constant currency, the outlook increased by $75 million at the midpoint, reflecting the higher revenue versus prior guidance, strong progress on cost containment actions, and a small improvement in service pricing. Outlook, we expect operating margin expansion in a range of 10 to 30 basis points.

The new equipment segment.

I mean varying rates of recovery with the high end, reflecting a slight growth in the second half a year.

Depending on the overall macroeconomic environment and the occupancy level of buildings.

Adjusted operating profit is expected to be flat to down $50 million at constant currency and down 40 $200 million at actual currency.

We expect operating margin expansion in a range of 10 to 30 basis points.

Rahul Ghai: Adjusted EPS is now expected to be in a range of $2.20 to 2.30, up $0.20 at the midpoint, driven by improved operating profit outlook, lower net interest costs, lower tax rate, and a reduced share count. We are lowering our full year tax rate guidance to 31.5% from 32% in May, and down from 33% on investor day. We expect the tax planning work that we're doing to continue to yield benefits and the tax rate to trend down to between 25% to 28% over the medium term. Taking a further look at our organic growth assumptions on Slide 10 in the New equipment segment, Americas is expected to be down mid single digits to 10%, reflecting the sharp decline we saw in Q2.

Adjusted EPS is now expected to being a range of 2020 cents due 2030 cents up 20 cents at the midpoint.

Driven by improved operating profit outlook, lower net interest costs lower tax rate and reduced share count.

We are lowering our full year tax rate guidance with 31.5, both in from 32% in may and down from 33% on Investor Day.

We expect the tax planning work that we're doing do continue to achieve benefits and the tax rate to trend down between 25% to 28% over the medium term.

Taking a further look at our organic growth assumptions on slide 10.

In the new equipment segment Amedicas is expected to be down mid single digits grew 10%.

Flexing the sharp decline we saw in Q2.

Rahul Ghai: The high end, or a 5% decline, contemplates a rapid recovery in Q3 and growth in the back half of the year, while the lower end reflects continuing challenges in accessing the job sites. The EMEA new equipment business is expected to be down high single digits, reflecting business recovering to pre-COVID levels during Q3 in North Europe and a gradual recovery in South Europe and the Middle East. We are improving the Asia new equipment outlook due to strong recovery we experienced in China during Q2 and now expect Asia to be down mid single digits. This reflects the continued recovery in China, with varying pace of recovery across Asia Pacific, with challenges in India and Southeast Asia, while the rest of Asia holds up well in the service business.

The high end or a 5% decline contemplate a rapid recovery in Q3 and growth in the back half of the year.

One of the lower end reflects continuing challenges in accessing the job sites.

EMEA and you recruitment business is expected to be down high single digits, reflecting business recovering to pre forward levels. During Q3 in North Dakota, and a gradual recovery in south Europe, and the middle East.

We are improving the Asia, new equipment outlook due to strong recovery, we experienced in China during Q2.

And now expect Asia to be down mid single digits.

This reflects the continued recovery in China with rating pace of recovery across Asia Pacific with challenges in India, and Southeast Asia, while the rest of Asia holds up well.

And the service business, we anticipate the maintenance business to remain stable into the back half a year with continued pressure on discretionary repair early in Q3 and recovery in the later months of at year end.

Rahul Ghai: We anticipate the maintenance business to remain stable into the back half of the year, with continued pressure on discretionary repair early in Q3 and recovery in the later months of the year, and expect the overall maintenance and repair business to be flat to down slightly for the year. While our modernization sales grew in the first half, there is potential for modernization projects to push out into 2021, and we now expect modernization sales to be flat to down low single digits. Overall, the high end of the 2% to 4% organic sales decline reflect an early Q3 recovery globally, and the low end assumes first half conditions to continue into the second half of the year, switching to operating profit on slide 11 at constant currency.

And expect overall maintenance and repair business to be flat to down slightly for the year.

While our modernization sales grew in the first half that has potential for modernization projects push out into 2021.

And we now expect modernization sales to be flat to down low single digits.

Overall, the high end off the 2% to 4% organic sales decline reflect an early Q3 recovery globally and the low end assumes first tough conditions to continue into the second half per year.

Switching to operating profit on slide 11.

As constant currency adjusted operating profit improved by $75 billion for the May guidance at the midpoint and is now expected to be flat to down 50 million, what's as the prior year.

Rahul Ghai: Adjusted operating profit improved by $75 billion from the May guidance at the midpoint and is now expected to be flat to down $50 million versus the prior year, reflecting the impact of reduced volume from the COVID-19 pandemic, incremental under-absorption of costs, and an impact on pricing including some temporary price concessions. In our service business, we will continue to offset these impacts through strong material and service productivity and cost containment actions that are tracking as per prior expectations. Foreign exchange is now expected to be a headwind of $40 to 50 million for the year, an improvement from the $60 million of headwind that we had expected in May due to strengthening of the euro against the US dollar.

Reflecting the impact of reduced volume from the covert 19 pandemic.

Incremental under absorption of call.

And that impact on pricing, including some temporary price concessions in our service business.

We will continue to offset these impacts through strong material and service productivity and cost containment actions that are tracking as the prior expectations.

Foreign exchange is now expected to be a headwind of $40 million to $50 million fill that you're an improvement from the $60 million of headwind that we had expected in may with strengthening of the euro against the U.S. dollar.

Rahul Ghai: An update on capital deployment on slide 12. We started 2020 with about $1.4 billion of cash on hand and expect to generate between $1 to $1.1 billion of free cash flow in 2020 and now plan to pay down $350 million of debt instead of the original placeholder of $250 million in 2020. We still expect to return $260 million to shareholders through dividends in Q2 through Q4 at about 40% of adjusted net income and spend approximately $200 million between non-controlling interest M and A. These actions will allow us to maintain sufficient liquidity and will enable us to increase the cash on the balance sheet by the end of the year, which, depending on the overall liquidity conditions in the market, can potentially allow us to start share buyback in 2021 after we complete our previously disclosed $500 million of debt repayment.

An update on capital deployment on slide 12.

We started twentytwenty with about $1.4 billion of cash on hand, and expect to generate between $1 billion to $1.1 billion of free cash flow and twentytwenty.

