Otis Worldwide Corporation (OTIS) Earnings Call Transcript & Summary

Okay. Well, thank you, and good morning, and I'm very happy to have with us today Judy Marks, the President and CEO of Otis. It's great to have her with us. [Operator Instructions] At the end, also, I want to remind you to please complete the Procensus poll because you'll get some feedback right away from that. I think it's pretty interesting. So with that, I want to turn it over to Judy. I know she wants to say a few words to start with here, and then we'll go into the fireside chat. Judy?

Great. Thanks, Doug. It's great to be with you today. First, let me read our forward-looking statement. Please note, except where otherwise noted, the company will speak to results from continuing operations and excluding restructuring and other significant items. The company will also refer to adjusted results where adjustments were made as Otis was a stand-alone company in Q1 2020 and the prior year. A reconciliation of these measures can be found on the company's website. We would also remind listeners that this discussion contains forward-looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including its registration statements on Form 10 and Form S-3 and its Form 10-Q provide details on important factors that could cause actual results to differ materially. Well, again, good morning, Doug. Great to be with you here. This is a really fascinating time in Otis' history. We're just coming off of a really strong Q1, really strong performance. Our orders were up over 5%, excluding China, which shows there's still good business out there and we're still winning at least our fair share, if not more. Our sales were down slightly but -- on our Service segment and again showing the resilience in the Service segment, but New Equipment sales were down. I'm really pleased with our adjusted operating profit. We're up $27 million at constant currency, 120 basis points in margin expansion. Important to mention in both -- our 2 segments, New Equipment and Service, again showing a strong stream of growth funds that we started in 2019 and just really continued and came into 2020. That's 7 straight quarters of Service contribution growth for Otis. And 57% of our sales in 2019 were in our Service segment, but 80% of our profit was there. So again, that Service contribution growth is really our colleagues becoming more productive, serving our customers there. And then just recently, our Board announced a $0.20 dividend, again a 40% payout ratio. We will be using levers of balance sheet to take care of our shareholders. So strong Q1 as we left the parent, and it will be 8 weeks at midnight tonight since we became independent, and I'd like to share with you kind of what we've changed and what we've observed and a very high level [indiscernible] more questions on that. First and foremost, our strategy remains on track. That is not changing. That's what gave us the tremendous performance in 2019 and really during the first quarter of 2020. We understand what we need to do to meet our customers' expectations, and that will be our shareholders' expectations as well. The key to us is growth, and that's the big change for Otis. It's growth in share and it's growth in our Service portfolio. And it's that growth mandate which really are changing [indiscernible]. The best way that I know how to do that in the immediate sense is to drive an incentive [indiscernible] and I'm pleased to share [indiscernible] short-term incentive essentially as part of becoming an independent company to basically incentivize the short-term top line in terms of sales and revenue growth. But also, we're sensing orders growth. And these are in addition to [indiscernible], all of which are important, but we've now created this growth engine because we truly believe the megatrends in the medium and long term will still drive [ urbanization ], so really focusing on growth. We've, obviously during these 8 weeks, been dealing with the COVID-19. We saw it early. In China, we watched it and reacted to it very quickly. Cost-containment activities became top of mind. First and foremost though is the health and safety of our employees. But with those cost containment really focused on discretionary costs, hiring freezes, travel freezes and then some furloughs where required. Yes, we want to retain the incredible people who work for our company. And we have created a focus on doing that. And we've shared in our Q1 earnings call, we're driving $300 million cost out of our system. Again, some of that is temporary and we'll align 2021 as we get closer to 2021 as we see where we're really in sales and top line [indiscernible] for that, so focus on cost savings. The other part are the independents really is the [indiscernible]. And there's such an excitement with Otis, 69,000 colleagues serving customers in 200 countries and territories throughout the world even with the pandemic. The excitement is palpable. And really where I see it best is in something I call the pace in which we're doing business. We're more agile [indiscernible] the change processes. And a few examples, first and foremost is how we responded to the COVID pandemic. We have been an essential service. But our products team, sales and our [indiscernible] teams have instantly come up with additional offerings to help our customer partners as they return to their office buildings, whether if that's through simple signage or through more [indiscernible] solutions like our Compass destination dispatch, fans, everything again to help people move. So we're really excited about that. And then the process side. We knew we had the opportunity to revisit how we conducted our business versus from when we were with our former parent. And really, I'll point you to China where we know we go to market with agents and distributors. We have sped up that process without sacrificing any compliance, any ethics. What used to be a multi-month process under our parent, we now do it in a matter -- and we count it in a matter of days. And we've been able, since the beginning of the year, to bring on over 200 new agents and distributors who will help us really drive the channel. So what's our path to success, our path to creating shareholder value? There's really 3 strong items we're focused on: first, growth, growing New Equipment share in every region in the world and growing Service portfolio at faster rates than we had for the past decade; second, really grow our operating margin, coming off a strong 2019, where we had significant earnings growth, again a strong first quarter. We're looking at supply chain efficiencies globally, material productivity, top of mind; and then clearly, making our labor force, our field professionals more productive by giving them tools. We'll drive the cost side down. We have a keen focus for [indiscernible] and driving SG&A down. We did that in the first quarter. That will continue, but really driving [indiscernible] operating margin. And the third element, which is absolutely just as important, is really driving that shareholder value through increased EPS. We're driving the tax rate down. We've already made progress there. We leveraged our balance sheet, debt repayment and obviously, dividend issuance. And once that debt is repaid, [indiscernible] investment-grade and credit rate and then we will then be able to do shareholder -- do share buybacks. So it's an exciting time for our business. I think running and leading a global enterprise has never been more challenging yet more rewarding, and the company is in great condition, and we're really looking forward to a strong second half of the year.

