Morning, and welcome to Otis' First Quarter 2020 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com. I'll now turn the call over to Stacy Lachesky, Vice President of FP and A and Investor Relations.
Thank you, Angela, and good morning to everyone. Welcome to Otis' Q1 2020 earnings call. On the call with me today are Judy Marks, President and Chief Executive Officer and Raul Gai, 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 other significant items. The company will also refer to adjusted results where adjustments were made as 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 its registration statements on Form 10, Form S-three and its 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 Judy.
Thank you, Stacy, and good morning, everyone. We hope that everyone listening across all of our stakeholders is safe and well. We're glad that you could join us today on Otis' first earnings call post spin, another important milestone for us in this new era as an independent company. Before I discuss our Q1 results and Otis' outlook, let me share some insights into our people, our business, our management through this crisis and more importantly our commitment to our long term strategy and values. Employee health and safety, the core value is first and paramount to us.
I am proud of our 69,000 colleagues who are supporting our customers and the riding public during these unprecedented times. Elevator maintenance and repair was deemed an essential service in most countries and cities and we continue to service the largest global maintenance portfolio including elevators and hospitals, critical infrastructure and residential buildings. And we're doing this while prioritizing and paying utmost attention to ensure the health and safety of our workforce around the world, allowing many employees to work from home and providing the proper PPE and guidelines for safe and hygienic working conditions for our colleagues in the field and our manufacturing operations. Early in Q1, we made critical decisions to ensure business continuity and this helped us navigate the COVID-nineteen impacts, first in China and then in countries throughout the world. Today, all 14 of our principal factories are open.
Our supply chain team has done an excellent job locally and globally in minimizing disruptions to our factories and our field sites while meeting customer demands. Our decision to airship critical parts early during this outbreak has enabled us to protect the supply chain and we're confident that Otis factories around the world are ready to manufacture at full capacity as soon as job site demand resumes and businesses start to return to normal. During this time, we've extended support to our vendors where necessary, providing advances to limit supply disruptions. Let's discuss the new equipment segment by region. China has seen substantial recovery within the quarter.
At this point, China factories have returned to full capacity and access to China new equipment job sites is returning at varying pace by city to pre COVID levels. In Asia Pacific, we're installing new in Southeast Asia where our access to job sites is limited and there are labor shortages due to government imposed measures. North America and EMEA continue to experience job site closures in certain areas and cities that are preventing the installation of new equipment and we are monitoring the situation closely as job sites reopen. Moving to service. As I mentioned earlier, elevator maintenance and repair was deemed essential in most areas allowing Otis' service professionals to provide critical maintenance for our customers.
Maintenance and repair made up 80% of Otis' services sales in 2019 and our maintenance business remains resilient. While we are experiencing some pressure on our repair business where buildings are shut down. Our field professionals continue to support round the clock service at hospitals across the globe. In North America and EMEA, we have seen a greater need to support a few limited customers within the hardest hit verticals with delayed payment terms and concessions during building closures. We will continue to strengthen our long term customer relationships.
Modernization, the other 20% of our service business is expected to see impacts from COVID-nineteen as discretionary projects are put on hold, especially in North America and Europe. However, some code driven and technologically required modernizations are driving activity in Asia Pacific and other regions. Across our business, we have responded with cost containment actions to address the evolving situation and associated sales declines. Our China team was focused on immediate actions, which did minimize the Q1 financial impact. Cost containment actions already underway include a global hiring freeze, reduction in travel and other discretionary costs, merit and salary deferrals, reducing executive pay and furloughs in certain locations.
These are difficult but necessary actions and our team continues to assess and adjust to address the evolving situation. This crisis has also shown us that our Otis absolutes, safety, ethics and quality drive our commitment to each other, our customers, our passengers, our investors and to the communities where we live and work. In multiple countries across the world, we use 3 d printing technology to manufacture face shields for use by our teams and by frontline workers in hospitals. In Wuhan, beyond providing uninterrupted elevator maintenance, we donated elevator cab air purifiers to several hospitals. And lastly, we pledged to match employee contributions to COVID-nineteen relief funds and our colleagues continue to volunteer local communities in many ways.
As the world reopens, we will continue to innovate and lead our industry. We're leveraging technology to allow smartphones to interact with elevators for remote floor selection and providing disinfectants and fans to assist in a cleaner environment and services elevators and escalators. We're working closely with many customers who've requested elevator adaptations as their buildings reopen and people return to work locations and we will do all of this while investing for the long term. Now let me turn to our Q1 results on Slide 4. As you've seen from our earnings release yesterday, the Q1 was a solid start for Otis in spite of the initial COVID-nineteen outbreak in China and the subsequent global spread.
