Q1 2020 Earnings Call

Thursday

good day.

And welcome to the Allegiant first quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero today's presentation. There will be an opportunity to tunity to ask questions. Please note this event is being recorded. I would not like to turn the conference over to Thomas Martineau vice president Treasurer and investor relations, please go ahead. Thank you Jason. Good morning, everyone. Welcome and thank you for joining us for Allegiance. First quarter 2020 earnings call with me. Today are Dave petratis chairman president and chief executive officer and Patrick Shannon senior vice president and Chief Financial Officer of allegiant.

Our earnings release which was issued earlier this morning and the presentation which we will refer to in today's call are available on our website at investor. This call will be recorded. An archived on our website. Please go to slides two and three statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal Securities Law. Please see our most recent SEC filings for description of some of the factors that may cause actual results to differ materially from our projections the company assumes no obligation to update these forward-looking statements today's presentation and commentary include non-gaap Financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.

Dave and Patrick will now discuss our first quarter 2020 results which will be followed by a Q&A session given the high uncertainty around the duration and severity of the covid-19 pandemic Thursday. We had previously pulled our outlook for 2020 and will not be providing an update during this call for the Q&A. We would like to ask each caller to limit themselves to one question and one follow-up and then re-enter Thursday. We will do our best to get to everyone given the time allotted. Please go to slide for and I'll turn the call over to Dave. Thanks Tom. Good morning. And thank you for joining us today. Like all responsible global companies Allegiant is closely monitoring and assessing the covid-19 outbreak which continues to evolve.

We are focused on doing what's right for our employees customers and communities. We're also maintaining our business health and supporting the central critical infrastructure around the world.

Allegiant operates within several different critical infrastructure sectors, making our work essential to our customers and in many cases their customers are people create the home security and life safety devices so many others depend on whether private homes government buildings or medical facilities.

We are regularly called on to provide our products and solutions for hospitals and Healthcare facilities. Most recently new construction for Laboratories that will support the fight against June 19th. This work gives us clear purpose, especially in these unprecedented times.

With the exception of Italy and Mexico were government Health decrees have temporarily pause production our manufacturing sites May operate.

We monitor for demand and materials shortages related to covid-19 taking necessary short-term actions such as adjustments to production to protect the long-term future of a wage.

Such majors are being implemented in a way that minimizes disruption to customers and the overall business in the case of Italy. We are shipping orders for finished goods with government-approved and continue to engage in dialogue with Mexican authorities to open prior to the lifting of its General decree. In the meantime. We are working with our supply chain off existing inventory inventory and channel Partners to fulfill customer requirements for goods normally coming out of Mexico.

It remains Our intention to continue to serve our customers the best of our abilities.

You've heard me say before but it Bears repeating. We have one of the safest workforces in the world. I could not be prouder of our company of experts who have leveraged our strength and safety to adapter current reality.

We have faced covid-19 since mid-January in China and developed operational practices that keep our people safe. We're modeling best practice same age and guidelines based on standards from the World Health Organization and the Centers for Disease Control and prevention. We're Kentucky and deep cleaning of our facilities and their regular basis. We're social life where we were and were limiting crowds. We've increased our personal protective equipment and supplies there's additional cleaning solution wipes hand sanitizer Thursday. Our facilities employees can ask for p p supplies like gloves and we're we're acquiring face masks and Manufacturing and distribution facilities. We pause on non-essential meetings and visitors as well as air travel early in the crisis.

Essential meetings are encouraged in Virtual ways. We're hearing to government decrees and orders and monitoring health conditions and wherever possible and where necessary in life are working from home.

The strength of Allegiance Global Supply Chain is a major asset and allows us to continue servicing our customers.

We have many levers to pull from utilizing safety stocks and inventories to leveraging dual and Alternate Supply to sharing components across their own facilities and regions without these options that our team have employees are increasing Allegiance credibility and Customer Loyalty loyalty in the marketplace.

Of course our business must be healthy to continue to support our employees customers and communities. We have proactively taken actions to mitigate financial implications associated with covid-19 off these actions include reductions in discretionary spending elimination of non-essential Investments a hiring freeze and reprioritization of all capital expenditures, including a temporary suspension of share repurchases.

Importantly, we believe Allegiant has an extremely strong balance sheet and liquidity the price provides flexibility and positions as well throughout this time. Our net debt to adjusted. Ebitda was 1.6 times at December $31 2019.

We have an undrawn credit facilities up to $500 billion if needed and no principal payments due on an outstanding debt until September twenty to our business generate significant cash flow do the industry-leading even in margins and low Capital intensity.

We just available cash flow conversion to earnings ratio have the average over one hundred percent as a stand-alone company.

Yes, there will be challenges ahead. The start of twenty-twenty has made that clear Allegiant can take on great challenges with an Engaged safe and healthy work-life Financial strength Legacy brands that have stood the test of time and a steady Focus Allegiant will remain true to our values and strong business fundamentals.

Please go to sleep five.

Let's turn the results for the first quarter.

We have a strong discipline supply chain in our teams in an outstanding job navigating their early challenges posed by covid-19 pandemic as evidenced by the revenue growth experience in the quarter in particular the Americas had a stellar quarter offset by weakness in Europe and asia-pacific.

The Americas region had reported growth of 7.7% inorganic growth of 8.2% in the quarter driven by both non-residential and residential businesses would give me a Market's continued to to be soft through the quarter and our business was further impacted by the covid-19 pandemic came back beginning in March month for Asia Pacific Asian markets markets remained week and the region as a whole experience the covid-19 impacts as well.