Well, this -- I think this is -- what you're talking about is some very interesting dynamic because when you contrast -- when you think of Otis as part of UTC and Otis independently, on one hand, I would assume -- I think you described some of it there that you can be more quicker and more nimble as an independent company rather than part of a large organization. On the other hand though, there are a lot of shared costs, corporate costs that, of course, you could get some scale advantage by being part of UTC. How would you contrast what you can do today but in terms of flexibility, speed as an independent company versus before? And then how would you describe -- you talked a little bit about cutting SG&A, but how can you get it -- some of those scale advantages that you might have had before? How would those not become a burden for you?

Yes. So as I said, the good news is our strategy remains on strong, $27 million of profit growth in 2019 at constant currency. And the strategy -- like I said, the investments we put in place continue the yield for us. It's important to note that even with where we're heading as a company -- and we did get new corporate costs, as you can imagine, about $150 million this year and up to $175 million next year. We're lifting the covers on every one of those costs to figure out how do we optimize, how do we move quickly and how do we advance Otis simultaneously. So let me give you a few thoughts on that in addition to really telling you what's different and what's dropped and what's [indiscernible]. In Otis, little things matter. When you're leading an organization that's got 1,400 branch offices, again, serving customers globally with our incredible Service portfolio and our New Equipment offerings, little things matter. Every productivity hour for our 33,000 service field professionals is worth 33,000 hours of savings, and we really continue to add digital tools [indiscernible] a few of them back [indiscernible] and are being prepared there. So there's a win-win there for everyone. On the corporate side, I got to thank [indiscernible] through. There's a lot of mutual work over the past 16 months to ensure that we can receive similar [indiscernible] purchasing, be that in our IT systems, be that in our travel rates, procurement rates, everything. So we've worked hard to do that. But by doing that, we've also absorbed, in the interim, their current systems. And so what we're spending time this year doing to drive that $175 million down is drive the cost down but also leapfrog technology. So instead of buying fixed and with the way it was done and is done now for the parent, we're going to move more towards really buying software-as-a-service, paying for more -- basically paying for what we need, leapfrogging some applications. Instead of using a homegrown treasury system, we moved into a commercial, off-the-shelf, cloud-based software-as-a-service. So we're going to improve offerings for our internal customers, improve [indiscernible] services, and we're going to drive down the cost through that. The other example would be -- we brought over several corporate functions, tax, treasury. They are already both yielding significant savings. Our treasury team did a tremendous job with our debt placement. Because of that, we were able to reduce our interest expense already versus what we shared in our Investor Day in February. And our tax team, which was very focused on the separation since January, has come up with methodologies, approaches and more and more ideas on how we can drive down what's a fairly high effective tax rate. We came into the year at 34%. At Investor Day, we said we begin the year at 33%. At our Q1 earnings call, we went to 32%. So we've got opportunities there to more -- far more runway there. So it's really a mix of taking the best of scale from where we came from, becoming more agile, becoming increasingly incredible negotiators for our supply chain opportunities, including our direct material purchases. And you -- if you were on our Q1 earnings call, material productivity was a great tailwind for us and will continue to be.