On April 3, we successfully separated from United Technologies, returning to our roots as an independent company, while exemplifying various elements of Otis' culture, our innovation, empowerment and collaboration. Over 200 IT systems were replicated, more than 600 procurement and IT contracts re signed and almost 500 processes cut over. We created several new departments including tax, treasury, investor relations and executed nearly 50 facility moves in 18 countries. I'd be remiss if I didn't once again thank our team for this historic undertaking, rising to the occasion and setting us off on the right foot as an independent Otis. In terms of liquidity, we had approximately $1,400,000,000 of cash at the time of separation and have an undrawn $1,500,000,000 revolver, which serves as a backstop to our commercial paper program.
During the Q1, we placed over $6,000,000,000 of debt at favorable rates. That led to a $30,000,000 reduction in interest expense from our initial expectations. We announced a Q2 dividend yesterday of $0.20 per share and plan to return $260,000,000 to shareholders through dividends in the balance of the year. Q1 results continued the strong operational momentum that you saw during 2019. New equipment orders increased 5.6 percent at constant currency, excluding China, with double digit growth in the Americas and mid single digit growth in EMEA.
Organic sales declined slightly excluding China where top line growth was significantly impacted by the COVID-nineteen outbreak. Adjusted operating profit increased $17,000,000 and we achieved margin expansion in both the new equipment and service segments with 120 basis points of margin expansion overall. Free cash flow conversion was 73%, including the impact of spin related tax prepayments. I'm pleased with these strong first quarter results despite the impact from COVID-nineteen. However, we are not immune from the broader economic impact as this pandemic spreads across the globe.
With this in mind, we are updating our 2020 outlook. We now expect organic sales to be down 3% to 7%, reflecting recovery beginning in early Q3 at the high end and a delayed second half recovery at the low end. Adjusted operating profit is expected to decline $25,000,000 to $175,000,000 at constant currency, reflecting volume declines partially offset by cost containment actions I previously described. We expect adjusted net income to be in the range of $840,000,000 to $940,000,000 This net income outlook reflects the reduction in interest expense and a one point adjusted tax rate improvement from our expectations in February. And lastly, we expect free cash flow conversion to remain strong between 110% 120% of net income.
With that, I'll turn it over to Rahul to walk through our results and outlook in more detail.
Thank you, Judy. Good morning, everyone. Starting with Q1 results on Slide 5. Net sales were $3,000,000,000 down 4.4% with slightly less than half of the decline coming from organic sales and the rest from the impact of foreign exchange and net divestitures in 2019. Strong organic sales growth of 3.3 percent in the Service segment was more than offset by a 9.8% decline in new equipment due in part to COVID-nineteen.
Adjusted operating profit was up approximately 4% or $17,000,000 and up $27,000,000 at constant currency. Operating profit growth at constant currency was driven by approximately $45,000,000 of operational improvement from higher service volume, strong material and service productivity, lower SG and A and transactional foreign exchange favorability. This was partially offset by the impact of COVID-nineteen that reduced operating profit by an estimated $17,000,000 due to lower volume and under absorption of costs. Adjusted operating profit margin expanded 120 basis points to 15.2 percent with margin expansion in both new equipment and service segments. R and D as a percentage of sales was flat versus prior year and adjusted SG and A expense improved by about $30,000,000 in the quarter.
Adjusted EPS was down $0.02 as a $0.04 improvement from operating profit and lowered net interest cost was more than offset by $0.06 of headwind from tax due to an unfavorable year over year compare in the quarter and higher non controlling interest costs. Moving to Slide 6. New equipment orders grew 5.6% at constant currency, excluding China and were flat overall for Otis. New equipment orders grew double digits in the Americas, mid single digits in Europe and the Middle East and declined low teens in Asia, including China. This strong order growth was delivered in a global market that was down mid single digits excluding China and down mid teens globally as the China market declined an estimated 20% in Q1.
New equipment share continued to grow and was up an estimated 25 basis points in the quarter. While the overall bookings were down in Asia, we continued to see progress in the infrastructure segment and received several key orders, including for the Chongqing and Nantong Metro Projects in China. As we discussed on Investor Day, this is one of our key target segments and our infrastructure bookings grew high teens in a segment that was down low double digits. We also saw pricing stability in most parts of the world with 80 basis points of booked margin expansion. Booked margin expanded in EMEA and China and was offset slightly by the pressure in Asia outside of China.