Electronics growth in the Americas came in at 12% in the quarter. We continue to see Electronics as a long-term positive trend as more and more products become connected for ease of access.

The underlying fundamentals of the business are strong it will serve as well as the global pandemics subsides adjusted operating margin rep 190 basis points in the quarter margin expansion led by the Americas regions with adjusted margins of 270 basis points in the asia-pacific margins were down due to volume declines in both regions. It may emerges further pressure by continued operational in efficiencies from the move of our operations from Turkey to Poland month. We highlighted last quarter our expectations at the impact would carry over in the first half of this year.

First quarter adjusted EPS growth came in at a robust 18% and available cash flow was up nearly $44 million versus the prior quarter or prior year.

Overall, I'm very pleased with our q1 2020 results that said the near-term future will be more difficult as we continue to navigate the uncertainty brought on by the covid-19 pandemic off and I expect Financial headwinds.

Ian the expense and cash management actions previously discussed. We are implementing cost reduction actions to optimize and simplify the European and asia-pacific region.

These actions are intended to address weaker End Market fundamentals enable enhanced customer focus and will help position these regions for future success month and there's one accounting item Dimension. We recognize a ninety six point three million dollar nine cash charge related to Goodwill and walk in definite live trading in pyramids or are non us operations predominantly related to the covid-19 and the expected future impacts.

Please go to sleep at 6 and I'll take you through the first quarter Financial summary.

Revenue for the first quarter with six hundred seventy four point seven million increase of 3% inclusive of 4.3% organic growth currency headwinds and the impact of the divestitures of our business and Colombia and turkey offset some of you organic growth.

Americans led the way I'd Revenue grow up 7 in the weakest weakness. We experience in India and Asia Pacific Patrick will share more detail on the regions in a moment adjusted operating off in increased by 190 basis points in the first quarter is I stated earlier we saw a significant margin expansion in the Americas with decline in Europe and Asia wage adjusted earnings per share of a dollar for increased $0.16 or just over 18% versus the prior-year the increase was driven primarily by higher operating income favorable share count and tax rate offset the increase

in other expense

available cash full came in at $19 an increase of nearly forty four million versus the prior-year increase adjusted earnings an improvement Network and cap on where the driving factors for the increase Patrick will now walk you through the financial results and I'll be back to a wrap up.

Thanks, Dave. Good morning everyone. Thank you for joining. Today's call. Please go to slide number seven this slide depicts the components of our Revenue growth for the first quarter of focus on the total Legion results and cover the regions on their respective slides.

As indicated we deliver 4.3% organic growth in the first quarter led by the Americas region with strong growth and both the non-residential and residential businesses price relaxation was again solid in the quarter more than offsetting material inflation the impact of the divestiture of our businesses in Colombia and turkey along with continued currency pre-owned nemea and asia-pacific. We're headwinds a total garage. Please go to slide number eight.

Reported net revenues for the first quarter was 674.7 Million as stated earlier this reflects an increase of 3% versus the prior-year up 4.3% off organic basis. We delivered good price realization and saw solid volume driven by the Americas region. We experienced an estimated 10 million Revenue loss related to covid-19 during the quarter primarily in our International regions as a result of business closures.

Adjusted operating income of 128.2 million increased more than 14% over the same time frame from last year adjusted operating margin of 19% increase to 190 basis points. The margin expansion was primarily driven by solid operating leverage on incremental volumes in the Americas along with pricing and productivity outpacing inflation headwinds, the margin performance include incremental Investments, which had a 30 basis-point impact on adjusted operating margins and an estimated 4 million impact to adjusted operating income wage covid-19.

Please go to slide number nine.

This slide reflects our earnings-per-share reconciliation for the first quarter.

The first quarter of 2019 reported earnings per share was $0.84 adjusting $0.04 for the prior-year restructuring expenses in integration costs related Acquisitions. The 2019 adjusted earnings-per-share was eighty eight cents.

Operational results increase earnings per share by 16 cents is favorable price operating leverage on incremental volume and productivity more than offset inflationary impacts and unfavorable currency.

A year-over-year decrease in adjusted effective tax rate drove another $0.04 increase favorable year-over-year increase adjusted earnings-per-share by another two cents.

The impact of incremental investments in the quarter was a $0.02 reduction in an increase in other expense drove another negative $0.04 per share impact.

This results in adjusted first quarter 2020 earnings per share of a dollar for an increase of $0.16 or 18.2% compared to the prior-year.

Lastly we had a $1.04 per share reduction for charges primarily related to Goodwill in a definite live trade name and pyramids these charges related to covid-19 and its impact on expected future results after giving effect to these one-time items you arrive at first quarter 2020 reported earnings per share of zero sense.

Please go to slide number ten.

First quarter revenues for the Americas region were 512.1 million up 7.7% on a reported basis and up 8.2% Organically the growth was driven by same price realization and strong volume.

both

The non-residential and residential businesses grew High single-digits the business saw growth across all product segments and verticals particularly in institutional and markets off the electronics growth for the quarter was 12% electronic products continue to be a long-term growth driver as consumers and end-users value the connectivity and convenience. They offer over there a mechanical counterparts the overall growth of the Americas reflects. The company's strong position in the market as well as a returns associate with incremental investments in new product development and channel strategies.

America's adjusted operating income of 146.6 million increased 19.1% versus the prior year. And adjusted operating margin for the quarter in Chrome 270 basis points volume leverage on the revenue increase along with price and productivity significantly exceeding inflation drove, the substantial margin expansion team continues to deliver solid cost leverage and productivity to further improve operating performance in our competitive position.

Lastly incremental Investments where a 40 basis-point decrease on margins.