And now plan to pay down $350 million of debt instead of the original place holder of $250 million in Twentytwenty.

We still expect to return $260 million for shareholders to dividends in Q2 Q4 at about 40% of adjusted net income.

And spend approximately $200 million between non controlling interests and M&A.

These actions will allow us to maintain sufficient liquidity and we'll enabled us to increase the cash on the balance sheet by the end of the year, which depending on the overall liquidity conditions in the market can potentially allow us to stock share buyback in twentytwenty. One after we complete a previously disclosed $500 million of debt repaid.

Good.

Rahul Ghai: With that, I'll turn it over to Judy for some closing remarks.

With that I'll turn it over to Julie for some closing remarks.

Judy Marks: Thanks Rahul. I'm pleased that Otis delivered a solid second quarter despite current COVID challenges while driving our long-term strategy as the world begins to reopen. Over the medium term, we expect sustainable growth and global share gain in new equipment up 90 basis points year to date to continue to expand on our leading service portfolio. We'll continue to make progress on service transformation, deploying IoT and the digital tools that drive productivity and margin expansion. Although these are unusual times, we will continue to invest at a sustainable level to ensure we stay at the forefront of this industry and adjust our costs structurally to align with our medium-term sales outlook. We will continue to drive EPS growth, use our robust cash generation, and leverage our balance sheet to create shareholder value. With that, I'd like Chris to open up the line for questions.

Thanks for whole Im pleased that Otis delivered a solid second quarter. Despite current Kobe challenges, while driving our long term strategy at the world begins to reopen over the medium term, we expect sustainable growth and global share gain new equipment up 90 basis points year to date to continue to expand on our.

To align with our medium term sales outlook and we will continue to drive EPS growth use our robust cash generation and leverage our balance sheet to create shareholder value.

Matt I'd like Chris to open up line for questions.

Operator: Thank you. And as a reminder to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by. We're compiling the Q and A roster and our first question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Thank you and as a reminder question we need to press star one of your telephone to withdraw your question. Please press the pound key please stand by with about two and a roster.

And our first question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Oh, thanks, Thanks, good morning.

Nigel Coe: Thanks. Good morning. I cover a lot of ground in the prepared remarks, but I just wanted to quickly go back to the pricing comments. One of your major competitors, I think, mentioned price pressure about 17 times on their call. Not that I was counting, but maybe just comment on what you've seen sort of right now in terms of some of the bidding pressure that they referred to. Would you agree with that comment, and maybe touch on these price concessions you've been offering to customers on the service side? Kind of. Is that tracking in line with your expectations, and when would you expect that to taper off?

Hello ground in the prepared remarks, but.

Good to go back to the pricing comments.

One of the major competitors.

I think mentioned price pressure about 17 times on that coal.

Counting, but maybe just comment on what you've seen sort of.

Right now in terms of the some of the business pressure that the they referred to.

Would you agree with that comment and then maybe.

Touch on these price concessions have been offering to.

On the service side.

Kind of is that tracking in line with your expectations on when would you expect that too.

Taper off.

Judy Marks: Sure. Thanks, Nigel. So we have seen about 70 basis points of booked margin impact in the second quarter. That was mainly in EMEA and Asia Pacific. China itself was flattish, and the Americas actually had improved booked margin. And as you understand, this flows through to our revenue primarily in 2021. We do expect some pressure. We expected it this quarter. We expect some in the remaining half of the year. On pricing, because pricing follows macroeconomic trends and this is really why we have focused so hard on cost containment and on our productivity initiatives. The only part we don't have in our outlook is any additional activities driven by stimulus. And that could also impact pricing probably favorably. Our service pricing is holding up well outside of the price concessions. We did get our normal price increases throughout the first half of the year.

Sure. Thanks, Nigel So we have seen about 70 basis points of booked margin impact in the second quarter.

That was mainly in EMEA and Asia Pacific China itself was flattish any Americas actually had improved booked margin and as you understand this flows through to our revenue primarily in 2021.

The only part we don't have in our outlook is any add additional activities driven by stimulus and that could also impact pricing probably favorably.

Judy Marks: The price concessions themselves were a little less than we anticipated, primarily in the hospitality space, hospitality and retail. We have included those in our outlook for the remainder of this year. So service pricing is holding up well. Booked margin is down 70 basis points on new equipment. Again, China flattish and we understand what we need to do to drive cost out and drive productivity up.

In our outlook for the remainder of this year, So service pricing is holding up well.

Book to margin is down 70 basis points on new equipment, but again, China flattish in.

And we understand what we need to do to drive cost out and drive productivity.

Great. Thanks, Thanks, Judy and then.

The tax rate, obviously moving into right direction Im just curious if we have a line of sight on.

Issuing of a foreign debt.

Further maybe optimize that tax rate.

Yeah, Nigel so we guided to in our in our prepared remarks, we kind of mentioned that we expect the medium term tax outlook to be about 25% to 28%.

Rahul Ghai: Yeah, Nigel, so we guided to, in our prepared remarks we kind of mentioned that we expect the medium term tax outlook to be about 25% to 28% and that is over the next three to four years; it's not going to be all back ended. We expect measured profit progress over this time period. We're working on several projects reevaluating our entire business and understanding, okay, where does, where should things fit from the right business perspective and what impact does that have the tax rate? So we're working extremely hard and I think we've shown good progress since, you know, since 2019. We are now expecting this year to be about 31.5%. So 3.5% decline over where we were in 2019. So that's really good progress. And then we see path between 25% to 28% over the next three to four years. Okay, great.

Okay and that is over the next three to four years, it's not going to be all back end loaded we expect measured progress.

Over this time period, we working on several projects evaluating our entire business and understanding what the awareness ratio things.

From a REIT business perspective, and what impact does that have the tax rate. So we are working extremely hard and I think we've shown good progress since.

Since 2019.

Now expecting this year to be about 31.5 listen so create a hospitals in decline overweight everywhere in 2019, So that's really good progress and NBC.

Bob the between 25 20, plus it over the next three to four years.

Okay, great. Thanks, Okay.

Nigel Coe: Thanks a lot, guys.