Americas booked margin was flat. Backlog was up 3% at constant currency in the quarter with growth in Americas and EMEA offset by a low single digit decline in China. Organic sales were down 9.8%, with double digit declines in Asia, including China, primarily from the impact of COVID-nineteen. Sales in Americas declined 9%, reflecting a tough compare and the impact of lower order intake in Q1 of 2019. Sales in Europe were up low single digits, but this was more than offset by weak results in Middle East due to market softness.
Overall, new equipment sales in EMEA were down 3%. New equipment adjusted operating profit margin expanded 80 basis points, a strong material productivity and a small benefit from lower commodity prices was more than offset the impact of volume decline. Material productivity in the quarter exceeded our long term target of 3%, reflecting the benefit of the actions that we are taking. Service segment results on Slide 7 remained strong in the Q1. Modernization orders grew 2.5% with high teens growth in Asia, outside of China and Europe, primarily offset by a high single digit decline in the Americas.
Our maintenance portfolio grew by 1%. Organic sales increased 3.3 percent with modernization sales up 6.8% and maintenance and repair sales up 2.5%. Adjusted operating profit margin expanded 20 basis points and profit grew by $14,000,000 at constant currency, as strong productivity, favorability in price and mix and lower SG and A expense was partially offset by higher labor cost. Service contribution expanded for the 7th straight quarter with growth in all major regions. As we close out the Q1, our operational agenda remains on track and we are pleased with the progress on key initiatives, driving share gain in new equipment, making continuous progress on service contributions, material cost productivity and containing SG and A costs.
However, as the economic activity slows globally from the spread of COVID-nineteen, we are seeing the impact on our business activity in the 2nd quarter, which is highlighted on Slide 8, with our new equipment orders and factory shipments both down in April outside of China after a relatively strong start in the 1st couple of months of the year. We are also seeing reduction in service sales in April due to the challenges created by closure of buildings impacting our modernization and repair business. While China activity is recovering, it is clear that the business in China will not be immune to the global slowdown. And as we look at the balance of the year, we need to adjust our revenue and earnings growth expectation that we have communicated in February while taking incremental cost actions to offset the impact to earnings from sales shortfall. Let me start with sales on Slide 9.
We now expect overall organic sales to be down 3% to 7% for the year with a 5% to 10% decline in new equipment and a low to mid single digit decline in service. The low end or a 10% decline in new equipment reflects continuation of the first half trends into second half, while the high end or a 5% decline reflects a recovery in the second half of twenty twenty to twenty nineteen levels. We do expect continued stability in our contractual maintenance business. However, the range of service sales outlook reflects varying degrees of delay and push out discretionary repair and modernization projects to continue in the back half of the year depending on the overall economic environment and the occupancy level of buildings. Adjusted operating profit is expected to be down between 25,000,000 dollars $175,000,000 at constant currency and between $85,000,000 $235,000,000 at actual currency.
At the midpoint, this reflects nearly $300,000,000 of cost containment actions that Judy alluded to earlier. Most of these actions are already announced and are at varying stages of implementation. At the midpoint of our sales outlook, we would expect operating margins to be relatively flat. Adjusted net income is expected to be in the range of $840,000,000 to $940,000,000 driven by reduced operating profit, partially offset by lower tax rate and non controlling interest costs. We are reducing our tax rate guidance for 2020 to approximately 32% from 33% at Investor Day and are working on additional projects to continue to reduce the rate over time.
Free cash flow would remain strong between 110% 120% of net income as reduction in profit and higher restructuring costs will be partially offset by reduced capital expenditures. 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 are seeing in Q2 with job site closures. The high end or a 5% decline contemplates work resuming in Q3 and growth in the back half of the year. In EMEA, the significant delays and limited access to job sites in South Europe, the UK, parts of Russia and the Middle East.
The EME and new equipment business has continued. It is expected to be down high single digits to 10%, with the high end of the range reflecting job sites reopening in pre COVID levels in Q3 in North Europe and a gradual recovery in South Europe and the Middle East. In China, the new equipment business is recovering in Q2 and in Western Asia activity in Japan and South Korea has held up relatively well. But we continue to face challenges in India and Southeast Asia from government imposed lockdown measures. We expect the Asia new equipment business to be down mid to high single digits depending on the pace of recovery in India and Southeast Asia and the extent of impact the Japanese and South Korean economies from the pandemic.
In the service segment, our contractual maintenance business has been resilient and we anticipate this business to continue to be stable. However, there have been delays on discretionary repair and modernization projects as these projects push into 2021. And we now expect modernization sales to be down mid to high single digits and maintenance and repair to be down low single digits for the year. Overall, the high end of the 3% to 7% 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 profit outlook on Slide 11.