Please go to slide number 11.

First quarter revenues for the immediate region were 129.9 million down 9.1% and down 6.2% on an organic basis. The lower volume was driven by continued weekend and then markets across the region and covid-19 impacts primarily in the southern region.

The impact of the divestiture of the business and turkey and currency headwinds also contributed to the reported Revenue decline.

Ami adjusted operating income of 3.3 million decreased 71.8% versus the prior-year. Adjusted operating margin for the quarter decreased by 570 basis points. Also during the quarter inflation, exceeded Price Plus productivity. Revenue declines had a negative impact on operating margin and we continue to experience cost pressure off with the plant relocation from Turkey to Poland.

Earlier in April. We announced cost reduction initiatives aimed at optimizing and simplify our operations improving our customer service as well as addressing the cost structure in our non-public locations. These are not specific to the covid-19 pandemic, but part of our long-range business planning process, please go to slide number 12

First quarter revenues for the asia-pacific region were 32.7 million down 11.1% versus the prior-year organic Revenue was down 4.9% The decline was driven by continued weakness in Australian end-markets primarily residential as well as impacts related to code 19 total revenue continued to be affected by currency headwinds.

Pacific adjusted operating loss for the quarters one point six million a decrease of 0.9 million with adjusted operating margins down three hundred basis points versus the prior year. I bought a significant volume declines and unfavorable mix had a large impact on the reduced income and margin.

Nope. Nope, we did have approximately $95 million in a pyramid charges for Goodwill and indefinite live trade names. These charges were related to covid-19 and its impact to expected future results as with the Emir region the cost reduction actions announced earlier in April. We have a favorable impact on operations in asia-pacific. These actions are also the result of long-range business planning and not specific to covid-19 impacts. Please go to slide number 13

Zero to date available cash flow for the first quarter 2020 came in at $19 million, which is an increase of nearly $44 million compared to the prior-year. The increase was driven by higher adjusted net earnings and improvements and a net working capital looking at the chart at the bottom of the slide. It shows working capital 2% of revenues decreased based on a four-point quarter average wage on a year-over-year point in time basis working capital as a percent of revenues down 220 basis points. This was driven by accelerated turn over and both inventory and receivables.

Has always we remain committed to an effective and efficient use of working capital. We will continue to evaluate opportunities to minimize Investments and working capital in order to continue to drive substantial cash conversion.

Please go to slide number 14.

The slide provides an update on our capital structure as you can see. Our leverage has dropped steadily over the past five years and we ended 2019 at 2.1 times gross leverage off 1.6 times net leverage to adjusted ebitda and looking at our debt maturity profile. We do not have any loans maturing until September 2022. We also have a $500 million untapped credit facility. Should we need additional liquidity?

Our balance sheet is in a strong position in our high level cash flow conversion provides us flexibility and optionality to run the business going for these same strength have led to six consecutive years of annual increase in dividends that are most recent dividend increase of nearly 19% and now it's in February remains intact.

During the first quarter the the company repurchased approximately $94 million of stock due to the uncertainties related to the pandemic. We have placed repurchased plans on hold and we will review further as the year progresses now now hand it back over to Dave wrap up. Thank you Patrick. Please go to slide number 15.

we reach

We announced that we were withdrawing or outlook for 2020 based on the magnitude and uncertainty surrounding the covid-19 pandemic.

We respect the need for financial guidance for the analyst community and shareholders. However, the covid-19 pandemic is ongoing.

Health Care Experts are still learning about the virus and there is tremendous speculation on the economic recovery and the path that will take the mini unknowns include the scope and effect of further government regulatory fiscal monitoring and public-health response has our update will come when we release our 2020 results.

The fundamentals of allegiant are strong.

And if the world adapts to The New Normal we should have more clarity on the rest of 2020 at that time.

We do expect the covid-19 will have a near-term negative Financial impact on the business including the reduction in your over your revenues operating profit and cash flow due to government decrees and softening demand.

with that said Allegiance and fundamental business strike provide some resiliency in times of Economic downturn and our long-term investment thesis remains unchanged

For the past several years. We have a delivered above Market organic growth the strength of our Channel relationships new product development large installed base brand home and work at positions have helped us continually Drive higher organic growth than the market.

Since pin that we do have delivered a 5.4% organic Revenue kegger in the first quarter of the company grew organically at 4.3% with the Americas at 8.2%

Our strategy of seamless access takes full advantage of the keyless and connected Technologies increasingly demanded in our industry. The electronic products need to facilitate these demands continue to be a long-term growth driver for the company.

The Americas business experience 12% growth in electronics in q1, even with the growth. We have seen in these products since we became a stand-alone company adoption is still in the early stages are for the industry conversion opportunity remains robust.

Although Allegiant has industry-leading even margins are focused on price realization productivity and cost management allows us to expand margins when volumes are up like the hundred seventy basis point increase we produce in q1, but also facilitates the margin profile to be resilient through economic Cycles.

Balance sheet low Capital requirements and tandem with the high level of cash flow conversion. Our business generates allows us to have Capital allocation optionality.

We are well within our get Kevin and said have no near term debt repayments for the six full years that Allegiant has been a stand-alone company that conversion of net income to available cash flow has on a cruise exceeded 100%

the covid-19 demek has cause worldwide disrupt disruption in economic markets where they're haltering growing economies are furthering softing ones that were in decline. In fact last week filled the our company is set up well to weather the storm and our strong fundamentals will serve us well when the pandemic subsides

Allegiant has the right people in place to help ensure this our employees have shown a great deal of adaptability during these uncertain times. I could not be prouder off of our people.