Thank you.

Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open. Hi, good morning. Maybe, you know, a first question around the overall new install market. One of your peers had mentioned that market getting back to 2019 levels by 2022. Just wondered if you thought that was a realistic assessment, if it differs from your own perspectives at all. And also, maybe how that sales outlook for the medium term, what's that informing your actions on the cost base in new equipment? What are you doing there?

Your next question comes from Milan, Julian Mitchell with Barclays. Your line is now.

Hi, good morning.

[music].

Maybe.

First question around the overall new in store market.

One of your peers had mentioned that market getting back to 2019 levels by Twentytwenty too.

Just wondered if you thought that was a realistic assessment if it differs from their own perspectives at all.

And also maybe how that sales outlets for medium term, what's that informing your actions on the cost space in new equipment.

Are you doing that.

Julien Let me, let me try and talk to both of those I'm sure rubble will add.

Judy Marks: Yeah, Julian, let me try and talk to both of those, and I'm sure Rahul will add. We have seen the job sites reopening at a fairly strong pace. Globally, it's over 90%. In April, we were at about a 65% global. Again. The current restricted areas are more so in India and Southeast Asia. So. So the job sites are reopening in North America. We are almost totally reopened. But as we reopen, we're seeing some different behaviors due to health and safety concerns. So we're making sure we do initial safety startups. And obviously we have to separate some of the workforce in terms of how the construction crews are coming back as well. In terms of what we're seeing on buying behaviors. The orders, especially in North America in this last quarter, were down.

We have seen the job sites reopening had a fairly strong pace globally. It's over 90% in April we were at about a 65% global.

Again, the current restricted areas are more selling Indian southeast Asia.

So the job sites are reopening pricing North America, we're almost totally reopened but as we reopened we're seeing some different behaviors due to health and safety concerns. So we're making sure. We do initial safety startups and obviously, we have to separate some of the workforce in terms of how the.

Construction crews are coming back as well in terms of what we're seeing on buying behaviors.

Judy Marks: And the reason they were, a lot of the reason they were down, was that the decisions were just not being made and were being delayed. When we speak to the customers, they're optimistic, and they still plan on moving forward with their projects. Additionally, when you look at our end market exposure, we, we are, and we share this in the appendix, we are far more than 50% driven by residential, and we're seeing residential projects grow strongly. So our outlook really does anticipate that we get back to new equipment levels sometime in 2021. And that is that we will obviously modulate our costs based on what we see both the orders coming in second half of this year and then as we see the new equipment business coming back as well. Rahul.

Additionally, when you look at our end market exposure, we are and we shared this in the appendix we are far more than 50% driven by residential and we're seeing residential product projects.

I would strongly so our outlook really does anticipate that we get back to his new equipment levels sometime in 2021.

And that is that we will obviously modulate our costs based on what we see both the orders coming in second half and this year and then as we see the new equipment business coming back as well right now.

Rahul Ghai: No, I think you covered it, Judy. You know, it's overall we've seen, you know, our proposals are kind of holding through the first half. It's been, you know, as you would expect, Q2 is a little bit softer. But over the first half, our proposal to holding China activities has been really, really strong both across infrastructure and the other sectors. And if you look at the market in China that was up in for the first half, it was pretty much up across all sectors with Q2 being especially strong. So, I mean, it's overall, it's a, you know, it's an uncertain environment, definitely fluid. But so far the business seems to be recovering well. And as Julie mentioned, the job sites are coming back. And that's what we kind of focused on right now is just making sure that we are executing the backlog that we have.

I think you covered a duty.

So overall, we've seen proposals out kind of holding up through the first half. It's been utilized we would expect Q2 is a little bit softer, but over the first half our proposals are holding China activities is being really really strong both across infrastructure and the other sector than if you look at the market in China that was up.

In total for the first half those pretty much up.

Yes, all sectors with Q2, being especially strong so I mean, its overall it so it's an uncertain environment definitely for with but so far the business seems to be the covering well and.

Judy mentioned the job site, the coming back and Thats, what we kind of focusing right now.

Just making sure that we are executing in the backlog that we have and what what will drive our revenue in the near term is obviously the backlog, which is good to see better backlog victory opt to both in Italy useful to second half and then as you look forward into 2021, we'll stay focused on maintaining this backlog growth if you've seen.

Rahul Ghai: What will drive our revenue in the near term is obviously the backlog, which is good to see that our backlog is actually up 2% year-over-year through the second half. Then as you look forward into 2021, we'll stay focused on maintaining this backlog growth that you've seen, accelerating the pace of conversion from backlog into new equipment, revenue driving cost out to ensure that we can stay competitive on margins and deliver strong margins. That's what we are focused on internally.

Accelerating the pace of conversion from backlog into new equipment revenue driving cost out to ensure that we can say competitive on margins and delivered strong margins. So thats. What we are focused on an identity.

Thank you and then my second question just around maybe the the revenue splits. Thank you for that so that's on slide 18 on the end markets, but maybe geographically.

Operator: Thank you. And then my second question just around maybe the revenue splits. Thank you for that. Split on Slide 18 on the end markets. But maybe geographically, 10 years ago, you know, five to 10 years ago in that European slump, there was a bifurcation between Southern European trends and the north. Perhaps we're seeing a similar bifurcation starting now. Just wondered if you could clarify, you know, how large is that Southern Europe exposure within the overall EMEA sales split and how different you think the recovery slope might be between that Southern Europe piece and the rest of the EMEA region?

10 years ago, five to 10 years ago in that European slump, there was a bifurcation between southern European trends and the lower.

Perhaps we're seeing a similar bifurcation starting now.

Just wondering if you could clarify how large is that southern Europe exposure within the overall EMEA.

Sales split.

And how different you think the recovery slow might be between that southern Europe piece and the rest of the EMEA region.

Rahul Ghai: Yeah, Southern Europe is definitely. Julian, as you know, Southern Europe is definitely a bigger market for us. You know, we are, we have number one position in France, Spain, and Italy. So we have definitely a strong presence in Southern Europe. But, you know, and the recovery has been stronger in Northern Europe. Our business in Germany did really well in Q2. So we are seeing the Nordics, German market, Switzerland come back strongly. And Southern Europe is a little bit slower, as you would expect, given what you saw happen with the pandemic. So that is definitely the case. But even if you look, you know, we did provide some color on the overall industry.