Well, I'd like to turn actually to the intersection of 2 things here. There's COVID-19 and then there's China, 2 important issues. Can you -- could you first tell us a little bit about what you're seeing in China with respect to COVID-19? Clearly, there's been a restart of much of that economy. How -- and even over the past few weeks since you reported, how have you seen the situation evolved there for Otis?

Yes. So for everyone who wants to understand…

I'm sorry, ma'am. I'm sorry, Judy, to interrupt. This is the operator. I'm just turning your camera up to try to help improve the audio quality. I'm sorry for the interruption.

Okay. No problem. So China itself is back. That's probably the way to net this out. We were an essential service in China. So we never stopped providing maintenance and repair. From the end of January, from the beginning of the spring festival on, we've got about 15,000 colleagues in China, and they are all back at work. All of our branch offices moved and our factories are producing and shipping. The one item we've continued to watch is job site reopenings. That's a key indicator for us not just in China but throughout the globe. But in China, that's now just approaching the mid-90% in terms of New Equipment construction sites reopening. The last remaining sites that haven't reopened tend to be more in the Tier 2 -- or Tier 3 through 5 cities that are a little more -- or a little smaller and a little more remote. And part of that's just due to labor availability not just with us but with the general contractors and some of the migrant labor that needs to return for construction. So China is back. We're very pleased with what we saw in terms of orders and shipments not just in April but also in May. And if China is the proxy for the rest of the world recovering from COVID, there will be a very positive bounce back in the second half. And that's what we've assumed in the high end of our guidance that we released at first quarter earnings. So China is strong in every element. We're local-for-local in China. We source there, we manufacture there, and we deliver, install and service there.

And in China, we've had a number of questions related to -- if you think about your market share in China right now, is this...

Doug, I've lost you in terms of audio.

I don't know what -- can you hear me now?

There we go. You're back now. I got it. Sorry.

No, I was asking...

I heard market share, yes.

Yes. So market share. How do you see market share evolving in China? What can you do to improve that?

Yes. So market share in China, listen, we've got some work to do, but I'm really pleased with what's happened over the past few years under Perry's leadership. We now have 2 brands in China. We focused our brand to come down to a much more common product offering. So our cost position is coming down. And we haven't been able to get price as well. But in terms of share for New Equipment, we are not #1 in China. We have improved our share by several hundred basis points over the past 2 to 3 years. And even in the first quarter of this year, with COVID-19, we saw a 25 basis point improvement in share in China. So on the New Equipment side, we're holding our own, again not #1 but we believe that with the addition of, again, common products with several of the focus items that Perry spoke about, improving our sales coverage with agents and distributors, which I spoke about earlier, adding another 200, developing our relationships with the key accounts, the key -- the large country developers who are consolidating and becoming a much more significant buying force in China, and then also adding infrastructure. Our win rate in infrastructure and our share in infrastructure is higher than in any other segment. We believe that will continue to be an area where the government drives stimulus, including -- mentioned at the Congress just last week, the National Congress. So we've got a really good plan on New Equipment share. On the Service side of the portfolio, we've got work to do there. We convert a little over about 40% of the New Equipment installations after warranty into Service. That's up 10 percentage points over the past few years, the 40%. But as Perry shared, we're going to grow from a little over 220 -- 200,000 -- 20,000-unit Service portfolio in China to about 350,000 over the next few years. China remains the largest market for elevators, escalators and moving walkways and also will become the largest single country for Service. So it's really important that we grow share there. We've got some strong initiatives in play. I'm really pleased with 1Q results. We grew our Service portfolio, and we grew New Equipment share by 25 basis points. So we've got to let the strategy play out, but I've got confidence in our team. You will see -- and we will share more color on this in our earnings calls. You will see growth in China.