Our management acted early to mitigate the economic impact our supply chain has proven itself to be flexible for efficient and dependable and we are positioned to continue to leverage it as a strength moving forward.

And of course our Legacy brands have stood the test of time and delivered incredible value Allegiant is strong if people are resilient and we remain focused and disciplined song. I don't want to think every member of the Allegiant team on a successful Q 12020. Everyone stays safe and healthy and now Patrick and I will be happy to take your questions.

We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two. Please limit yourself to one question and one follow-up if you have further questions, you may re-enter the question queue.

First question comes from Tim Weis from Baird, please. Go ahead.

Hey, good morning. Good morning.

Maybe it's just my first question, you know, maybe if we can, you know, just add a little bit of color of of particular in America's how the demands trajectory, you know, I'm kind of trending through the quarter and maybe if you could give us just some flavor of how April has trended here just to give us an idea what you know cute too and and kind of the near-term it may look like

Quiet to do that I would say first the company got on the covid-19 response early with a focus on our supply chain and protecting our people with a strategy for us to gain market share in q1. So we went extremely strong through the first quarter. I think that's reflected in our American results and the strength our ability to keep our supply chain strong and we got in to March. We saw a slight decline in the last month or two weeks. But again, we had our foot on the gas and we communicated that and we moved into April, you know, we're 17 days into this. I think I think that we're seeing are rather predictable. We see some softness in the overall residential I would say we have a view and the point-of-sale birth.

In you know the big box.

And I'd say it's off Low T. And I as I look at that I'd say yeah that probably makes sense. Second wage. I think from a positive standpoint are are we see softness is bookings and the commercial and institutional our backlog is strong. We see the continuation of construction projects and we think if grounds broken if permits are issued these projects are going to roll in as I came into work this morning, I see and or construction continue to move forward. The last thing I did 10 is our specs in quotes continue to be very possible. I know you can spec yourself in quote yourself right off a clip but it's a positive indicator that work continues to role.

Okay. Okay, is that as you guys looking to you know, maybe the back half of this year and into twenty one is that really the part of part of your your leading indicator or what might give you confidence that um, you know, covid-19 more of kind of a temporary issue as opposed to something maybe more cyclical, you know for non-residential Construction general.

I think you've got to be more critical than you know, people would call it a v I think the construction pipeline that we have today against other projects that are approved in our in progress Will Roll. I've got uncertainty about 21 commercial institutional commercial going to be soft. I think you know, that's where the strength of our spec regarding our wholesale Channel whatever the market gives us at Allegiant we expect to do back in the market.

Thank you. The next question comes from Jeff from vertical research, please. Go ahead. Thank you. Good morning. Everyone. Hope everyone is well. Thanks. Thanks for that color. And also just trying to now kind of think about since we're all going to make our assumptions here. Could you give us a little a little additional thought on Thursday decremental and you know how linear or not linear the relationship is in other words, you know, if revenues are down ten. What do you think? The deck remotes might be an s or down twenty, you know what they might be and you know frame it. However you like but you know, we we've all got to kind of take a shot here at what's coming at us and you should probably try to put a stake in the ground in terms of an earnings estimate.

yeah, so

Have a big question mark I think Jeff relates to what's what's on the demand Verizon and you know as we've highlighted, you know, very difficult to predict, you know, just kind of given the government decrees and as we've highlighted we have a couple of plant closures today that will inhibit us a little bit on the top side and also provides, you know, cost pressure pressure just went under absorption perspective near-term, you know, as I think about it and you try to run some correlations to you know, prior Cycles back to saying I mean everyone knows 08 was pretty drastic. I think it's too early to make some comparisons to that right now. We're still is everyone else is collecting data from Economist and a lot of people have different opinions, but I you know as I think about it related to Elysian, you know, some couple of points, you know, I'd like to highlight why I think we're better positioned than perhaps we were dead.

You know at the last downturn several reasons number one, we have a much stronger business franchise a lot better stronger portfolio of businesses. As you know, we've divested of poor-performing businesses. We added businesses to our portfolio that effect or are more resilient and a downturn and less susceptible to to Market downturns. This whole convergence of electronics is a uh, you know, you kind of look back ten years ago. It wasn't a big driver in the business and whereas today it is a driver's growing at one and half to two times the market today. And as you know, we continue to put up really good numbers related to that. So I think that's an item that needs to or will continue to grow and will be a continued Focus for us going forward as you know, it's a higher average selling price summer. Margin, which means more even dollars the channel Investments. We've made particular in the repair. Yep.

Market discretionary markets, we have a much broader product portfolio to serve our customers in that segment. And I think we're better position to participate in that market segment. Whereas at time of spin, we weren't I think that will be a good for us going forward and then to your question on the margin profile. We would say historic. Oh we've been able to adjust our cost profile. We can react pretty quickly. We historically have shown some margin decrement related to the last Cycle's if you kind of go back 208 small margin deterioration, you know, we adjusted our our cost position fairly aggressively pricing. We will continue to push that lever. It was a good driver force in the quarter. So, you know, I would say, you know, maybe some margin pressure but not substantial.

Relative to to where we are.

If you think about where we are today, we're too high Watermark. Again. We had another record q1 performance up 190 basis points. And so we're coming from Peak margin performance and you know will continue to take the actions necessary to address our cost base. We talked about those, you know, eliminating the discretionary spend hiring freeze kind of reprioritization essential Investments. You will see a reduction in and some of the incremental vegetable. Will you be focused on long-term, you know areas and and so I just, you know, we'll see how things kind of pan out here. But I think it's going to be more demand-driven and we'll adjust our cost profile to meet future demands both of the factory in sg&a.