Yes, no southern Europe is definitely going as you know southern Europe is definitely a bigger market for us.

We are rehab number one position and France, Spain, and Italy will be have definitely a strong presence in southern Europe.

But even with the and the recovery has been stronger in northern Europe business in Germany did really well in the second quarter. So that we are seeing the nordics German market.

Switzerland come back strongly and southern Europe is little bit slower as you would expect given what you saw happen, but the pandemic. So that is definitely the case, but even if you look.

We did provide some color on the overall industry, but if you look at a European business as well.

Rahul Ghai: But if you look at a European business as well, Europe especially, the fact is that close to 70% of our business in Europe cumulatively in the EMEA is residential. So we are a little bit more heavily skewed on the residential side in EMEA versus the rest of the world. So that obviously helps the overall mix and how the various sectors recover. And the residential market matters more to us in Europe and probably in some other parts of the world.

Europe, especially the fact is that close to 70, plus some of our but your business in Europe cumulatively in EMEA in residential told we are a little bit more heavily skewed and on the residential side in EMEA.

This is the best for the word so that obviously helps the overall makes and how the radio sector recover and the residential market matters more towards in Europe, and probably in some other parts of the board.

Very helpful. Thank you.

Operator: Very helpful. Thank you. Thank you. Our next question comes from the line of Cai von Rumohr with Cowen. Your line is now open.

Thank you.

Next question comes from a line of Cai von Rumohr with Cowen. Your line is now open.

Cai von Rumohr: Yes, thank you very much. Good quarter. So, going back to Nigel's question, I don't know whether it was 15 times, but certainly KONE hammered on pricing being an issue. Schindler sort of mentioned it, and you don't seem like it's a big issue. Is that part of that because of the success. I think your target was to reduce material costs 3% per year. Is that part of it? And maybe give us some color on how you're doing in terms of those cost targets.

Yes, thank you very much.

Good quarter so.

Going back to Nigels question, I don't know, whether it was 15 terms, but certainly called the hammered on pricing being an issue schindler sort of mentioned.

And you don't seem like it's a big big issue is hard to that because of the.

Success, I think your target was to reduce material costs, 3% per year.

Part of that and maybe give us color on how you're doing in terms of those cost targets.

Rahul Ghai: No. So Cai, listen, we are again we gave you the numbers that we are seeing. We saw our booked margin, and Judy repeated this in response to Nigel's question. I mean, we're seeing the pressure. I think it's like the booked margins were down 70 basis points, and you would expect that. I mean, Asia Pacific, given what's happening in India, given what's happening in Southeast Asia, and the Indian economy still hasn't opened up. And in terms of units, that's the second largest economy in the world, the elevator market. So it's clearly an issue. Right. And we are not hiding from that. And as Judy said, rightfully so, the pricing will depend on the overall macroeconomic environment.

No to listen VR game, we gave you the numbers that we have seen we saw our book margin then you'll be repeated business into response Nigels question. I mean, we've seen the pressure it's like the book much the down 70 basis points as you would expect that I mean Asia Pacific given what's happening in India, given what's happened in Southeast Asia, and then economy still hasn't opened.

And in terms of units Thats, the second largest economy in the world the elevator market. So it's clearly an initial right have you not hiding from that.

Rahul Ghai: But if you go back to right from the investor day, what we're seeing and what we did not build into our medium-term outlook that we have wired in investor day, we did not build in any margin increase on the new equipment side of the business. And the reason we did not is we expected the pricing pressures to manifest themselves over this time period. We did not know that would be the second half of 2020 versus 2021. But we knew that they were going to come at some point. And that's why starting last year we have been so focused on driving material productivity. And we set a target for us for 3% over this medium-term every year over the next three to four years.

Medium term outlook that we had widened investor day, we did not building any margin increase on the new equipment side of the business and the reason we did not as we expected the pricing pressures to manifest themselves over this time period, we did not know that would be the second half Twentytwenty was 21, what we knew that they're going to come at some point and that's why starting.

Last year, we would be so focused on driving would field productivity and we set a target for us what people attend all of this medium term every year over the next three to four years and if you look at the first half it's great to see that we've done. This now two quarters in a row and that is helping I mean, if you look at our margin trajectory this quarter and even for the first off we have base.

Rahul Ghai: If you look at the first half, it's great to see that we've done this now 2 quarters in a row, and that is helping. I mean, if you look at our margin trajectory this quarter and even for the first half, we're basically following through. Our earnings are falling through at the contribution margin. That means we are able to absorb all the under absorption, any pricing pressure, bad debt expense, all throughout material productivity, and cost containment. We knew it's going to happen; we didn't know when. I think internally we were focused on taking cost out. We'll deal with pricing as it happens. Yes. Is it worry? Absolutely. It's a worry.

Typically falling through our earnings according to where the contribution margin that means we are able to absorb all the underabsorption any pricing pressure bad debt expense, all who have material productivity and cost containment. So we knew it's going to happen. We didn't know when and I think internally Mueller focused on taking cost out. So we will be with will be with pricing.

As it happens and.

Yes, it absolutely February but we are focused on things that we can control and making sure that won't repeat the mistakes of the boss Bettany gave up share because we didn't want to compete on price. So we'll we'll keep dealing with the pressures as they as they come into market Yeah, Cai the share it's really really important.

Judy Marks: Yeah, Kai, the share is really, really important and you know, we prepared for this. All four of our regions went up in share and you know, significantly up in the Americas and in China. In general, we were up for the quarter 110 basis points and, and then for the half of the year, 90 basis points. So in a declining market where the segment itself was going down last quarter, high single digits, we took share everywhere.

And we prepared for this.

We we took share everywhere.

Cai von Rumohr: So, a follow-up, everyone talks about share. And how do you define share? If you talk about picking up 90 basis points, what are you talking about? New elevators, organic comp, constant currency sales. How are you defining shares?

And so a follow up everyone talks about share and.

How do you define share you talk about ticking up 90 bips.