At constant currency, adjusted operating profit is expected to be down between $25,000,000 $175,000,000 year over year, reflecting the impact of reduced volume from the COVID-nineteen pandemic, incremental under absorption of costs, higher bad debt expense due to deteriorating credit outlook and an impact to pricing, especially at the higher end of the sales decline. This will be partially offset by the cost actions we have taken and will take in the balance of the year. Foreign exchange is now expected to be a headwind of $60,000,000 for the year versus the $20,000,000 that we were expecting in February due to the strength of the U. S. Dollar.
Moving to 2020 capital deployment on Slide 12. At spin, our net debt to EBITDA was about 2.4x with $1,400,000,000 in cash. During 2020, we expect to generate between $925,000,000 to $1,025,000,000 of cash and plan to pay down $250,000,000 of debt and return $260,000,000 to shareholders through dividends between Q2 and Q4 at about 40% of adjusted net income. Approximately $200,000,000 will be spent between non controlling interest and M and A. We believe these capital deployment plans are prudent during these uncertain times as they allow us to increase the cash on the balance sheet by the end of the year and are consistent with what we announced in February, reflecting our confidence in the cash flow generation capacity of this business.
With that, I'll turn it over to Judy for some closing remarks.
Thanks, Raul. Great start to the year. And while the pace of recovery is not known yet, Q1 results illustrate we are on track to support our investment thesis and long term strategy. We're confident that Otis will endure and succeed despite today's current challenges. And I want to close by reminding you of the strong fundamentals behind this fantastic business.
This is truly an iconic brand in this large industry where we have been the leader. Over the medium term, we expect sustainable growth and global share gain in new equipment to continue to expand on our leading 2,000,000 unit service portfolio, the heart of our recurring business model where we'll continue to focus on margin expansion through productivity. And in these difficult times, we're going to continue to invest for growth, maintaining a sustainable level of R and D and capital expenditures to ensure that when we all return to our normal lives, we are still at the forefront of technology, driving digital innovations, providing new solutions for our customers and empowering our field professionals with tools to make them more effective. You have our commitment that we use our robust cash generation in excess of 100% of net income to create shareholder value and you saw that with our dividend announcement yesterday. With that, I'd like Angela to open up the line for questions.
Our first question is from the line of Jeff Sprague with Vertical Research. Please go ahead, sir.
Thank you. Good morning, everyone.
Good morning, Jeff.
Good morning, Jeff.
Good morning. Congrats on a great start out of the gate. A couple from me, if I could, please. First, Judy or Raul, could you comment a little bit more on what you're seeing on pricing and the potential pressure on bad debts? And is the pricing comment essentially a new equipment issue?
Or are you seeing that across the service business also?
All right, Jeff. So pricing actually, we had a good start to the year. I mean, as I mentioned in my prepared remarks, the new equipment, the booked margin actually expanded. We saw that and it was pretty strong across the globe, with small slight pressure in Asia, but outside of that, it was fairly good. So really, really good starts to the year.
In Americas, where we saw some pricing last year, the pricing was stable this year. Europe, we saw good pricing. And same thing, even in China, where the markets were down, we were our book margins actually went up a little bit. So good start to the year on the new equipment side. And same thing on service pricing as well.
And the service pricing held up really well in Q1 and we gained a little bit of price in Q1 and we implemented our regularly scheduled price increases that we had planned. Having said that, I mean, the situation in Q2 is different. And we're working with our customers in the hardest hit sectors in hospitality, in retail, etcetera, that Judy mentioned a little bit in her prepared comments. These sectors make up about less than 10% of our service installed base, but these are temporary concessions. And therefore, a very specific period of time and we do not expect any long term impact from these.
Also, most of our customers do understand that we do have fixed costs like our Otis call center and we need to maintain and address service issues even when the buildings are only partially occupied. So that is why the concession requests have been very limited and we've addressed each one of them individually. But as we gave guidance, we obviously factored in that these concession requests might increase. Again, as I said, we have not seen a lot of these. There have been a few and we should address them at 1 at a time.
But in our guidance, we've assumed some impact and especially at the higher end of the range. And same thing on new equipment, we've assumed that there is a little bit of pricing pressure in the back end of the year, especially on the new orders. Now most of that will not impact this year, but on the service pricing, the concessions that we are talking about will come our results this year. So that's what we've kind of guided to. Same thing on the bad debt.
The results were okay in Q1. There's not a lot of incremental P and L expense. We did take not a lot of incremental P and L expense in Q1, but we have factored some in our outlook at the back end of the year.