As an unrelated second question just on the Goodwill, you know, it's awful early in the Cove it it sounds like you're kind of using that as kind of a wage justification for knocking out that Goodwill. It's it's it sounds like you know, but you've really Beyond kind of covid-19 clear judgment that those Acquisitions just have not lived up to Snuff that I just I just wonder if you know any of the other, you know Acquisitions in Europe or anything as you've you know gone through this Goodwill testing are, you know are kind of close to being on the bubble here.

So asia-pacific, you know as we indicated a write down their Goodwill and then definitely lived past sets off which pretty much releases the entire balance there. I think there's a a de minimis amount that remains, you know, as as we kind of talked about in Q4 Thursday the pressure they're really given from the Australian market and you know, just weekend Market fundamentals. And so, you know, we we looked at that particular time in the covid-19, which really accelerated the market decline, you know kind of as we look at it going forward and so put us in a position to kind of do that analysis which is, you know, kind of a discounted cash-flow. It's cetera when we look at Europe. There is some cushion left there. We didn't need to take an impairment. I think, you know, hopefully we took a conservative. Yep.

On the discounted cash flow and hopefully we're okay, but time will tell and we'll see, you know where this pans out going forward. But again, you know in markets continued weakness particularly in summer. I feel really good about our electronics business there and the dramatic area as you mentioned Acquisitions Simon's boss has been a home run for us and I think there's some good growth opportunity. They're going forward. So again, we'll kind of re-evaluate as the year progresses and we'll see you know, what happens when the fog lifts. I did one other comment, you know, if you bring up the issue Pacific our acquisition profile has been Australia in one acquisition and Korea all of those markets were in life, you know in the second half of of 2019 throw the covid-19 and it's hard to you know, retain that Goodwill in the books.

Great. Thanks for the call.

Best of luck. Thank you.

The next question comes from Andrew open Bank of America, please. Go ahead. Yes, sir. Good morning. Good morning. I'm just wondering so the first question I have often should I think about your ability to release working capital in this environment? Because you know, a lot of companies are telling us that you know, they're going to run off inventories around for cash, but my understanding also is that a lot of your product in the is highly customized. So how should I think about your ability to release working capital in second and third quarters to covid-19 sort of switch through the

Yeah, you know once I get most companies in downtown which a higher cash conversion than than earnings cuz of the runoff and working capital. I think I should be no different in that situation. However, I just remind everyone are working capital is a percent of Revenue is fairly low, you know, four point average, you know, we're like 6% of Revenue. So there's not a lot of room there for significant cash flow conversion on further reductions in working capital actually q1 a we made substantial progress in both inventory turns and receivable DSO. So there's probably a little Improvement there, but I wouldn't look at it as a significant opportunity and further a cash flow generation for us. Just kind of given where we are relative to maybe other industrial companies to that two dead.

One of our objectives, you know coming through. The first quarter was have the right inventory, you know, we made some Investments there as we go through the summer here. We'll probably run a little longer unfinished good inventories as an opportunity, uh, you know, the strength of our supply chain in the ability to get the component parts into the right products where we need them. I think gives us an advantage.

You know use that Advantage, you know in some inventory to try and get orders to help the business.

And the second question I have sort of unrelated but you know given that a lot of municipalities are shut down. How do you deal with the whole how does the industry deal with the whole permitting process. And what is it mean for the construction activity in the summer both in residential and institutional space? Thank you.

I think you got to keep an eye on permits. You've got to assume that that will you know, the permitting process is that run through government, you know, we'll we'll you know, you know slowed down I think so too when whether it's institutional commercial housing when people want to commission Capital, you know, they'll force that process to move forward. But you know as as you well know permit to the key indicator for us, we'll keep an eye on it and you know, see where that Trend goes. I think you know today Andrew, you know from

You could you could say.

Think about you we in fact do go into recovery the the permit process the ability to do that will loosen up its then, you know, how is capital deployed to be able to go out in in, you know drive this industry. So you're saying its economic activity driving permit you can process and if economy improves permitting log Campbell improve as well. Yes. Thank you very much.

The next question comes from David MacGregor from Longbow research, please. Go ahead. Yeah, good morning everyone. Just hope you're well. Just wanted to ask about the the strength of the North American volume here in the first quarter and there's been some various observations for different people in the industry about pull forward particularly in in in the case of education, but maybe in some Health Care applications as well and they're just wondering if if you're able to characterize the degree to which you may have pulled forward routing you from from the summer Quarters here in 1 Q

We announced the price increase, you know, so we get some natural all through as a result of that but I'd say generally if you look across America are rather mild winter, I think and we executed at a high level and we picked up opportunities in the quarter that others could not serve. So I'd say a robust Market, you know, really in Q4 in q1, you've got the electronics driver and I think about the strength of a legion shown heart and the price increase pulled forward, you know slight demand which I like Thursday we go through, you know cute to uh, you know to be able to serve a local market.

Okay, I guess just as a follow-up, you know, you're undertaking restructuring in Europe. I know, you know, you've been working on turkey for a while now. We talked about that last quarter. Again, this quarter of those things never happened quickly. I understand, but when you think about certain the disparity nature of from a scale and a profitability and grow standpoint between the North American Business, and and you know what you're what you're doing now, or would you have been doing recently in Europe? And in Asia, I guess the question at a high level is you need to be in Asia Europe or you know, this be a stronger business. If you were just solely in North American Business and it was packed that maybe if you could talk about the extent to which you know, North American results May benefit some degree from being in in the Europe and Asia. Thanks.