Are you talking about new elevators organic constant currency.

[music].

Sales.

Define and share.

Rahul Ghai: Well, the way this industry tracks share, Cai, is based on the number of units in the market. So that's how it's done. And I think everybody pretty much does it the same way. So we define share based on the number of units we booked in the quarter versus what we estimated the market to be in second quarter versus end of first half.

Well its and with the wave this industry track shared Cai is based on the number of units in the market. So thats, how its Don and I think everybody pretty much does at the same way. So we define shared based on the number of units we booked in the quarter versus what we estimated the markets to be into full in second quarter horses.

The first half.

Terrific and last one service units you mentioned that you are up 1% and yet.

Cai von Rumohr: Terrific. And last one, service units. You mentioned that you were up 1% and yet you were up 5% in China. Lost 1% because of divestitures. Maybe give us a little bit more color in terms of how you're doing and how those numbers compare with the industry as a whole.

First.

Thanks.

Last 1% because of divestitures, maybe give us a little bit more color in terms of how you're doing.

Those numbers compare the industry.

Yes, I cant report on the industry as a whole certainly for this year, but I can tell you we have an intense focus on growing our service portfolio. We understand that is the foundation of our business model and we have we are focused on getting our Otis units back in.

Judy Marks: Yes. I can't report on the industry as a whole, certainly for this year, but I can tell you we have an intense focus on growing our service portfolio. We understand that is the foundation of our business model and we are focused on getting our Otis units back in addition to recapturing other units, driving our conversion rates up, driving our cancellation rates down. So the biggest move we made in the portfolio this quarter was China, which went up over 5% in terms of units under maintenance. That's the largest growing market for the portfolio. So we've challenged the team to outgrow what they've done in the past in every region, but especially in China.

In addition to recapturing other units driving our conversion rates out driving our cancellation rates down. So the biggest move we made in the portfolio. This quarter was China, which went out over 5% in terms of units under maintenance, that's the largest growing market for the portfolios. So we've challenged.

Team to outgrow what they've done in the past in every region, but especially in China.

Okay. Thank you very much.

Cai von Rumohr: Okay, thank you very much.

Thank you.

Operator: Thank you. Our next question comes from the line of Steve Tusa with J.P. Morgan. Your line is now open.

And our next question comes from the line of Steve Tusa with Jpmorgan. Your line is open.

Hey, guys good morning.

Steve Tusa: Hey, guys. Good morning. Can you just clarify whether the interest expense guidance reflects all the kind of recent and planned moves on, you know, on debt in the balance sheet and capital structure?

Steve.

Can you just clarify whether the interest expense guidance reflects all the kind of reset and plan moves on.

You know on debt.

In the balance sheet and capital structure.

Yes, it does see so.

Rahul Ghai: Yeah, it does, Steve. So, yeah, I mean, we increased the debt repayment from $250 to $350 million this year, and we still holding our long-term total debt repayment to around $500 million. So we did, we plan to do $350 million this year and $150 million next year.

Yes, we increased the debt repayment from 250 $350 million this year and we still holding our long term total debt prepayment around 500 to rebid.

Thank you to treat 50, this year and 150 next year.

Okay, Great and then is there anything in the second half when it comes to kind of the profit comps that we have to keep in mind from last year for kind of sequencing third quarter in fourth quarter or should things be kind of pretty smooth on a year over year basis, Yes, no I think if you. If you look at Q3 versus Q4, Steve on the new equipment.

Steve Tusa: Okay, great. Is there anything in the second half when it comes to kind of the profit comps that we have to keep in mind from last year for kind of sequencing third quarter and fourth quarter, or should things be kind of pretty smooth on a year-over-year basis?

Rahul Ghai: Yeah, no, I think if you look at Q3 versus Q4, Steve, on the new equipment side, Q4 will be. We expect Q4 to be marginally stronger than Q3. You know, the activity a little bit slow in some of the larger markets in Asia Pac like you mentioned, you know, India, Southeast Asia, and in the US while the job sites are open, the number of COVID-19 cases is still rising and that sometimes impacts the number of people we have available to job site on job site or certain job sites shut down temporarily. So there's a little bit of still fluidity in the market. But this will be counterbalanced by China to some extent because we are catching up in certain areas in China and we do expect China to be strong in Q3. So overall, maybe on the new equipment side, slight skew towards Q4.

Q4 will be we expect Q4 will be marginally stronger than Q3, the activity through a little bit slow and some of the larger markets in Asia Pac like you mentioned, India Southeast Asia.

And in the U.S., while the job sites that opened the number of.

Forward banking cases, it's still rising and Thats, sometimes impacts you know the number of people to have a good job site.

Well job site or southern job site shutdown temporarily so there's a little bit of still fluidity of into market, but this will be counterbalanced by China. We had to some extent because we are catching up in certain areas in China as we do expect China will be strong in Q3, so overall well maybe on the new equipment site slight skew towards Q4.

Rahul Ghai: On the service side, as we mentioned in the prepared remarks, our repair activity is still subdued due to the lower building occupancy. Some of the buildings are not fully open yet, and we expect gradual improvement as we go through the year. On the service side, we'll definitely have a stronger Q4 than Q3, and that's the higher margin business. Some of the profit will kind of follow so similar trajectory.

And on the service side as we mentioned in the prepared remarks I referred activity is still stuff.

Due to the court ruling occupant. These little buildings are not fully open yet and we expect gradual improvement as we go to the through the year. So on the service side, we will definitely have a stronger Q4 than Q3, and that's the highest margin business. So some of the profit to kind of follow similar trajectory.

Steve Tusa: And then one last quick one. I think you guys have some pretty good visibility into, you know, what's going on in the, in the elevators that you know, your buildings are installed in. You mentioned lower occupancy. Any early reads on kind of any surprising utilization trends of your assets within those buildings despite the lower occupancy due to social distancing? Like you know, for example, if you know you're fitting less people in the elevator, it's you know, going to go up, up and down more times to carry the same amount of people. I mean, and any read into kind of into that utilization dynamic there.