Well, part of your strategy in China has been through some minority stakes in Chinese companies. How do you see that going forward? Do you plan to continue playing in minority roles? Or could you see even buying some of these companies out?

So we have 2 JVs, which represent our 2 brands in China. And obviously, you see those payments that we make to our partners. We disclose those every quarter in our 10-Q and in -- typically in our earnings presentation in the backup. That has served us well. We went to China in 1984 to start our first joint venture and have remained ever since and really been part of that 2000 to 2015 growth wave. And right now, the market is flattish to potentially declining a little this year, but it's still going to be over 500,000 of the 900,000 New Equipment units in this cycle. We're going to continue with our JV partners. It's -- we feel it's the right way to go to market. They've been helpful, and we're going to continue in those relationships.

Well -- and then I'm interested in one of the big things about Otis historically when you've moved into new markets has -- it's always taken a while, in a sense, to educate the end market on the value of Service and to get the attachment rate up. When you think about China, you said your attachment rate is now up to 40%, what do you see as the challenges there? Because I know at one time, there were regulatory changes in China that were really requiring Service to be provided by either the OEM or an approved provider. What do you see as the evolution of Service in China? And how does that get taken up to the levels that you can -- you see in more developed markets?

Yes. I think the single biggest change coming to China is the Internet of Things and IoT and in our case, our Otis ONE offering. It's going to have multiple advantages for us to increase -- you call it attachment, I call it the conversion rate, which although it's only 40% in China, it's over 90% in the rest of the world. So we've got a really great ability to sell a unit with the best of our technology and innovation and then convert it to our Service and build that annuity and that resilient Service business. So with the way IoT is going to work, it's going to help us attract new customers as well. We've started deploying sensors in China and have had a really strong experience in the fourth quarter of last year in terms of these sensors providing data to us and to the regulator to prove we're a quality provider and we understand the health of our system. What it's shown is -- we get calls. We have our Otis line, which is our 24/7 helpline that anyone can call in and drive what we call a callback, where we have to dispatch a field professional, roll a truck, in most cases a bike in certain developing countries, and have them go and fault isolate and repair an elevator. There's a significant number of those callbacks that when our mechanic gets there, the elevator is running on arrival. Now with a data sensor that connects through a cloud gateway, both our Otis line that answers the phone call, our field mechanic has access on their apps on their iPhone, and our customers, through our new customer portal, will be able to see the heartbeat of the elevator. It will be started out as a red, yellow, green, plus typical stoplight-type scenario that is language-independent to understand that even though they may have called that there's an issue, the elevator could be running. In China, in the fourth quarter of last year, we saw a significant reduction of the need to roll vehicles, which obviously is a productivity savings for us, but more importantly, our customers' elevators are working. We can also guide them from a remote intervention. And sometimes, we can just tell them, "Now someone's pulled the stop button. Maybe they're moving. Maybe they've locked the door." And that can just be fixed by pushing the button in on-site without us needing to deploy a field technician. So that's going to help. The other part of the sensor that helps us is it gives us more information to be able to fault isolate when we get on-site. And in China, in the fourth quarter of last year, we had several thousand units deployed by branch, by route, and what we found is a 10% reduction in time when our mechanic was on-site because he or she knew, "Go to the fifth floor. It's that door landing where the issue is." So they don't have to fault isolate every floor and go floor by floor. So we have the opportunity through IoT and through our Otis ONE offering to really make a huge game-changing step function in customer satisfaction, in elevator uptime and in our productivity. What that does, Doug, is it lets us take cost out of our system. Because now we can predictably understand what's going to drive mechanics times. We'll have far less nonproductive time, less travel time and the customer will be more satisfied. That will then let us compete with the independent service providers. The independent service providers throughout the world for the about 19 million units in service throughout the world have over 50% share. They will not have this incredible data capability, Otis ONE capability, sensor capability, to be able to predict and respond as quickly. And so we think we're going to gain more customers. The key accounts are asking for this. We're going to gain more customers. Our attach and conversion rates are going to go up. And then our retention rates, when we re-sign a customer, are going to go up as well. We've got the industry-leading retention rates around the world at 93%, but that means we've got a 7% churn rate and we need to change that and continue to improve that. And IoT is going to be that game-changing technology that gives us that transparent data, situation awareness, reduces our cost structure, and lets us really take share back from these ISPs, especially in China.