I would say it again the adjustments that we made in the quarter with the restructuring announcement will strengthen those franchises. I think both virgins. I'd also emphasized. I've been very clear that we lack scale outside of North America. I think the movement were may allow us to focus where we can win rip out costs that you know, we think will simplify the business in continue to sharpen our phone notice on what we call Seamless access. There is some complementary nature to the Australia New Zealand business, especially on residential which is still developing and I think Simon's boss Interplex business, which we've been extremely pleased with gives us a Looking Glass in the seamless access and uh again, you know birth

I think look to a legion.

To have more focus on where this business is going deploy more human and financial Capital into that seamless access to experienced as we compete wherever we're at in the world.

Okay, great. Thanks very much and stay well.

The next question comes from Josh poker Winski from Morgan Stanley, please go ahead. Hi. Good morning guys. Good morning. Just on the the pipeline of South Riding that you mentioned was was fairly strong the folks use this opportunity or you know, if you look back at other points in time where we've had kind of pauses inactivity wage. Is there kind of a natural lag where everyone says okay, here's something I was working on but I'm going to rethink it and maybe that adds, you know, three or six months to you know, kind of the the recovery time from where there's just an air pocket is that you know, is that the way you guys have experienced in the past and how should we think about kind of like a natural delay, you know folks kind of get back to work and and the economy reopens or or just activity continued throughout on this bike riding side. So just this is my seventh little disruption in the account.

I mean, you know since I began my career in nineteen eighty so, you know, I think you know, the experience is give you some strength as you go through this there will be an air pocket and you know, that's what we're trying to understand, uh, our car bids a quote activity specs, you know, we track terms of a dollar, uh, you know dollar level of activity, but you know, you can actually have specs kick back and say hey let's revalue engineer this off. You can't look at this current situation and and say hey there's going to be a an air pocket of demand activity is because of all supply chain factors background in quotation, wholesale activity, uh construction other Supply challenges on the construction site.

So it's a part of our thinking but I I think as a a lead indicator that spec writing is a clear strength of a legion and it will help us as we navigate through this.

That's helpful and then unrelated and kind of back to to just question on sacramentals. If I look back to you know, the same business or you know, we bought most of it, you know under Ingersoll ownership back in, you know, nine the the margin expansion during that time frame on a pretty significant Revenue decline was pretty phenomenal hundreds hundreds of basis points, obviously a higher starting point today. So not all those levers are available. But you know David Patrick, can you just remind us, you know, some of what happened since then maybe one of those actions, you know can be Revisited or you know re-examined today, you know versus stuff that was maybe, you know more of kind of a one-time, you know, real life of the cost base.

I I would characterize it this way entering the 2008 financial.

Prices there was probably more options to reduce the cost profile particularly on manufacturing footprint. I think I are at the time was fairly aggressive and and closing certain factories related to the security Technologies business at the time that helped protect. The margin profile pricing was another lever know I think was was pushed pretty hard. You kind of have to look at it over the 2008-2010 time frame and if I remember correctly, it showed a slight margin took over that time. I would characterize today, you know relative going into the situation where a better franchise strong portfolio of businesses that you can maybe protect ourselves more on the top line side. And you know again, we are taking the birth

Create actions to reduce our cost structure Dave talked about actions. We're taking an international Arena, you know, we're doing things here to tighten them. Obviously in America's will continue to do that and adjust to Future demand. You know, I would say quite frankly. We don't maybe have as many levers to pull but having said that I wouldn't expect a significant margin degradation relative to where we are today. So dollars will come down basis of Demands. Are you top line but margin percent, you know, we'll do what we can to try to maintain that.

I appreciate the call were in best broadcast and let me so one one other quick thing is probably worth noting is that short-term, you know, again given the government decrees and the fact that you know, some of our facilities are closed. I mean you're going to have you know, it's going to be a lot more chopping right? I mean you kind of have to your talk about marginal profile. You need to really look at it over 12 month. You're always going to get hit initially immediately you make adjustments and then you start to you know, kind of level out. So just kind of keep that in mind as you're thinking through this

Got it will do appreciate that.

The next question comes from John Walsh from credit Swiss, please. Go ahead.

Hi, good morning and glad to hear everyone as well. Wanted to follow on to that question. Clearly you're getting ahead on the on the Carfax and there a way to quantify. You know, how much is kind of structural you did make the comment that some of it would have been done regardless covid-19 and then kind of those variable cost actions. Just wondering you know, what might come back, you know, if volume return em pay employees Etc things like that.

So so there are variable components relative to our cost structure as you would expect in any business and it can be anything from the way that we have or icing structure, you know kind of volume rebates. For example, you can look at things like salesman commissions those type of things naturally will come down and correspond with the volume decreased, you know, the the things that we're adjusting now, you know some of the discretionary spend really really looking at some of our things down to two Investments and making sure that we went through a reprioritization of those that's really focused on the things that matter so that we're coming out of this stronger particularly on Revenue growth opportunities associated with electronics. We're taking that into into consideration, but, you know collectively this these variable cause I mean, it's tens of millions is how I would

You know, if you're looking for a type of a magnitude, we will give you more color as in Q2 as Dave mentioned when we have a better kind of outlook on on Revenue off, but it's it's fairly significant. I would add, you know, the announced restructuring we saw significant softening in a specific and in areas of Europe as we exited the second half of 2019. We were not pleased with our position. In fact, we took actions regardless of the covid-19 and pandemic as as not the other thing I would say, you know, when you're in the construction related Industries you doing a variation of demand and Allegiance ability to adjust our cost structure I think can be seen, you know over the last twenty years and will be making the money.

that help keep this business from

Great, and then, you know, maybe one about ten markets. So I guess the cares act fixed somewhat of a bonus depreciation, which that wasn't part of the tax plan, you know, wondering if you're hearing from folks that you know with the wrong IP adjustment that they're more willing to do in interior improvements or if that's something that's nice. But just given the severity of what's happening right now. It's not enough to kind of offset some of the demands.

