Q3 2020 Allegion PLC Earnings Call
Good morning, and welcome to the Allegion third quarter Twentytwenty earnings Conference call.
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I would now like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasury. Please go ahead.
Thank you Andrew good morning, everyone.
Good morning, everyone welcome and thank you for joining us for Allegion <unk> third 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 Allegion.
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 <unk> Dot com.
This call will be recorded an archived on our website.
Please go to slide number 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 a description.
One 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 the 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 third quarter 2020 results, which will be followed by Q and a session.
So today, we would like to ask each caller to limit themselves to one question and one short follow up and then reenter the queue, we would like to give everyone an opportunity given the time allotted.
Please go to slide four I'll turn the call over to Dave. Thanks, Tom Good morning, and thank you for joining us today.
I'll start by walking through the third quarter financial summary.
Revenue for the third quarter was 728.4 million a decrease of 2.7% or 3.4% organically would show sequential improvement from Q2 to Q3.
The organic revenue to decrease was driven by continued economic challenges stemming from the COVID-19 pandemic.
Currency Tailwinds provided a boost to total revenue and more than offset the impact of divestitures of our business in Colombia in Turkey.
Patrick will share more detail on the regions in a moment.
Adjusted operating margin increased by 20 basis points in the third quarter.
I'm extremely proud of the resiliency shown by the Allegion team.
We executed extremely well and the cost management actions taken during the year helped mitigate the de leverage from volume declines.
Positive price immediate inflation also helped deliver the operating margin increase.
Adjusted earnings per share of $1.67 increased 20 cents or approximately 14% versus the prior year.
The increase was driven primarily by favorable other income.
Sorry, Greg and share count offset the lower operating income.
Your days available cash flow came in at 256.1 million, an increase of just over 26 million versus the prior year.
Improvement in net working capital and reduce capital expenditures more than offset the lower net earnings.
Please go to slide five.
Access it's been part of our company's heritage for more than 100 years, and our vision of seamless access and lets say per world are providing a sound foundation for future.
And the reality is the be post co bid world customer.
Customers have new concerns and new needs for healthy environments.
The importance of making home work and institution safer has never been so important to our customers and the needs for touch lets say exit is not going away.
Our business is discipline and focus prioritizing investments in our seamless access strategy.
As a result, Allegion continues to deliver labour leadership and innovation across the portfolio.
Our slate brand is 100 year old powerhouse that spans the globe.
In the building channel our mix of slag mechanical and electronic solutions continue to help us win projects.
Including the new development community being Florida with over 3000 homes.
Allegion is further advancing seamless access for builders with electronic solutions that provide contact whats home showings and the show like income Smart dead well continues to gain momentum in both residential new construction and retail markets.
On University campuses.
Among the first schools to adopt flags security solutions for Apple wallet are the University of Tennessee University, the Vermont and the University of San Francisco.
Allegion now supports contact with student ideas across Apple wallet, Android and Google Pet.
For commercial and institutional markets, we have a full suite of mobile enabled schlake walks and readers.
In a post come it environment and mobile technology contactless hard work and readers in combination with wave to open actuators now extend our touch us options for interior and perimeter security.
Seamless access also getting ground outside the Americas in Q3.
Diamonds box is celebrating its 25th year as an electronic access innovator and was recently recognized in Germany as the number one electronic locking system manufacturer.
In Australia, we just delivered the Gainsborough freestyle electronic trademark for single family and short term rentals.
Given the honor full control of access for my mobile out.
And in Australia, and New Zealand, we introduced the slag omni fire rated smart work for multifamily and office settings.
In the quarter, we booked over 4 million in order to support.
And provide seamless access to loot solutions to a global leader in social media to be delivered in 21.
Our investments in seamless access are bolstered by global accelerators.
Well, we just partner of choice and open credentials strategy is an important accelerator more than 45 physical access control software providers already integrated with slag electronic locks and devices.
Many of them are moving to integrate to our mobile credentials ecosystem as well.
Our global accelerators include E Commerce, Touchless access and increased focus on visitor management and occupancy monitory team.
Seamless access is providing to be a strong foundation for our future.
Patrick will now talk to walk you through the financial results and I'll be back later discuss our 2020 outlook and wrap up.
Thanks, David Good morning, everyone. Thank you for joining todays call.