Well, I think this is really important. And when I look at the questions coming in as well, the #1 question -- the most popular question coming in right now from the audience is on Services margins. And clearly, the cost reduction efforts you're talking about would be an important part of this. But can you also -- you talked about it a little bit there. But can you talk about some of the competitive dynamics? I know over time, there had been -- particularly Southern Europe, there's been a fair amount of pressure on Services margins. You'd see a lot of competition for Services even on your elevators and others. Can you talk about that dynamic and what your expectations are in the near term and medium term for Services margins?

So we still have room for Service margin enhancement. There are several ways. First of all, the market determines pricing, but there are several elements that we can control. One is the number of callbacks and how we handle them. And the other is how efficient we can be and how productive we can be. And so a few years ago, we made an investment, service transformation program. We started in about the 2016 time frame, 2017 time frame. And then in 2018, after making that investment and developing some really industry-leading apps for our field technicians, we started deploying these connectivity tools, these iPhones, putting the power in the hands of our field professionals so they could order parts, so they could fault diagnose more effectively. We have an app we call Tune that they can put on the floor of an elevator or the stair or the rail of an escalator and it will then give them vibration readings, tell them if it's within tolerance. It will do noise readings, things that we needed human expertise to do in the past, and we still rely on a merger of human expertise in these apps. But it lets us diagnose far more quickly what a customer's problem is. So these apps have made our field force far more productive. There's still in -- differing rates of adoptions in different countries. We've got them rolled out now at about 75-plus percent of our field technicians, all of our major countries where we've got significant field forces, workforces have them, especially where we have large pockets of field costs. Where we've got large pockets of field costs, I think it's important that you and the audience understand in our Service business, 70% of our cost base is labor. So productivity matters and scale matters. So we now have the opportunity in Europe where we have deployed these iPhones and these apps to again drive productivity. And we've seen 7 straight quarters of Service contribution growth, and that is making a difference. Now we add Otis ONE and IoT, and part of our deployment plan this year -- we've already got 400,000 devices connected in Otis telling us every day their health and monitoring. We're adding another 100,000 devices this year with Otis ONE, with this new data sensor as well. And we've chosen those high-cost, high-opportunity countries to do it. So clearly, North America and China, but we're really going in Spain, France, in Germany, places where we can make a difference on day 1, make those routes more efficient, reduce the nonproductive time and again grab that share back from these ISPs. We think the customer experience is going to be far more positive. Our cost basis will go down. We believe it's repeatable. We had Service contribution growth 5 straight quarters in Europe, including first quarter of '20. And so we are acutely focused on driving out more efficiency and more productivity and doing that by providing digital tools. That's why digital is so important to our DNA now and it really is leapfrogging us. We brought in some really outstanding experts in several domains and we had last year as we were getting ready to spin to do this. When you blend that expertise with the knowledge we have, the rich knowledge we have of the elevator mechanics, the elevator electronics, it just gives us a tremendous advantage. And that's why imperative #1 is growth, grow New Equipment, but just as importantly, grow the Service portfolio at rates faster than we've done in over the past decade.

Well -- and then following on that and in Europe -- and there's a European recovery plan that's being launched. And in that, there is money for building renovation. Is this something that you see could be helpful for Otis in Europe?