I'm I'm not aware of that feature of the cares act. I'm sure there's people here to Legion if we feel that's an opportunity, you know, we'll go after it off so you can't give you a good response to that.

Okay.

Thanks for the color. Appreciate it. Okay, but thank you. The next question comes from Joe Ricci from Goldman Sachs, please. Go ahead. Good morning, everyone.

Good morning, this kind of just maybe just starting off. I know a lot of the questions so far but on the forward, but maybe just maybe just going back to one Q for a second clearly the margins and in America. This is this is your best one key margins, but you know by a long shot. I'm just wondering was there anything kind of either like one time machine that came through in the quarter or you know, maybe elaborate a little bit more on like pricing this quarter and how you expect that to hold up as the year progresses.

Yeah, I it's so nothing unusual and the quarter that accelerated the margin Improvement, you know, it's the old blocking and tackling and execution of a team did a great job, you know, we went into the year and say with a really healthy pipeline of productivity activity, you know around both material and the factory we got great volume leverage on the incremental volume. And then you add on top of that price was good particularly in in a commercial segment, you know will continue to flash drive that and you know, so everything kind of played out and again no real big surprises, but you know the team really kind of continue to drive off execution all around all around I'd go back even farther Joe if as we exited 2018 as a leadership team we felt we left margin on the table.

We put a pipeline of activities in in 2019 that we worked on throughout the year and and we picked up strength as we went in. I you know to the second half of nineteen and twenty that strip in the business.

The other comment I just mentioned two on the input costs. So think about commodity prices they've come down. So year-over-year. There was a benefit there where we didn't have any inflation on on the material side.

Got it that no that makes sense Patrick. Is that something that's going to continue as the year progresses as well? I mean it can it has sticky evening pricing will be yeah basis of the current cost, you know for steel zinc Copper Brass Etc that will continue throughout the course of the Year. Yes.

And that's that's helpful. And maybe my my one follow-up you're going back into you know, several years several quarters, the the level of of outgrowth you saw this on a relative to you know, your biggest biggest competitor based in Europe and the Americas was was was I think like higher than any other any other quarter that we've seen I guess I'm I'm curious if maybe you can elaborate, you know, what what you're doing or or or the effect of the share gains that you're seeing specifically this quarter and if you know, we're both trying to figure out what the demand environment is going to be like but should you continue to kind of outpace your peers, you know in in this downturn

sorry, I think number one, you know give you

Personality, why did the Patriots roll up 6?

Your Championship six rooms same head coach great quarterback good offensive strategy. If you look at our competitors over the last month quite a bit of turnover at the top a lot of management change. One of the strengths of the Legion is our experience. We have a system of management here that we're pretty disciplined to them. You know, it doesn't mean it's perfect. But I think the strength of the leadership team the now it's a Cascade through our business and some favorable Market wage, you know, you know regionally in the country helped us to you know, continue to put up grow that we have built on over the the last six years. So it's a combination of things there. I think the electronics as well is another this is an industry Trend and you know, we continue to wage

Prioritize our investments to take advantage of that opportunity and I think it'll continue to reward us to and I'll add Joe to you know to be fair on Alice's and we did have a little bit easier comparison on residential you may recall we had some Channel difficulties in in q1 last year. Those obviously have been worked through wage you get really good Electronics growth and we added a substantial customer on the new construction Lennar that helped our year-over-year comparisons as well.

Yeah, that makes a lot of sense. Thanks guys. Thank you.

The next question comes from Julian Mitchell from Barclays, please. Go ahead.

Hi, good morning. Maybe just wanted to double-check again the the mix of business. So within the Americas if you could just remind us money in terms of 2019 splits. Let's say how much within the resi and non recipes of the business. How much of each of those was related to new-build versus aftermarket replacement activity for a legion?

So we would say it's around fifty fifty collectively, you know across the entire portfolio.

Julian you'd want to think that the non-residential is a little heavier. I think on the new construction versus the aftermarket and then its flipped on the residential but then it Nets out to about $50 a month.

Thank you. How much related to that of your sales are going die of the big box Channel nowadays.

So I'd say it's about a third 40% of the business 50% maybe up to 50%

Thanks very much. And then my second question would you know following up on that question from Joe around pricing and productivity? So those items I think it wants to 200-point Tailwind to margins in the first quarter year-on-year based on your comments. Should we assume that that remains a very strong wind for the next nine months, perhaps not quite at the level of q1, but it should be a material contributor.

Yeah, I think we'll have we'll continue to have a Tailwind there. But again, you know, some of the you know issues associated with the closure reduced demand and such will put some pressure on those repairs understood. Thank you very much.

The next question comes from Jeffrey Kessler from imperial capital, please. Go ahead. Thank you. Hope you guys are doing well. And you too quick question on the bed looking at the looking at the the channel the integration and the and the installation Channel we've been seeing that there is continuation of big projects going on. There's some problems and getting people onto sites at some of the mid-size midsize projects and obviously when they get on they have to be wearing the types of people and things like that that that are that are mandated by the local ordinances and in some places the smaller smaller SMB Market seems to be shut down completely. Can you make some comments on dead on how you're what you're getting back from from your installers and integrators with regard to their ability to do work on on projects. What's control?

Where what's what's out there where there's some restriction on their ability to get to the site and what's out there which is completely closed down.

