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.

Thank you, Chris, and good morning, everyone. Welcome to Otis' Second Quarter 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 nonrecurring 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. 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. 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 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 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 continue to deploy units in the U.S., 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 gains 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. 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. New Equipment backlog was up 2% versus the prior year. In the second quarter, organic sales were down 6.5%, driven by a 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. 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 the 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. Lastly, we expect free cash flow to be robust, between $1.0 billion 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.

Thank you, Judy, and good morning, everyone. Starting with second quarter 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 first quarter earnings call, both the New Equipment and Service segments declined organically in the second quarter, 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. In the New Equipment segment, our material productivity in the factories fell 3% for the 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 rates and lower interest costs. These results were better than we had expected in the previous outlook provided during the 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 a 110 basis point 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 improvements in the Americas and the Middle East. New Equipment backlog was up 2% at constant currency from growth in the Americas, and backlog margin was up slightly over the 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 the decline in Asia Pacific was more than offset by strength in China. China's 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 remains 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 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 declines, 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. We are maintaining the execution momentum in the business and continuing 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. 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 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 a number of service requests from our customers continuing to increase, and we expect to see a 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. 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 $40 million 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, 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, the 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 are improving the Asia New Equipment outlook due to the 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, 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 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. Foreign exchange is now expected to be a headwind of $40 million to $50 million for the year and an improvement from the $60 million of headwind that we had expected in May due to the strengthening of the euro against the U.S. 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 billion 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 noncontrolling interest 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 start share buyback in 2021 after we complete our previously disclosed $500 million of debt repayment. With that, I'll turn it over to Judy for some closing remarks.

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, 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 the line for questions.

Our first question comes from Nigel Coe with Wolfe Research.

I wanted to revisit the pricing comments. One of your major competitors mentioned price pressure quite frequently on their call. Could you share your current observations regarding the bid pressure they mentioned? Do you agree with that assessment? Additionally, could you discuss the price concessions you're providing to customers on the Service side? Are those aligning with your expectations, and when do you anticipate that to decrease?

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

Great. 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?

We mentioned that we expect the medium-term tax outlook to be around 25% to 28% over the next 3 to 4 years. This won't all be back end-loaded, as we anticipate steady progress during this period. We're assessing our entire business to determine the best fit from a business perspective and its impact on the tax rate. We've made significant progress since 2019 and now expect this year’s rate to be about 31.5%, which is a 3.5% decline from 2019. This is a positive development, and we see a pathway to achieve 25% to 28% in the next 3 to 4 years.

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe 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?

Yes, Julian, let me address both of those questions, and I'm sure Rahul will provide more insight. We have observed a strong reopening of job sites, with over 90% globally. In April, we were at about 65% globally. Currently, the restricted areas are primarily in India and Southeast Asia. Job sites are reopening, and in North America, we are nearly fully reopened. However, as we resume operations, we are noticing changes in behaviors due to health and safety concerns. We are ensuring that initial safety protocols are established, and we need to adjust the workforce arrangements as construction crews return. Regarding purchasing behaviors, orders, particularly in North America over the last quarter, were down. This decline was largely due to delays in decision-making. When we speak with customers, they remain optimistic and intend to move forward with their projects. Additionally, over 50% of our market exposure is to residential projects, which are showing strong growth. Therefore, our outlook anticipates returning to New Equipment levels sometime in 2021, and we will adjust our costs based on the orders we receive in the second half of this year and the revival of the New Equipment business. Rahul?

No, I think you covered it, Judy. Overall, our proposals have held steady through the first half. As expected, Q2 is a bit softer. However, in the first half, our proposal for maintaining activities in China has been particularly strong, both in infrastructure and other sectors. The market in China saw growth across all sectors in the first half, with Q2 being especially robust. It's an uncertain and fluid environment, but so far, the business appears to be recovering well. As Judy mentioned, job sites are reopening, and our current focus is on executing the backlog we have. Our near-term revenue will depend on this backlog, which has increased by 2% year-over-year through the second half. Looking ahead to 2021, we will concentrate on sustaining this backlog growth, accelerating the conversion of backlog into New Equipment revenue, reducing costs to maintain competitive margins, and achieving strong profitability. This is our internal focus.

I have a second question about the revenue splits. Thank you for the information on Slide 18 regarding the end markets. However, I wanted to ask about the geographical aspect. Approximately 5 to 10 years ago during the European downturn, there was a noticeable difference between trends in Southern Europe and the North. Are we witnessing a similar split emerging now? Could you clarify how significant the Southern Europe exposure is within the overall EMEA sales? Also, how do you anticipate the recovery trajectory might differ between Southern Europe and the rest of the EMEA region?

Yes, Southern Europe is certainly a significant market for us. We hold the number one position in France, Spain, and Italy, so we have a strong presence there. However, the recovery has been more robust in Northern Europe. Our business in Germany performed exceptionally well in the second quarter, and we are seeing strong rebounds in the Nordics and Switzerland, while Southern Europe is recovering at a slower pace, which is to be expected given the pandemic's impact. Additionally, close to 70% of our business in Europe, particularly in the EMEA region, is residential, which skews our focus towards the residential market compared to the rest of the world. This dynamic influences our overall mix and the recovery across various sectors, making the residential market particularly important for us in Europe and in some other regions.