All right and then one last quick one I think you guys got some pretty good visibility into what's going on in the in the elevators that youre buildings are installed and you mentioned lower occupancy any any early reads on kind of any surprising utilization trends of your assets within those buildings. Despite the lower occupancy due to social distancing light.

For example, if you're getting less people in the elevator. It's it's going to go up up and down more time to carry the same amount of people I mean, and any read into kind of into that utilization dynamic there.

Judy Marks: Yeah, it's still early, but as you know, Steve, we had a tremendous amount of remote information from our remote monitoring systems, and these are early days. The residential elevators are getting tremendous usage because most elevators, people are only stepping in if no one else is in that. In condominiums and apartments throughout the world. So the residential usage we know is up in the more commercial space and office space. We're working with our customers to understand that. We're adjusting some traffic flow algorithms. Our destination dispatch system is being tuned based on customer requests. But as long as a building is open, it's certainly the elevator's getting used and maintained and eventually will need repair work as well. So early days, hopefully. We'll have some more data for you on the next call.

Yes, it's still early but as you know, Steve we had a tremendous amount of remote information from our remote monitoring systems and these are early days.

The residential elevators are getting tremendous usage because most elevators people are only stepping in if no. One else is in that in condominiums and apartment throughout the world. So the residential usage, we now resolved.

The more commercial space in office space, we're working with our customers to understand that were adjusting some traffic flow algorithms are destination dispatch system is is being tuned based on customer request, but as long as a building is open it certainly the elevators getting used and maintain.

And.

And eventually will need repair work as well so early days hopefully we'll have some more data for you on the next next call.

Steve Tusa: Great. That's great. Thanks a lot.

Great that's great. Thanks, a lot.

Thank you and our next question comes from the line of John Walsh with Credit Suisse. Your line is now open.

Operator: Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Your line is now open. If your phone is on mute, John, please unmute it.

It performs on mute John Please UN mute.

Hi, good morning, everyone sorry for that.

John Walsh: Hi, good morning, everyone. Sorry for that.

Judy Marks: Hi, John.

Hi, John.

John Walsh: Hi. Just wanted to dig a little bit into your comments around the modernization market. Obviously held in there better than we expected. You called out Asia Pacific. Just wanted to know if it was kind of a return to normal you were seeing with activity or if there was something else that was driving that expected growth and modernization on a regulatory front or anything else there.

Hi.

Just wanted to dig a little bit into your comments around the modernization market.

There.

Judy Marks: Yeah, John, the major regulatory front activity is a safety regulatory program that's driving significant, significant modernization in South Korea. And it's going very well for us. But it is a regulatory program that's going to be multiple years. In Q1, our sales were up 7%, down 1.5% in Q2, but orders for the first half are only down 70 basis points. So our modernization business is actually holding up better than we had anticipated through the first half. And we've, you know, we've tried to put some of that, you know, that revision into our assumptions for our, you know, for our revised outlook. But it's Asia Pacific between Japan and Korea, modernization is healthy. Korea is primarily regulatory.

Yeah, Jeremy the major regulatory front activity is a safety regulatory program, that's driving significant modernization South Korea.

And it's going very well for us, but it is a regulatory program that's going to be multiple years.

Our.

Q1, our sales were up 7% down 1.5% in Q2.

But orders for the first half were only down <unk> 0.7, 70 basis points.

So our modernization business is actually holding up better than we had anticipated to the first half and we've we've tried to put some of that.

With that.

Revision into our assumptions for our revised outlook, but it's in Asia Pac between Japan, and Korea modernization is healthy Korea is primarily regulatory.

Great. Thank you for that and then.

John Walsh: Great. Thank you for that. And then, you know, I guess maybe going back to Steve's question as you talk to your customers, what is the appetite for them to move to more of a touchless solution and actually upgrade? Are we still in kind of the early stages of having conversations with those facility managers or are you actually seeing them kind of pull the trigger and wanting to move forward with some of those kind of post-COVID-19 investments as they prepare for people coming back?

I guess, maybe going back to to Steves question.

You know as you talk to your customers what is the.

But tight.

For them to move to more of a touchless solution and actually upgrade is it are we still in kind of the early stages of having conversations with those facility managers or are you actually seeing them trying to pull the trigger and wanting to move forward with some of those kind of.

Post covert 19.

Investments as they prepare for people coming back.

Judy Marks: So I think we're seeing, and I'll start with China, where we've seen the biggest pull to start from purification fans and, you know, being ordered in the thousands to touchless technologies, whether those are using our app for an iPhone or Android to be able to call the elevator or you know, we're piloting some hand gesturing technologies as well as just better traffic flow. So you see early adopters following both the technology early adopter curve, but also we're seeing it earlier in places that have recovered earlier. So China, it's already, it's being installed. We're seeing good pickup where we're seeing on the early adoption in EMEA, the rest of Asia Pacific, and the Americas are those building managers who really are trying to figure out how not to queue in the lobbies and how to really create a safe and healthy building environment.

So I think we're seeing and I'll start with China, where we've seen the biggest pull to start.

From purification fans and Thats being ordered in the thousands.

Touchless technologies, whether those are using our app for an iPhone or Android to be able to call the elevator or where we're piloting some jester hand gesturing technologies.

As well as just better traffic flows so.

You see early adopters following both the technology early adopter curve, but also we're seeing it earlier in places that have recovered earlier, so China. It's already it's being installed we're seeing good pick up.

Where we're seeing on the early adopters any EMEA the rest of Asia Pac in the Americans are those building managers, who really are trying to figure out how not to Q in the lobbies and how that really create a safe and healthy building environment and it's early but we're starting to see how it's not much.

Judy Marks: It's early, but we're starting to see it's not material in terms of revenue yet. But a lot of people are interested. Some are doing short term activities, but others are looking at major modernizations. And I think, you know, it's still to be determined if that modernization budget is going to replace some other modernization they were planning in their capital planners. I think we'll see that come out over the rest of 2020 and into 2021.

Cereal in terms of revenue yet, but a lot of people are interested some are doing short term.

Activities, but others are looking at major Modernizations and I think it's still to be determined that modernization budget is going to replace some other modernization they were planning in their capital planners.

I think we'll see that come out over the rest of 20 to 21.

Great. Thank you for the color.