Yes, Jeff, this is Judy. The long term relationships we have with these customers are that we're there for them when times are challenging as well. And as Rahul said, the hospitality retail segment is just under 10% for us. I really was pleased China price mix up for the 7th straight quarter. So new equipment again although it was up, book margin was up everywhere.
China again delivering especially in a COVID quarter. And then on our service pricing, our revenue per unit was up as well for another quarter. So those indications, again, strong performance in Q1, and we're going to continue to watch price in Q2 through Q4.
Great. And maybe just an unrelated second question. Just on tax, with a little bit more time under your belt, do you have a kind of better idea of what maybe the 2 or 3 year trajectory of the tax rate might be?
Kane, it's early days, Jeff, right. Overall, we feel that we're making progress. I mean, our last year tax rate was 34%. We guided to 33% on Investor Day. Now we are at 32%.
And the improvement that you're seeing between Investor Day and now is coming from reduction in the taxes that we have to pay on repatriation of cash. If you recall at Investor Day, we had mentioned that we had about 2 to 3 points of tax headwind because we needed to pay tax when we repatriated cash into the U. S. And that we've been able to work on certain projects to reduce that and we are taking incremental actions in early 2021 to maybe take some of our dollar denominated debt and convert that into euro denominated debt. So we're taking incremental actions.
And beyond that, we are working on several initiatives to structure our business better and to reduce the tax that we pay on high tax jurisdictions. We'll keep updating you as we learn more, but we are in early stages, but I'm confident that rate is going to come down over time.
Great. Best of luck. Thanks.
Thank you, Jeff. Thank you.
And your next question is from the line of Julian Mitchell with Barclays. Please go ahead.
Hi, good morning. And I'd like to hear the congrats on getting a tricky first quarter out of the way. Maybe one thing that might be helpful is when we're thinking about the recovery slope is just a bit more color on the end market split, Judy, if you'd be willing to provide that. Understood that hospitality and retail is sub 10%, but perhaps if you could flesh out maybe some of the other splits or if not at least give us some context as to how your split might differ from the one that KONE provided a couple of weeks ago just directionally?
Sure, Julien. Good morning. So the residential market which obviously is not single family homes, residential market is north of 50% for us in both of our segments and that tracks the industry overall. That's really where the strength has been coming from and the usage has been coming from that we've been seeing the demand as well on repair is in the residential segment. Other than that, we really don't break these out below that.
But as you can imagine, we are talking to a lot of customers as they do rebound and more importantly reopen and come off pause as to how they want their buildings to be utilized, especially in the office and commercial space, whether that's malls or more importantly office buildings. So we've got lots of requests to help with limited spacing. We've gotten requests to help with additional products. I think what it does is it reinforces our Compass product, our Destination Dispatch product, which does allow touch free utilization as well as improved utilization of elevators. So it's early days to see where when the recovery happens and how the world reopens, But we're in significant dialogue with lots of our customers across all segments on that.
Thank you for that. And then maybe just a follow-up question for Rahul on the free cash flow. Maybe just help us understand that free cash flow pressure in the Q1 and how quickly the free cash flow recovers? And also, I guess, I was a bit confused because if I look at the material, I think you have about €975,000,000 of free cash flow guide at the midpoint, I guess excluding NCI about €890,000,000 of adjusted net income at the midpoint. So it's maybe about 110% conversion on adjusted net.
But I think the conversion you present is versus GAAP net income. So just wanted to check that and does that mean that GAAP net income and adjusted net income are broadly similar for the year even with that big delta in Q1?
Yes. Let me yes. Let's start with Q1 cash, Julian. So we feel we had a good start to the year despite the COVID-nineteen situation. So in our Q1 cash, we put forward about $70,000,000 of tax payments from Q2 to Q4, and that was primarily due to the spin.
So that's in our Q1 results, again, Judy added in the prepared remarks. Also, we did extend support to our vendors, especially in China. And you see that our tables were down about $200,000,000 from December to March. So and part of this decline was to support getting a supply chain up and ready in China. And this cash flow impact should get mitigated between Q2 and Q3.
But despite the impact that we saw in China, our working capital actually came down by about $30,000,000 in the quarter. And then we had about $47,000,000 of separation costs. So overall, we feel that we had a very strong performance operationally given the pull forward of tax payments, the impact that we saw in China, given the support that we had to extend to our vendors and then the separation costs. So working capital coming down. So overall, we feel really good about how our business performed on cash given the overall environment.
Now what you will see going back to your second question on how this kind of translates into the rest of the year. Now Q2 is going to be a little bit challenging in Europe and China Europe and the U. S. China is going to recover, but we will see some pressure in Q2 in Europe and the U. S.