Our next question comes from the line of Cai von Rumohr with Cowen.

Yes. Thank you very much and good quarter. So going back to Nigel's question, I don't know whether it was 15x, 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 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?

No. So Cai, we have shared the numbers we are observing. Our booked margin was down 70 basis points, which you would expect. The situation in Asia Pacific, especially in India and Southeast Asia, and the ongoing challenges in the Indian economy, which hasn't fully reopened, are significant factors. This region is the second-largest economy in the elevator market, so it clearly presents challenges, and we are not shying away from that. As Judy mentioned, pricing will depend on the overall macroeconomic environment. Since our Investor Day, we did not factor in any margin increases on the New Equipment side because we anticipated pricing pressures would emerge eventually. We weren't sure if that would occur in the second half of 2020 or 2021, but we knew they were coming. That's why we have concentrated on improving material productivity, targeting a 3% increase per year over the next 3 to 4 years. In the first half, we achieved this for two consecutive quarters, which is beneficial. Our margin trajectory for this quarter and the first half shows that we are effectively absorbing under-absorption, pricing pressures, and bad debt expenses through our material productivity and cost management. We anticipated these challenges and were prepared to focus on reducing costs. While it is concerning, we are concentrating on what we can control and ensuring we do not repeat past mistakes where we lost market share by avoiding price competition. We will continue to address the pressures as they arise in the market.

Yes, Cai, the share is really, really important. And we prepared for this. All 4 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 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 so a follow-up, everyone talks about share and how do you define share if you talk about ticking up 90 basis points? What are you talking about? New elevators, organic, constant currency, sales? How are you defining share?

Well, the way this industry tracks share is based on the number of units in the market. That's the method used, and I believe everyone does it similarly. We determine share by comparing the number of units we booked in the quarter to our market estimates for the second quarter and the first half of the year.

Terrific. And last one, service units. You mentioned that you were up 1%, and yet you were around 1% in China. I think you 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 to the industry as a whole?

Yes. I can't provide insights on the entire industry for this year, but I can share that we are intensely focused on expanding our service portfolio. This is essential to our business model, and we are working on getting our Otis units back, while also recapturing other units by improving our conversion rates and reducing cancellation rates. The most significant advancement in our portfolio this quarter was in China, which saw an increase of over 5% in units under maintenance. This is the fastest-growing market for our portfolio. We have encouraged our team to exceed their past performance in every region, particularly in China.

And our next question comes from the line of Steve Tusa with JPMorgan.

Can you just clarify whether the interest expense guidance reflects all the kind of recent and planned moves on debt in the balance sheet and the capital structure?

Yes, we have increased the debt repayment from $250 million to $350 million this year, while still aiming for a total long-term debt repayment of around $500 million. Our plan is to repay $350 million this year and $150 million 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 and fourth quarter? Or should things be kind of pretty smooth on a year-over-year basis?

Yes. If you compare Q3 to Q4, we expect Q4 to be slightly stronger on the New Equipment side. Some larger markets in Asia Pacific, like India and Southeast Asia, are still seeing slow activity. In the U.S., although job sites are open, rising COVID-19 cases impact the availability of workers and can lead to temporary shutdowns of certain sites. The market remains somewhat fluid, but this will be offset by stronger activity in China, where we are catching up in specific areas, and we anticipate robust performance in Q3. Overall, there may be a slight tilt towards Q4 for New Equipment. Regarding the Service side, we noted that our repair activities are still limited due to lower building occupancy, with many buildings not fully open yet. We expect gradual improvement as the year progresses. Therefore, we anticipate a stronger Q4 than Q3 on the Service side, which is a higher-margin business, so some of the profit will likely follow a similar pattern.

All right. And then one last quick one. I think you guys had some pretty good visibility into what's going on in the elevators that 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, for example, if you're fitting less people in the elevator, it's going to go up and down more times to carry the same amount of people. I mean, any read into kind of into that utilization dynamic there?

Yes, it's still early. However, we have gathered significant insights from our remote monitoring systems. The residential elevators are experiencing high usage since people tend to use them only when they are alone in condominiums and apartments globally. We know residential usage has increased. In the commercial and office spaces, we are collaborating with our customers to gain a better understanding. We are modifying some traffic flow algorithms and fine-tuning our destination dispatch system based on customer feedback. As long as a building is open, the elevator is being used and maintained, and will eventually require repairs. It’s still early, and we hope to provide more data in the next call.

And our next question comes from the line of John Walsh with Crédit Suisse.

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?

Yes, John, the main regulatory activity is a safety regulatory program that is significantly modernizing operations in South Korea. It's progressing well for us, but it's a long-term program that will take several years. In the first quarter, our sales increased by 7%, while in the second quarter they fell by 1.5%. However, orders for the first half are only down 0.7%. Our modernization business is performing better than we had expected in the first half, and we have adjusted our projections accordingly. In the Asia Pacific region, particularly in Japan and Korea, the modernization efforts are strong, with Korea focusing heavily on regulatory aspects.