John Walsh: Great. Thank you for the color.

Judy Marks: Thank you.

Thank you.

Operator: Thank you. Our next question comes from the line of Carter Copeland with Melius Research. Your line is now open.

Thank you.

Your next question comes from a line of Carter Copeland with nucleus Research. Your line is now open.

Steve Tusa: Hey, good morning. Great numbers. I wondered if you might expand a little bit, Judy. Maybe there's not enough passage of time and data here, but do you see differences in service quality differentials across the market, and do you see that having an impact on retention and cancellation rates? I mean, it may be too early to say, but is there to be going to be any impact there that you think is measurable?

Hi, good good morning, and and great numbers.

I wondered if you might expand a little bit Judy.

Maybe theres not enough passage of time and data here, but do you see any differences and service quality differentials across the market and do you see that having an impact on.

Retention and yet and cancellation rates I mean, it maybe too early to say, but is there going to be any impact there that you think is measurable.

Judy Marks: I think it will be, but I think it's early days, Carter. And the reason is because as we look at a lot of our maintenance activities, we did not have all the same quantity of callbacks as Rahul showed. It's growing again as we go month to month, but it's hard to find that kind of compare between 20 and 19 and 18 and before that. IoT is going to make a significant difference. Digital adoption is going to make a significant difference. And we're seeing customers now really having discussions with us on, you know, what can we know when from a data access from a remote, from an API perspective.

I think it will be but I think it's early days Carter and the rash. The reason is because as we look at a lot of our maintenance activities. We did not have all the same.

Quantity of call backs as rule showed its growing again.

As we go month to month, but it's hard to find that kind of compare between 20, and 19 and 18 and before that I have T is going to make a significant difference digital adoption is going to make a significant difference and we're seeing customers now really having discussions with us on what can we know when.

From a data access from a remote from an anti perspective, and so we see that's why we're going full steam on Otis one.

Judy Marks: And so we see that's why we're going full steam on Otis ONE and really picking up the pace in the second half of the year to make up for the first half where we didn't have access to all the buildings we needed to install the sensors and the gateway to our cloud. But you're going to see that pick up and we're going to hit that 100,000 units on Otis ONE throughout the globe, in the countries we've identified by year end and that is going to drive service quality. Absolutely.

Really picking up the pace in the second half a year to make up for the first half where we didnt have access to all the buildings, we needed to install the sensors in the gateway to our cloud, but you're going to see that pick up and we're going to we're going to hit that 100000 units on Otis one throughout the globe in the countries. We've identified by year end and that is going to drive.

Service quality absolutely.

And just as a follow up the the demand on modernization and that the flat to down there does that represent sort of a step.

Steve Tusa: Just as a follow-up, the demand on modernization and the flat to down there, does that represent sort of a step down that we stay there or is there a pent-up demand dynamic there? As we look into 2021 and 2022.

Down that we stay there or is there a pent up demand dynamic there as we look into 21 and 22.

I'm convinced there is pent up demand I mean in in the install base in the segment itself five and a half million elevators are over 20 years old and are either need a static upgrades or technology insertion and major upgrades and modernization in EMEA alone.

Judy Marks: I'm convinced there's pent up demand, I mean in the install base, in the segment itself, 5.5 million elevators are over 20 years old and are either in need of aesthetic upgrades or technology insertion and major upgrade upgrades and modernization. In EMEA alone, you know there's 3 million units that are over 20 years old. So every year they age they're all getting usage, especially the residential units. And the China modernization opportunity is emerging as well. So I think all of those converge and the challenge is going to be, you know, when can, when does the, that budget reemerge for the customers to engage and when do they see this not as discretionary but really as mandatory for their own usage, for their own, you know, technology insertions?

There's 3 million units.

That are over 20 years old so every year they age they're all getting usage, especially the residential lawn units.

And the China monetization opportunity is emerging as well so I. Thank all of those converge and the challenge is going to be when Ken when does that budget, we emerge for the customers to engage and when do they see this not as discretionary but really as as mandatory for their own usage for their own.

Acknowledging insertions.

Great. Thanks for the color.

Steve Tusa: Great, thanks for the color.

Thank you and our last question comes from a lot of Jeff Sprague with vertical research. Your line is now open.

Operator: Thank you. Our last question comes from the line of Jeff Sprague with Vertical Research. Your line is now open.

John Walsh: Thank you. Good day everyone.

Thank you good day everyone.

Judy Marks: Jeff.

Jeff or pager.

Rahul Ghai: Hey Jeff.

John Walsh: I wonder if we could come back to the booked margin discussion. Kind of a two-pronged question around that. First, Rahul, you responded, I think it was to Kai's question and on your productivity and other actions that you're taking. So to be clear, is that booked margin kind of a gross booked margin or is that net of everything you're trying to do to counter price and pressure?

Well, there if we could come back.

The margin discussion kind of a two pronged question around that.

First of all you responded.

It was to cause question.

On your productivity and other actions that you are taking so to be clear is that books margin kind of.

Gross.

Margin or or is that met.

Everything you're trying to do the counter pricing pressure.

Judy Marks: No, it's clearly gross. It's the margin we take when we record the order and then everything else we do is obviously to drive that down with productivity offsets and other cost actions.

No. It's clearly gross it's the margin we take when we when we record the order and then everything else. We do is obviously to drive that down with productivity offsets and other cost actions.

John Walsh: And then obviously you're just talking about the quarter with that number. Do you have a sense of kind of total margin and backlog how that's sitting right now?

And then.

Obviously, you're just talking about the quarter with that number do you have a sense of.

Total margin in backlog, how that's sitting right now.

Rahul Ghai: Yeah, the overall. So the first half. So a couple of, couple of points there, Jeff. On Q2 our Booked margin was down 70 basis points. It's about flat for the first half because if you remember Q1 our Booked margin was actually up. So if you average the 2/4 it's kind of flat. So on the Booked margin side, on the Backlog margin, our Backlog margin was actually up slightly so. So that was good to see that not only just the Backlog up 2% but the margin in Backlog is also up. So that's a good sign for us clearly.