Please go to slide number six.
This slide reflects our earnings per share a reconciliation for the third quarter.
Third quarter 2019 reported earnings per share was $1.40.
Adjusting seven cents for the prior year restructuring expenses integration costs related to acquisitions and debt refinancing costs. The 2019 adjusted earnings per share was $1.47.
Favorable other income and interest expense increased earnings per share by 15 cents the increase.
The increase was driven by an approximately 14 million non cash currency translation gain related to the liquidation of a legal entity in our EMEA region.
This benefit would not be expected to recur and 2021.
Favorable year over year tax rate and share count combined to provide another positive eight cent per share impact.
Operational results decreased earnings per share by three cents driven by volume de leverage that was nearly offset by favorable price and productivity exceeding inflationary impacts as well as favorable currency.
This results in adjusted third quarter 2020 earnings per share of $1.67, an increase of 20 cents or approximately 14% compared to the prior year.
Lastly, we have a nine cents per share reduction for charges related to restructuring and impairment costs after giving effect to these items you.
All are 58.
Please go to slide number seven.
This slide depicts the components of our revenue performance for the third quarter I'll focus on the total allegion results and cover the regions on their respective slides as.
As indicated we experienced a 3.4% organic revenue declined in the third quarter.
The COVID-19 pandemic continue to have an impact on the top line number although we did realize the benefit of delayed projects from the prior quarter.
As shown on the trending chart revenues rebounded nicely, but we're short of the very strong quarterly results in the prior year.
Despite the difficult and uncertain times, we are operating in the overall business performed very well, particularly in the supply chain and meeting customer requirements.
It is also important to note that price remained solid in the quarter was slightly offset the volume pressures.
Currency also provided a tailwind to total growth and more than offset the impact of the divestiture of our businesses in Colombia and Turkey.
Please go to slide number eight.
Third quarter revenues for the Americas region were 539.1 million down 5.1% on a reported basis and down 4.6% organically.
The decline was driven by volume challenges on the Nonresi residential business due to the COVID-19 pandemic.
Partially offset by good price realization and strength in the residential business.
The non residential business was down low double digits, Conversely, residential bounced back nicely and grew at a low double digit rate.
The Americas electronics revenue declined in the mid single digit range has discretionary commercial projects are delayed.
We see electronics and touchless solutions, continuing to be a long term growth drivers and expect to electronics accelerated growth will resume what market conditions normalize.
Americas adjusted operating income of 166.6 million decreased 5.1% versus the prior year period.
And adjusted operating margin for the quarter was flat.
Discretionary cost actions restructuring benefits and material deflation mitigated the impacts of volume deleverage and unfavorable mix.
Please go to slide number nine.
Third quarter revenues for the EMEA region were 148.4 million up 7.7% and up 2.9% on an organic basis. The organic growth was driven by strength in the global portable security and Simon's boss businesses as well as solid price realization.
Favorable currency impacts contributed to total revenue growth was slightly offset by the impact of the divestiture and the business in Turkey.
EMEA adjusted operating income of 17.1 million increased 42.5% versus the prior year period Ajay.
Adjusted operating margin for the quarter increased by 280 basis points. The most.
The margin increase was driven primarily by price and productivity exceeding inflation.
Productivity was bolstered by benefits from lower operating costs from the restructuring actions taken earlier in the year and discretionary and variable cost reductions.
Please go to slide number 10.
Third quarter revenues for Asia Pacific region were $40.9 million down 4.2% versus the prior year with organic revenue decline of 6.8% the decline.
The decline was driven by continued COVID-19 related impacts and weakness in Korea.
Our Australia business performed quite well, despite the ongoing pressure in Australia and end markets.
Currency Tailwinds offset some of the organic revenue decline.
Asia Pacific adjusted operating income for the quarter was 3.2 million a decrease of 1.2 million with adjusted operating margins down 250 basis points versus the prior year period.
Of note. The prior year operating income includes a 1.1 million favorable onetime item related to the recovery of previously remitted non income taxes.
This had a 260 basis point favorable impact on Asia Pacific margins in Q3 of 2019.
Excluding that margins were essentially flat year over year, what the volume deleverage and unfavorable mix being offset by favorable price and productivity exceeding inflation.
Please go to slide number 11.