And then so our cash flow will be a little bit more skewed towards Q3 and Q4 than it typically is, but you would expect that given the overall macroeconomic environment. But we feel good about our guidance. I think we've done we've taken good steps to offset and mitigate some of the impact that is coming through from the profit net income from our previous guide to this guide. I mean, if you look at the guide to guide on our net income, it's probably down at the midpoint at AFX about $150,000,000 And we've mitigated that through lower CapEx. We've reduced our interest cost.
There there's some tax payments that we're trying to manage, some of that coming through the CAES Act, but we've kind of put all that in and yet drive $975,000,000 of cash at kind of the midpoint. So it's we feel good about our back end recovery and cash flow. Now on the conversion question, you're right, Jovian, it is about 110% on a reported net income basis. But the guide that we provided to include some of the cash that will outflow on the separation costs, the PSA payments that we'll have to make to UTC. So we factored that in and some of the restructuring that we've taken, the restructuring has actually gone up year over year as well.
So that reflects some of the impact from that. So adjusting for some of the one time expenses we will have, the number is between $110,000,000 to $120,000,000 And we've excluded any non cash one timers like the asset write off that we had in Q1, we've excluded that from the calculation. So it is purely on the GAAP net income adjusting for any non cash charges that we will have. So that's the guide that that's the range of 110 to 120 and as adjusted net income, which we'll speak to, that's at 110% at the midpoint.
That's perfect. Thank you for the thorough reply.
And your next question is from the line of Steve Tusa with JPMorgan. Please go ahead.
Hey, guys. Good morning.
Good morning, Steve.
Just to clarify, that $70,000,000 tax payment is part of the is that part of the separation and you're including that in the $975,000,000
No, it's not part of the separation, Steve. It is it got pulled forward into Q1 because of certain spin related consequences of spin, let me put it that way. So that's what because we're working on some things, it's complicated. But the reality is no impact to full year. It got pulled forward into Q1 due to the spin.
So that's Right.
But so I guess like your cash tax rate is kind of consistent this year with what you would expect going forward is the point, absent any of the moves you're going to make strategically on your GAAP tax rate?
For full year, it will have no impact to our cash taxes, right.
Right, right. So it won't be a tailwind next year is your point?
No, it won't be a tailwind next year.
Got
it. Okay. That makes sense. When you talked about the pricing dynamic, so you kind of bounced back and forth between services and new equipment. How should we think about that breakout?
Is there a heavier weighting to 1 or the other? I mean, you talked about kind of helping some customers out. That seems like it would be more of a services dynamic. Maybe you could just like flush out if there is more of a waiting to one of the other?
Yes. So in terms of the concessions we've made, those are 4 services, mainly in the hospitality industry, mainly in the U. S, Steve, just so you understand. Our China team was able to really work through this very rapidly and obviously these are the long term partnerships and we're being a responsive partner and supplier. But as we look at booked margin on the service side, it was up fairly significantly mainly in EMEA in China And then it was up more significantly than the new equipment booked margin was up.
But the new equipment book margin, obviously, it drives our 16.5 $1,000,000,000 backlog fairly substantively over the ensuing 24 months. So anytime we can get that booked margin up on orders be it in China or anywhere else in the world, it's a nice rolling tailwind for us as we look into the next year sales.
Okay, got it. And then one just last question on the Q2, if you look back to last year, pretty punchy number for new equipment margins. You had pretty significant, I think, mix kind of tailwind, maybe that was China flowing through. So the year over year comp there looks kind of tough. Maybe if you could just give us some kind of sequential color on to kind of calibrate everybody for what's coming here in the Q2, acknowledging that things will kind of bounce back or bounce around in the second half.
Are we from an EPS perspective, can we be down as much as kind of 30% to 40% sequentially 1Q to 2Q?
Yes. So we don't want to comment on specific numbers, Steve, but you're right. And the Q2 is probably going to be our toughest quarter, without a doubt. I mean, you see what's happened in April and we've seen some recovery in May, obviously, as things begin to open up, but April was a really tough month for us and you saw that some of the data that you put out there. So we do expect a fairly sharp decline in organic revenue year over year and it's going to be more so on the new equipment side for and then less on the service and then the service is going to be mainly on modernization and repair, but the new equipment side is going to be impacted substantially in Q2.
So that is what we are expecting. So you're right, in terms of modeling, obviously, we had a good start to the year. Q2 should kind of maybe kind of offset some of that. And then we see recovery on the new equipment side starting to happen in the back half of the year.
Steve, let me
try and add some
Yes.
So new equipment margins will be down quarter to quarter or can you move those flat?