It definitely will be helpful and we're seeing stimulus like that in many country plans. Part of our cost containment was to ensure that we retain the talent we need. We did take advantage of any social programs that were offered in Europe, in, yes, places like Singapore and other countries in Asia as well again to make sure that when we come back, we've got the right talent and we're ready to accelerate. We've continued our product development as well. And we've got that at about 1.6% of sales. We think that's the right level. And with all the cost savings we've done, we have not touched those strategic investments. So our Service segment consists of 2 subsegments. The first, we call maintenance and repair. That's about 80% of our revenue. The second, we call modernization, and it's about 20% of our revenue. Parts of modernization, it's a little bit like your car. For a while, you drive your car. Every now and then, you get out of warranty. You need some repairs. You take it into -- you take it back to the manufacturer today because it's far more sophisticated as are our elevators today with our Gen360 elevator, which is digitally native. So you take it back to the original manufacturer for them to continue to do repairs. But after a certain amount of time, you've had enough repairs and you want to trade that car in. Well, in the elevator business, that cycle time, that useful life for that original elevator or escalator tends to be about 20 years. During that 20 years, for a variety of reasons, you may want to do aesthetic upgrades because you're an office building and you're competing for tenants with other office buildings. So you would do an aesthetics modernization. That tends to be discretionary. And we've seen some pressure on that this quarter, not surprising, especially in Europe and in -- and other places because of COVID. That is a discretionary opportunity and, right now, a challenge. But every now and then, your car just breaks and you need to modernize it. In our world, the building itself is not being knocked down and rebuilt. It's not a new building, but the hoistway can be modernized. Europe has the largest opportunity for this when you look at how many units Europe has that are over 20 years old. It's almost 3 million units are over 20 years old in the segment itself. And a lot of them are on the Otis portfolio in terms of where we provide service. So Mark Eubanks spoke about this in our Investor Day. We think modernization is a great opportunity. We now have modernization toolkits. We have special modernization products. We're making the ability to propose modernization quicker, more seamless. And we even had customers during COVID call us and say, "You know there's not a lot of usage in my commercial building right now. Can we get you in now to do modernization?" And again, we were working. We're an essential service and we were happy to help our customers.

Well, I want to switch over and focus a little more on product development, which you just touched on there. Back when you took over in 2017, I think it's fair to say that you came into a company that had fallen behind some competitors in product development, in new products. Can you talk about a little more about what you have done, how you see Otis positioned against your lead competitors? And then also, on the Gen360, obviously a very important product, can you tell us a little bit about where that stands in terms of the launch and how you see that improving your position competitively?