Year to date available cash flow for the third quarter 2020 came in at 256.1 million, which is an increase of just over $26 million compared to the prior year period.
The increase was driven by improvements in net working capital and reduce capital expenditures, which more than offset lower net earnings.
Our strong cash flow generation has been an asset to the company. This was evident in the third quarter and will continue to serve us well during the current market environment.
Looking at the charts on the right shows working capital as a percentage of revenues decreased based on a four point quarter average. This was driven by reduced working capital needs from a lower volume as well as strong collections performance.
Business continues to generate strong cash flow and we remain committed to an effective and efficient use of working capital. We will continue to evaluate opportunities to optimize working capital and drive effective cash flow conversion.
Please go to slide number 12.
Our financial and liquidity position remains extremely solid our net debt to EBITDA ratio is 1.6 based on the last 12 months performance our debt covenants are well within the required limits and we have no near term debt maturities are 500 million credit facility remains untapped.
Our quarterly dividend at 2020 increased 18.5% through the third quarter.
This is the sixth consecutive year annual increases in addition, with the strong operational execution and cash generation the increased cash position since the beginning of the year and better visibility into business conditions, we have resumed share repurchases under our previously authorized 800 million.
Our program.
As you have heard us say numerous times, we put our excess cash to use as part of our commitment to a flexible and balanced capital allocation strategy.
I will now hand, it back over to Dave for an update of our full year 2020 outlook.
Thank you Patrick please.
Please go to slide number 13.
As you know we were one of the handful of companies who provided an outlook following Q2.
With another quarter behind us and a bit more clarity we are updating our outlook for 2020.
In the Americas, we expect to see continued pressure on the non residential business as discretionary spending and commercial markets remain soft due to the people continuing to work from home.
In institutional markets. The projects are already started we will continue to finish.
The rate of completion, maybe slowed as restrictions for the number of people on job sites remain in place and supply chain issues to the construction site.
Residential markets are expected to remain strong in all channels, we serve big box retail E commerce and new construction.
With these expectations, we are improving the organic revenue outlook in the Americas to be down 5.5% to 6% for the full year.
We are projecting Americas total revenue decline could be 6% to 6.5% would be.
With the slight impact from the divestiture of the business in Colombia.
In Europe, we saw sequential improvement in Q3, and we expect Q4 to be better than the year to date performance we have experienced.
For the region, we now project organic revenue to be down 6.5% to 7.5%.
Total revenue includes currency Tailwinds in the latter part of the year as well as the impacts from the divestiture of the businesses and Turkey.
And is projected to be down 4.5% to 5%, 5.5% for the full year.
In Asia Pacific markets were weak before covert 90, especially in Australia.
We expect that.
That along with the weakness we are experiencing Korea to continue.
With this backdrop, we expect 2020 organic revenue decline of 12% to 13% and.
And 2020 total revenue to be down 12.5% to 13.5%.
With a flight impact from currency.
We are projecting total inorganic revenue for the company to be down six to six and a half per se.
We are raising our outlook for adjusted earnings per share to a range of $4.75 to $4.80.
Although net investments are assumed to be relatively small in the revised outlook. We remain committed to investing in innovation that supports our Cmos access strategy.
This outlook reflects the reprioritization of investment to support the expected future Electronics group.
Our revised outlook assumes a full year adjusted effective tax rate of approximately 13% as well as outstanding weighted average diluted shares of approximately 93 million.
The outlook. Additionally includes approximately $1.30 to $1.35 per share impact from impairment and restructuring charge during the year most of which have already occurred as it.
As a result reported EPS is estimated at $343.50.
Finally, our river revised available cash flow outlook for 2020 has increased now projected to be in the $400 million to $420 million revenue.
Please go to slide 14.
[noise] Allegion has strong business fundamentals and a proven ability to execute and adapt to a changing and uncertain market conditions.
We have managed the business extremely well to mitigate the impact of the ongoing pandemic.
We remain ready to serve our customers and meet their needs for touchless access and healthy environments with our market leading brands.
We will provide an official outlook for 2021 during our Q4 full year call early next year.
But as we think about the remainder of the year and begin to look at 2021. Some key observations that we see are.
As previously expected commercial and institutional markets will continue to be soft in Q4 and in the first half of 2021 with a snap back in repair retrofit and small projects beginning in the second half of next year.