Great. Going back to Steve's question, as you speak with your customers, how eager are they to adopt more touchless solutions and make upgrades? Are we still in the early stages of discussions with facility managers, or are you seeing them ready to proceed with some post COVID-19 investments as they prepare for people returning?

I think we're seeing significant interest, especially in China, where there's been a noticeable demand for purification fans and touchless technologies. This includes our app for iPhone and Android to call elevators, as well as pilot projects involving hand gesture technology and improved traffic flow. Early adopters are embracing these innovations, particularly in regions that have recovered more quickly. Installations in China are progressing well, with strong uptake. In Europe, the Middle East, Asia Pacific, and the Americas, building managers are actively seeking solutions to avoid congestion in lobbies and create safer, healthier environments. While it's still early, interest is growing, and though revenue impact is not yet substantial, some facilities are engaging in short-term initiatives, while others are considering larger modernization projects. It remains to be seen if these modernization budgets will replace previously planned upgrades in their capital expenditures. We expect more clarity on this over the coming months into 2021.

Our next question comes from the line of Carter Copeland with Melius Research.

Great numbers. I wondered if you might expand a little bit, Judy. And maybe there's 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 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 believe it will be, but it's still early. The reason is that when we examine our maintenance activities, we noticed we didn't experience the same volume of callbacks, as Rahul pointed out. Although it is increasing month by month, it's challenging to make direct comparisons with previous years like 2020, 2019, and 2018. The Internet of Things will have a major impact. The adoption of digital technology will also make a significant difference. We are currently engaged in meaningful discussions with customers about what data can be accessed remotely and through APIs. This is why we are pushing forward with Otis ONE and increasing our efforts in the latter half of the year to compensate for the initial half, during which we lacked access to the buildings necessary for installing the sensors and the gateway to our cloud. You will see that growth, and we are on track to reach 100,000 units for Otis ONE in the countries we've targeted by the end of the year. This will enhance service quality, without a doubt.

And 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 '21 and '22?

I believe there is significant pent-up demand. Within the installed base, there are 5.5 million elevators over 20 years old that require aesthetic upgrades or major technological advancements. In EMEA alone, there are 3 million units in this age bracket. As these elevators continue to age and accumulate usage—particularly the residential units—this need becomes more pressing. Additionally, the modernization opportunities in China are beginning to develop. Therefore, the key challenge will be determining when customers will have the budget to engage in these upgrades and when they will recognize this need as essential rather than optional for their operational requirements and technological improvements.

And our last question comes from the line of Jeff Sprague with Vertical Research.

I wonder if we could come back to the booked margin discussion, kind of a two-pronged question around that. First of all, 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 the gross booked margin? Or is that net of everything you're trying to do to counter pricing pressure?

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.

And then, obviously, you're just talking about the quarter with that number. Do you have a sense of kind of total margin in backlog? How that's sitting right now?

Yes. The overall performance for the first half showed some interesting points. In the second quarter, our booked margin decreased by 70 basis points. It remained roughly the same for the first half because, in the first quarter, our booked margin actually increased. So, when you average the two quarters, it's about flat on the booked margin front. However, our backlog margin experienced a slight increase, which is encouraging since not only is the backlog up by 2%, but the margin in the backlog has also improved. This is a positive indicator for us.

Certainly. Returning to capital deployment, it seems that completing the debt reduction could occur in January 2021. Considering the cash balance at exit, could you provide some insights into your willingness to initiate share repurchases or increase M&A activities? Regarding M&A, it's more about the availability of opportunities than the desire, so any additional information you can share would be helpful.

We have a desire for M&A, as we've always shared, and it's a matter of the right properties coming up, 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, we've got a deal book that's live and 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 privately held companies that wouldn't show up. Rahul, do you want to...

Yes. Our intention for the share buyback has always been to initiate it after we complete debt repayment. If we speed up our debt repayment, the share buyback could also be accelerated. However, the situation is dynamic. We are closely monitoring the overall liquidity in the market and want to avoid a repeat of the restrictions we experienced in March and April when access to commercial paper markets became very limited. We maintain a strong credit rating and do not anticipate experiencing that scenario again. Provided that market liquidity remains stable and we expedite our debt repayment, we are certainly considering speeding up the share buyback as well.

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

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?

No, it's not the deleverage that caused us to lower our tax rate from 32% to 31.5%. The decrease from 33% to 32% that we guided in the Q1 earnings call was due to efforts to reduce waste in tax finding and the tax payable on cash repatriation. This led to a 1 point reduction in Q1. The current 0.5 point reduction is unrelated to finding ways to lower tax and cash repatriation; it is more structural.

Yes. And we're going to continue that structural focus. As Rahul shared in the comments, 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.

And this concludes today's question-and-answer session. I would now like to turn the call back to Judy Marks for closing remarks.

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.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.