I think it's clearly a step back in terms of being able to go in service install here at Allegiant. We have a policy, you know, you know, I highly controlled we don't want infection with that said it depends on where you're at. You know, the Dallas Market continues to be very active. We are moving across college campuses, but it it's not going to happen in New York City. It's certainly, you know, you know could happen in Denver. So again, it depends on where you're at and it puts an air pocket into the work. So I actually think it's been straighten themselves out. They'll be a pick-up in intensity short-term and over time. It's scheduled itself out. But I do think the normal project activity that we have. Typically that goes on college campuses Will Roll, you know to schedule which is really made through.

August

You know, it's an important driver for us could be moved up a little early if access is there but it depends on where you're at geographically jump higher infection ribs more difficult access.

We'll see what happens at West over the next few weeks. Second thing is do you what investments have you made in your life? You've made some in the past with regard to obviously collaborative spec writing. If you want to call that in the cloud touchless access and if see things like that wage, are you uh, are you in a position to take to take market share because of number one touchless access number to some of the you know, that's just called some of the new inventions that you've made in trying to in in trying to just make the process easier for your customers. Is that something that that can continue a market share gains in the at least in the Americas for the for the for the moment because it seems to have been to have worked at least over the last month.

Last year or so.

I believe if you look at our overall growth the Investments that we're making in collaborative tools Overture, which will continue to invest and develop Overture took it out in the the bulk of the world as a collaborative working tool and it's been extremely well received by our partners spec writers architect's office and they have been collaborative in the creation of Overture. So I really give Tim Eckersley credit to creating that we continue to invest in in the electrician excited is I think you may have seen Jeff our investment in open path as a partnership and investment that we think will help expand the world of seamless accents bird sense would be another and you know, our continued investment in electronics in new products. We also brought together sign off.

And Interplex under one leadership team because we believe that that's a Looking-Glass into seamless active and our growth there in electronics in the dark region is gaining sure. So I think you've got the right sense in that collaborative tools electronics and seamless access is going to help us as we go through this crisis and come out the other issue is that at the margin or is that something that can actually really move the needle as you come out of the as you can we come out of this recession.

I think the drivers are seamless access keyless actively simplifying the the world that our customers live in eliminating a turkeys and intelligence. Does that goes with seamless access is going to be a driver for the next two decades.

Okay.

Thank you very much. I appreciate it. Thank you.

The next question comes from diva from Wells Fargo Securities, please go ahead. Hey, good morning. Have you touched a little bit on the restriction and on construction sites actually impacting project activity, especially mentioned institutional now institutional evolve is considered, you know, long tail and nature more defensive as you go off cycle. Now, does that Dynamic now make it less defensive this down cycle and the other extending that question if off like access of continue to be restricted through this construction selling season, does this mean you know, you can you are able to recover Beyond fall off or in winter season, or you saying that then now pushed to the next construction season, which is, you know, next summer.

So I like our position and institutional I was looking last night, you know twenty two of the states have a generally in pretty good Financial shape, uh, uh infrastructure as aged that you know, we still have the driver of security in public settings off. So you gotta like that and then, you know our spec activity would also suggest that this will Market continue to develop with that said, you know, an earlier question describe the air pocket we're going to have to have our eyes wide open and understand that are pocket part of it is you get some immediate shock second is it's that snow plow fact that we talked about in the past projects will get pushed out but we may see that are pocket again as we move into 21 because budgets are a little bit tighter birth.

To be see my y card institutional position. It's been in my forty years. The institutional markets have always been a good place to operate and we'll try and get more than our share out of whatever Market is there.

Got it. So, can you talk about your Mexico and Italian from Italy plant closures? I mean, what kind of what percent of sales is coming from from those two Rejects and when you talk about working with your channel Partners to ensure demand is fulfilled. Does it entail higher cost?

So I'll take a stab at the the revenue base. I mean just to kind of put it into perspective on Mexico. That's predominantly the supplier for a residential business office here in in America's which you know, we've characterized about a third of the overall America's portfolio, you know, keep in mind the decree was across and it through the end of May. However, we are we've got inventory on hand. We're working with our distribution Partners to ensure customers can be served when that comes back online. There will be a restocking in the channels for the depletion of the inventory. So we're kind of working that but I think you know the messages neerja you're going to see a decline and obviously in revenue for some piece of that certainly in in Q2, Italy ugh again the the data off

on that is is May 3rd is

The current decree we will see that subject to change, you know, based on what the government dictates that might be, you know kind of call at 20% of our faith bolio and and Europe, you know, we are shipping finished goods inventory out of the warehouse there and in Italy today, so that activities taking place is just off the production manufacturing Etc right now that were inhibited from producing anything. However, it doesn't necessarily mean we're losing business owner. I think it just means delays deferral that type of thing cuz reality is the customers are closed also and so they don't have the ability to be able to receive invitation. So this is just going to be a deferral and we'll see how quickly that may or may not pick up in the back half of this year. See if I have to give a shout out to our Italian team.

Operated safety safely longer there than many manufacturers same in Mexico. We got a few extra days until that decree came down working hard to petition the government to consider the central. I believe in Mexico. We can keep our our hard people safer than them on the streets and the you know, so we're pushing that again, we've got a good supply of residential inventory on the shelf. And if I cut through this, uh, you know, we're going to be in good shape.

Hi Jason. Yep. There are no more questions in the queue and this concludes our question-and-answer session. I would like to turn the conference back over to Tom Martino for any closing remarks.

I appreciate it. So we'd like to thank everyone for participating in today's call and today more than ever. Please have a safe day.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.