So as I kind of go back to late 2017 when I joined, yes, one of the assessments was that Otis had been under-invested in. If you go back about a decade, our R&D investment as a percent of sales was at about 1%. CapEx was minimal as well as a percent of sales. And we knew that regardless us being a long-cycle business, innovation is your lifeblood. And we have tremendous skills in our engineering, our R&D, our digital teams. So the skills were there, the muscles are there, and guess what, we are now really toning those muscles. I've been really pleased with our product offerings over the past few years, and they really ranged from us looking at very specific enhancements of our incredible Gen2 product that has really become the bestseller ever in Otis history. Just last month, we introduced Gen2 Prime in India. It will be manufactured in India, and it is our entry-level offering. We never had an offering at 0.7 meters per second, but it just hits a great sweet spot in India that we couldn't service. We would try to bid Gen2s, but we would be -- our price point and feature point just couldn't compete with other entry-level competitive offerings. So we're going to build that at our Bangalore factory. And then that unit will have tremendous application in other developing countries. We take -- then go to Gen360, as I said, a digitally native combination of electronic -- electromechanical elevator that just really -- it has some safeties in it. It has a totally different ambience, new controller -- or almost state-of-the-art controller, I should say, and the ability to offer multimedia connections. What we found is beyond IoT, the connected elevator is the future of elevators. And so whether that's connecting in the cab with a display that can feed real-time information on the building, can do news feeds, can do any of that, and if you have a potential entrapment can actually, via video and voice, have one of our Otis line operators calm you down, talk you through what's happening and all that happens through multimedia. So it's a totally connected elevator. We target the launch in Europe, and we have multiple pilot customers. As you can imagine with any elevator, you really -- this is more of a life safety business. So beyond ringing this out in our test towers, in our labs, we really want to make sure that we've got a really robust quality, safe product that's going out there. So we're piloting it in Europe, and it's -- the safety aspects of it are what really resonate with our customers and with our employees and our colleagues because our employee, our colleagues, our mechanics will not need to be on top of the cab to maintain it. And this is a dangerous industry and every life, everyone, every colleague to go home every night. So we're really pleased with the launch of that. Again, we will continue on Gen2 Prime. And then you should think about connected elevators. Our other really incredible product is what -- destination dispatch. And it's our Compass product. It's continued to mature. And probably unbeknownst to the casual observer, they may see different fixtures out in front of an elevator. But that is our incredible algorithm that allows us to move people more efficiently, to group people in terms of floors so that the elevator accelerates, doesn't need to stop on every floor. Most of you know this in a large building where when you're away from the elevator, you push where you want to go or you use your access card to tell you -- tell the elevator where you want to go. And it says, go to bank H. And it's that grouping, and we've done over 15 major algorithm upgrades in addition to announcing Compass 360, which has new features. What we've seen with the Compass and the eView, which is the ability to have a display, an active display in the cab itself, Doug, is what it does for our conversion rates when we go from warranty into service as well as our retention rates, is it takes them up 5 percentage points to almost just under 99% at times retention rates and re-signing rates. So it gives us incredible customer stickiness. So the other big area, obviously, that we're going to continue to invest in is digital. It's on our backbone, on all of our internal systems, but more importantly, on Otis ONE and IoT. And we've made that commitment. That's a long-term commitment. We believe it's going to change again all of our metrics, making us more productive and our customers more satisfied, which will then grow our share on New Equipment because we will, later this year in China, start shipping IoT-enabled units out of our factories in China so that we will have that connection, and that will drive our rates up. It will drive our Service portfolio. This business model is pretty simple. We sell new equipment. It goes through a warranty period. We attach it. We convert it to our Services business. And then for -- after an average of about 4 years, 1 year in some countries, longer in others, then we re-sign these customers. We do that over and over again for a period of about 20 years, and then we modernize the elevator through the modernization activity we spoke about earlier. And then we sign them up again for more service. That's why our Service business is so resilient. It's predictable. Our maintenance business, it's scheduled. And we, throughout this whole time frame, have not seen really a demand disruption even in hospitality and retail. We just have not -- we've seen delays, but we have not seen a demand disruption. The residential business has continued strong. Our service offering, our people have continued to service the elevators in buildings we all live in. And that has happened throughout these last 8 weeks.

I'm curious on the competitive environment. We saw the Advent-Cinven acquisition of thyssenkrupp Elevators. How do you look at -- does that change anything? And when you look at your -- the competitive landscape, is this -- do you think of this as sort of a stable landscape now? There's been a lot of talk about acquisitions or mergers here over the last few years. What do you think it looks like now?

This is a pretty consolidated industry. When you look at the top 8 OEMs on the new equipment side, the market share is significant. We have not had a new entrant in almost 3 decades in terms of the new equipment side. I won't comment on the competition itself explicitly. What we are seeing -- because really, the top 8 OEMs are all public corporations today, we're seeing rational behavior. We're seeing rational pricing and we're seeing everyone needing to really respond to market pricing. In China, I've been really pleased at the evolution there. The top 10 providers, including -- probably not #9 and 10, are public entities in China beyond the first eight, which were all multinational corporations who are doing businesses, JVs in China. That top 10% net -- that top 10 now has 90% of the market share in new equipment. So if you went back to 2015, that would have been closer to 70%. So when you have public companies, we're seeing rational behavior. Where we tend to see thyssen most is in North America, where we have the leading market share and we've not seen anything irrational. And actually, I'm really pleased with the first quarter orders results out in North America, where we again had a really strong quarter. The last thing I'll comment on, Doug, which I think is important for people to know, as we've shared our capital allocation approach, we have shared that we have penciled in about $50 million a year of what we call bolt-on acquisitions. There are always smaller Service portfolios available to acquire. We look at those really through 2 lenses: One is where can we add those where they allow us to drive additional density. So the addition of those units come at a lower incremental cost so that we can be more productive and drive more earnings. Second, we look at where can this also -- where have we had success in quickly, quickly grabbing the synergy and integrating these companies. So you see us do this a lot in Southern Europe, in Spain, in Italy. We do it in North America as well. But we do it in places where density matters. This is a density play for our Service portfolio. And we're going to continue to do these bolt-on acquisitions where they make sense. Some years may be a little more than 50. Some may be a little less. But our cash flow is strong enough to support that while still taking care of our shareholders. And again, it builds that resilience in that annuity in our Service portfolio.