The overall for the full stop so fix a couple of couple of points there Jeff on the second quarter are booked margin was down 70 basis point, it's about flat for the first half because if you remember first quarter are booked module was actually up. So if you average the grew quarter. This kind of flat. So on the books margin side on the backlog margin our backlog.

Roger was actually up slightly so that was good to see that you don't but not a modeling that is the backlog up within but the margin in backlog is also up.

So thats a good sign for us.

Clearly and then just on the back on the capital deployment.

John Walsh: Then, just back on the capital deployment, I guess kind of it almost looks like completing the debt reduction you say 2021. It almost looks like it could be January of 2021. Given kind of the exit cash balance you're going to have here just.

I just kind of it almost looks like completing the debt reduction you say 2021, it almost looks like it could be January of 2021.

So that the given kind of the exit cash balance youre going to have here.

Just maybe a little more color on what your appetite is too.

Cai von Rumohr: Maybe a little more color on what?

John Walsh: Your appetite is to kind of institute share repurchase and or step up kind of the M and A activity. I guess on M and A it's more of a question of kind of availability versus desire, but any other color you have there would be appreciated.

Institute share repurchase and door step up kind of the M&A activity and.

Yes on M&A, it's more of a question of kind of availability.

Versus desire, but any other color you have there would be appreciated.

Judy Marks: We have a desire for MA as we've always shared, and it's a matter of the right properties coming up, you know, especially to add to our service portfolio in regions where we can achieve the synergies and have the ability to integrate effectively and gain those units on the portfolio. And we continue to look at those niche properties, and as they come up, you know, we've got a deal book that's live and always, always look. We think that $50 million a year that we shared at Investor Day is still the right placeholder for us, and we continue to do very small ones that are obviously of some privately held companies that wouldn't show up. Do you want to?

We have a desire for M&A as we've always shared and it's a matter of the right properties coming up.

As niche properties and as they come up we've got an ideal book. That's lies and always always looking we think that 50 million a year that we shared at Investor day is still the right place holder for us.

And we continue to do very small ones that are obviously, some small up some private privately held companies that wouldnt shala role do you want to yeah. So our plan Jeff on the share buyback. Our plan was always a stock share buyback both debt repayments. So if you accelerate that that fee payment share buyback and also get potentially accelerated.

Rahul Ghai: Yeah. So our plan, Jeff, on the share buyback, our plan was always to start share buyback post debt repayment. So if you accelerate the debt repayment, you know share buyback can also get that potentially accelerated. But the situation is fluid. Obviously we're going to watch the overall liquidity in the market. We don't want to repeat or what we saw back in March, April when the access to CP markets got severely restricted. So we've got a strong credit rating. We're not expecting a repeat of that scenario. But to the extent that the liquidity markets, the liquidity stays stable in the market and we accelerate our debt repayment will absolutely looking at accelerating the share buyback as well.

But the situation of fluid, obviously going to watch the overall like Mark liquidity in the markets, we don't want to repeat or what we saw back in March April then the access to CP markets got severely restricted so we've got a strong credit rating, we're not expecting a repeat of that scenario, but to the extent that the liquidity markets.

The liquidity stays stable in the market and the accelerate our debt repayment will absolutely looking at accelerating the share buyback as well yeah, great working capital. This quarter, we're obviously going to keep driving the team to drive that that free cash flow really pleased with that performance and obviously, we the more we generate.

Judy Marks: Yeah, great working capital this quarter. We're obviously going to keep driving the team to drive that free cash flow. Really pleased with that performance, and obviously, the more we generate and our liquidity situation, we will continue to focus on how we can benefit our shareholders.

And our liquidity situation, we will continue to focus on how we can benefit our shareholders.

John Walsh: I'm sorry, maybe just one follow up on that. Is the near term tax rate reduction that you're seeing and realizing more a function of the delever or is it more kind of the structural things that you're working on?

On slide maybe just one follow up on that.

In.

The near term packs reduction that youre seeing in realizing more a function of the de lever or is it more kind of the structural things that you're working on.

Rahul Ghai: No, it's nothing. It's not. The deleverage part is not, is not the reason why we took our tax rate down from 32% to 31.5%. You know, part of our reduction from 33% to 32% when we, that we guided to in Q1 earnings call that was related to reducing the rate of finding ways to reduce the tax that we need to pay on repatriation of cash. So we worked on that. That led to about a 1 point reduction back in Q1 on the Q1 earnings call. This reduction of a half a point is not nothing to do with finding out ways to reduce the tax on repatriation of cash. This is, this is more structural.

No. It's nothing it's not the de leverage spot is not.

It's not the reason why we took five actually down from 30 to 31.5 bonafide production from 33% to 32% when the that the guided two in Q1 earnings call that was related to reducing that rate of finding ways to reduce.

The tax that need to be on repatriation of cash. So we work on that that led to about a one point production back in in Q O Q1 on the Q1 earnings call. This reduction on behalf of point is not nothing to go with.

Finding out ways to reduce the facts on repatriation of cash. This is this is more structural and we're going to continue that structural focus as a whole shared in the comments, we see a 25% to 28%.

Judy Marks: Yeah. And we're going to continue that structural focus. As Rahul shared in the comments, you know, we see a 25% to 28% effective tax rate in the midterm. Lots of structural activities going on and we view opportunities to get there over the midterm.

Effective tax rate in the mid term.

Lots of structural activities going on and we view opportunities to get there over the midterm.

Operator: Great.

Great. Thank you for the color.

John Walsh: Thank you for the color.

Thank you and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one.

Operator: Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one. If you would like to remove your question, please press the pound key. This does conclude today's question and answer session. I would now like to turn the call back to Judy Marks for closing remarks.

If you would like to move your question. Please press the pound key.

In this does conclude today's question and answer session I would now let's turn the call back to Judy much for closing remarks. Thank.

Thanks again, everyone for joining the call. This morning, we remain focused on executing our strategy managing the risks and driving value for shareholders, while supporting our customers UNEV efforts to safely reopen job sites and buildings I want to once again, thank our colleagues for their dedication as well as those on the frontline fighting coated 90.

I mean stay safe and well thank you.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now do.

Operator: Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now.

Q2 2020 Otis Worldwide Corp Earnings Call

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