New equipment margins could be down quarter to quarter. We're not going to give specific guidance, but yes, given what we're seeing and all depends on the part the reason we are hesitating, Steve, a little bit is it all depends on how the recovery is in June. If we're coming out of the gate, if the job sites begin to open up and we are able to get quickly to work and we resume activity, it could be a little bit better. So that's where we hesitate because it just is the near term outlook is kind of not very clear at this point. So that's where we're kind of hedging ourselves a little bit.
Yes. And we really
are watching how job sites the pace at which job sites are opening very carefully. And we're monitoring it almost on a daily basis in the regions. But when you look at a company a country that was in lockdown like Italy, the job sites are now almost 35% open. In Spain, they're almost 90% open. And so we're really seeing the construction part of the new which is the main element of new equipment obviously other than the manufacturing is the installation and construction piece.
It's that speed of recovery that we're trying to watch and calibrate and monitor for 2Q.
Yes. Makes a lot of sense. Thanks a lot. Appreciate the detail.
And your next question is from the line of Carter Copeland with Melius Research. Please go ahead.
Hey, thanks for the time and welcome to the independent world and your first conference call. It's great set of results.
Thanks Carter.
Just a couple of quick ones. One, Raul, I wondered if you could give us a little bit more color on the cost out actions and how much of that is temporary things like pro oils versus anything that might be run rate as we look further into the future? And then one for Judy, just wondering about the impact of this whole thing and the change that it may bring on a competitive landscape on the service side, just given your scale benefits versus ISPs. I mean, I would assume you can bring much more to bear in terms of service performance and reliability. I just wondered if you might give us some thoughts on that.
Thanks.
Yes. Good morning, Carter. So obviously, as you would expect that at the midpoint of $300,000,000 of cost takeout actions that we have planned for, it's a combination of both. I mean, it's a combination of structural actions. It's also a lot of short term actions that we are taking that Joey mentioned, including furlough, merit, deferral.
So it's a combination of the 2. And if you see our restructuring numbers, we upped that to $70,000,000 to $80,000,000 We spent about $50,000,000 to $60,000,000 last year. So it's incrementally higher. We are looking at our structural cost in a very, very hard way, looking at where duplication of work is happening, pulling that out. So we are taking a lot of hard restructuring actions as you would expect us to.
So that's a piece of the cost takeout. But a lot of these actions may have more limited impact in 2020 and probably help us in 2021 more than they help us in 2020. In 2020, a lot of the benefit that you will see come through is going to be from the short term actions that we are taking. So that includes merit deferrals, that includes furloughs and executive pay reductions, all the things that you would expect us to do. And we're going to watch this thing very carefully and it depends on whether how it translates into 2021, depends on how the revenue comes back.
And our goal will be to ensure that we take enough structural cost out to mitigate the impact of any one time headwind that we will get from these actions that we're taking.
And let me address your second question, Carter, on impact to service. We've looked back and modeled the global financial crisis to understand what transpired there. And for those of you that covered Otis as part of UTC back then, you'll recall we had a 10 percentage point, not just 10 basis points, 10 percentage point higher ROSS than our local nearest competitors. The 2 biggest differences that we're seeing coming with COVID-nineteen right now in 2020 are the precipitous building closures, which are having an impact not just on the construction side, but on our access for repairs, especially discretionary repairs. We did not see this during the global financial crisis.
And the other key element is there's no oversupply right now of the skilled technicians and field professionals, which we did have back in the global financial crisis. So we have worked extremely hard to maintain. We have 40,000 service field professionals, 33,000 service to make sure that working with our workers councils, our unions that we have retained and are engaged with our field workforce because this is a labor business and they're the strength of our company to drive all of our servicing globally. We have the liquidity as well, which some of the ISPs won't have. So we see the dynamic changing.
We've started a recapture campaign while our sales forces are mainly working from home to be able to grow our portfolio and to get some of our customers back who may have left us for ISPs over the years. And then we have sustained our investment in our OtisOne IoT offering so that we'll continue to have both technological as well as transparent and predictive information to be able to provide service in a more productive way, in a better way for our customers. So I actually see service coming out of this once we get through the discretionary delays. I don't think they're a demand issue. It's really a delay issue.
And once we get through those, we see service having the potential to accelerate.
Great. Thank you for the color.
And your next question is from the line of Cuy Von Ramon with Cowen. Please go ahead.
Terrific. Thank you for taking the question. So you mentioned the 60% of your base resi and retail hospitality. What's the other 40%? How is it split between infrastructure hospitals and commercial office?
And are you seeing any weakness there specifically commercial office? Thank you.