Well, we're about out of time here, but to wrap up, I'd just like to ask you -- when you think about the pandemic right now and getting through this and the recovery, how do you think your priorities might change when we come out of this in terms of cutting costs, different investment priorities, different levels of investment? How do you look at the recovery from your standpoint?

Yes. So again, if China is any proxy, we are really looking forward to a strong second half recovery. We're going to have some headwinds in the second quarter, where we just couldn't shed costs quick enough with the volume decline, especially when you look at Europe and North America. But again, I think it's important for everyone to know that both of those countries have been open and we have never stopped providing essential services, and many construction job sites were open throughout the pandemic. Our investment, we're committed. We are committed in terms of creating shareholder value to driving innovation, and we think this 1.6% of sales is the right level for us. So we have taken a laser focus on discretionary costs. We're looking at SG&A. 2020, we're going to take $300 million of cost out of Otis. Some of it will be structural. The majority of it though will be temporary. As we go to Q3 and especially Q4, we are going to be -- continue to watch orders closely. We've got a really strong backlog of business, $16.5 billion of backlog. We can see where the sales are going to be coming from both this year and next year on both New Equipment and Service. This is a long-cycle business. So we have that visibility. It's the orders that get booked that continue to grow that backlog and give us the visibility into '21. In '21, we'll have to do -- and we'll have enough time late this year to make those cost decisions. But we'll continue to make structural cost decisions to make us a better business. We've got a lot of options as an independent business, again, where little things really matter, so productivity improvements, labor productivity, material productivity every quarter. SG&A, we have now really lifted the rocks to make sure that if we're going to drive additional share, then we're going to do that in a pinpoint manner. And we've proven that time and time again when we do add sales resources in a very focused manner in certain countries, Germany being the best recent example for us, that we have the ability to drive share. We're going to do that as well. But cost will maintain top of mind. With this large distributed organization, SG&A naturally increases over time. We made a commitment at Investor Day, and we shared that we're going to drive 100 to 150 basis points out of SG&A over the mid- to long term. And we're actually advancing that far more quickly now because of COVID. But it's doing all that while starting this growth culture. We are the leader in our industry, the largest in revenue, the largest in earnings, the largest in the Service portfolio at over 2 million units. We really have 3 key things we need to do, Doug. We have to, absolutely have to grow our business. That means we grow New Equipment share in every region and grow our Service portfolio. Second, the journey we started and the proof we've given throughout all of 2019 and into the first quarter of '20 is our adjusted operating profit will continue to grow. Our earnings will grow in our Service business and in our New Equipment business as we continue along in time. And that's what the second half recovery -- although we did provide revised guidance this year, but that's where the second half recovery is going to help us hit the high end of that guidance really at that kind of minus $25 million at constant currency. Because for us, it is about creating long-term shareholder value. We're going to drive down the tax rate. We're going to continue to focus on driving cost out, but more importantly, we're going to grow our business. And as we do that, whether it's through volume or cost reductions and productivity, we're going to share that benefit with our shareholders. It's our capital allocation, again, dividend, share repurchase after we've repaid the $500 million of debt to keep us investment-grade. And this is a really strong business. We've got the resilience, and we're going to come out of the gate and out of this pandemic and accelerate. Exciting times in Otis. It's great to be here.

Okay. Well, we'll have to wrap it up there. But again, Judy, thank you very much for joining us. I also want to encourage everyone in the audience to complete the poll, the Procensus poll at the end. But Judy, all the best and it looks like we've got an exciting time ahead.

Thanks, Doug. Appreciate it.

Thanks.