Yes, Cai. This is Judy. We don't disclose the segments that way, the end markets that way. I can tell you our infrastructure business is continuing. Obviously, it's a broad based business, great success in China as well as the rest of the world.
But obviously linkage to what's happening in the aviation market because not only do we support metros and rail and stadiums, We also obviously support airports. All that maintenance work is continuing in our service business, but there are several large bids that are still underway for airport modernization that we think it's going to be demand delay as well. But again, we don't break those out specifically.
Great. And then a second one, on the concessions, I mean, given that you're the strongest service population in the Americas, where there have been requests for concessions in the hospitality section and retail. Are you seeing that trend getting worse? And what does that imply for service margins in the Q2 relative to the first?
The trends are not getting worse, Guy. We did, as you would expect, that we've been working with our customers to make concessions where they're applicable, where the industries are hurting. Judy said, we do believe in long standing relationships with customers, so we have to react and share some of the pain that they are suffering. So that was where we came out and we made certain concessions that are tied and limit to a certain price at a certain time period. So that's where we worked.
Now it's not getting worse. You'll see some impact from in Q2 and some of that may spill over into Q3 depending on when those concessions started, but it's for a very, very limited period of time and it's going to be spread between Q2 and Q3.
Terrific. Thank you very much.
And your final question is from the line of Nigel Coe with Wolfe Research. Please go ahead.
Thanks. Good morning. Last question. So Ben, Nick, it's a good one. So, look, turning to the profit bridge, that COVID-nineteen buckets, the $250,000,000 to $315,000,000 to $515,000,000 buckets.
I mean, obviously, that includes price, bad debts, under absorption and of course volumes. But when you think about the raw volumes, decremental margins we should expect for new equipment and for service? How do we think about that? I mean, how does that break out between the two segments?
So the way I'll think about this, Nigel, and the question your question is always good, right? So it doesn't matter whether it's last or the first one. So in terms so if you look at our disclosures that we have made, our contribution margin on new equipment averages between depending on the quarter about 17% to 18%, right? So that's our overall contribution on new equipment. And on the service side, it's obviously higher.
And so the overall, if you look across the entire business, that averages out about 25%, 26% contribution margin. But then there is some under absorption of cost when the revenue decline is as sharp as what we are seeing this year, especially on the service side, because the fact is in service, we primarily use our own technicians to service the elevators and modernize those elevators. So that's where we use to see some incremental pressure because of under absorption of cost. So that's what we've kind of modeled in that bucket. It's that contribution margin plus there's an incremental impact from under absorption of cost.
Now we are working to offset that and that you see some of that on the in the green bucket. As we spoke about, we have taken actions wherever we could to reduce that under absorption through whether it's through restructuring actions or through PIRLO. So we are taking actions to reduce the under absorption. So we kind of one's on the left, the other one is in the middle of the page. So that's what that is.
So overall, you should think about 25% of our contribution margin plus an additional impact from under absorption.
Great. That's good information. And then just a couple of quick ones here. So the outlook for the service outlook, the low to mid single digit declines, you've given some great regional flavor there. But should we expect that most of that, if not all of it, lands in 2Q or you're assuming there could be some declines in 3Q as well?
Yes. I think it depends, Nigel, on whether we're going to see the high end or the low end. So on the high end, we think the majority of it is in Q2, but it will continue for the repairs depending on how the our access to buildings are. And then obviously on the low end, we do see it again that whole second half of the year being far more challenged and it rolling out throughout the whole year.
Great. And then just a quick one on NCI, a bit stronger than I expected certainly in light of what's China, the performance in China in 1Q. Just wondering what drove that higher?
In Q1, Nigel, that's the question. Thank you, Will. Q1, yes. Yes. Our profit with some of those JVs that we had in Spain and China was better.
I mean, we did better year over year in some of those businesses and that drove a higher JV payment to our JV partners.
So China JV income was actually higher year over year?
Again, we don't talk about China specifically, but between China and Spain that makes up about 75% of our overall income and that's what's driving that's what's driving our incremental expense on NCI in Q1, but our China business did very, very well despite the challenges of volume.
Got it. Okay. Thanks guys and congratulations on getting this ship launched. Thanks Scott.
Thank you. I'm showing no further questions at this time. I will now turn the call back to Judy Marks for closing remarks.
Well, thanks again for joining the call this morning. During these uncertain times, we remain focused on executing our strategy, managing risks and driving value for Otis shareholders. I want to thank our colleagues for their dedication as well as those on the frontline fighting COVID-nineteen. Please stay safe and well and we hope to hear from you all soon. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.