US state and local bond issues continue to be.
Moved ahead.
And supported by local communities.
Residential end markets are expected to remain strong for the long term as an undersupply of single family homes is corrected.
We will continue to manage our cost base to help aggressively mitigate any volume reductions.
Seamless access software and electronics will drive growth and continue to be among our top investment priorities. They are our future.
Strong cash flow generation will remain a focus with capital deployment to enhance shareholder returns.
Going forward Allegion will be leaner and more focused as we navigate the coming months and emerge from the pandemic.
We have implemented restructuring actions during the year that have addressed the cost base in order to rightsize the business.
We will continue to evaluate business going forward and make necessary changes.
Our execution and commitment to driving driving solid results will remain.
In closing allegiance future is bright we thank you and we'll now take your questions.
We will now begin the question and answer session.
Lastly question.
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The first question comes from Chris Snyder of U.S. Please go ahead.
Thank you for the question could you.
Could you just maybe unpack the Q4 guidance a little bit.
Just I guess, specifically as it relates to the resi and the Nonresi piece in the Americas.
So we don't provide specific guidance by quarter, you can obviously backend to that relative to our full year guidance.
I would say base.
Basis of our Q3 performance strong.
Strong both in terms of topline and.
Operating income margin performance relative to the backdrop of what's going on around the globe.
I would say you can kind of see similar type of patterns in terms of both the non residential and residential businesses in terms of what you saw in Q3, but.
But well continue to manage the cost to help mitigate any shortfall relative to the non residential business and the margin impact we do have a mix impact that's going on here relative to growth in residential and softness in non residential business.
Appreciate that and then maybe just following up on the resi piece and I certainly understand.
Your comments on the resi new construction cycle.
Picking up and Weve had low household formation for a long time now so certainly.
See that view, but I guess, specifically as it relates to maybe the restocking cycle I know there was the Q2 supply chain disruption like.
Has that as that restocking cycle fully been realized at this point, maybe whats kind of like the runway that you see growth just on that end.
I would say as as we look at the road segment and the pause that was taken by all suppliers in Q2.
We're out there.
Record backlogs and.
Normalizing that will take certainly into early Q2.
Thank you for that color very much appreciate it.
The next question comes from Ryan Merkel of William.
William Blair. Please go ahead.
Hey, Thanks, good morning, and nice quarter.
Thank you.
So first off Americas electronics revenue down mid single digits is much improved he gave some remarks that the trend of Texas access is real and happening do you expect this business to turn positive in the fourth quarter and could electronics provide some offset to weaker underlying commercial trends in 2021 or.
Is that a bit of a reach at this point.
[noise] electronics will be positive in Q4.
As you look at the year.
Although our electronics, especially electronics mirrors, our Roes and commercial performance excel.
Extremely strong electronics rose extremely strong somewhat muted in commercial and institutional two reasons for that the strength in residential.
Electronics is driven by our supply chain strength and an extremely strong position in the portfolio of our products. The slow again coat the slid connect our KPN walk through some of the best products on the market, So where was the growth in the quarter in Q.
In Q3, we had a supplier affected by covet.
And we lost a couple of weeks with that demand did not stop it.
Effected our ability and if you normalize.
That through the balance of the year our growth.
Electronics as well.
By Rose continues so feel good about that.
That's super helpful. Thanks for that and then I want to follow up on the Fourq guidance, maybe ask it a little differently. It seems to imply Americas revenue down mid single digits year over year flattish margins just like this quarter. So if I have that right why isn't that more improvement in the Americas business and for Q.
So I would characterize it this way.
Entering into Q3, we.
We had stronger backlogs and particularly in the non residential business. Some of the projects were delayed and the catch up and that type of thing and so we were able to maybe operate more efficiently from a manufacturing perspective that helped the margin profile in the business.
Two would be in Q4, maybe a stronger negative mix component.
Relative to the residential non residential sales in the quarter as well as within the channel and product segments within the non residential business. So there's a lot of things going on there but.
Quite frankly, we will as I said earlier continue to manage the margin well I was very happy with the progress we made relative to some of the mitigation on the cost side and you saw that with strong.
Strong overall margin improvement relative to the to the prior year.
Yep.
Thanks pass it on.
The next question comes from Josh Pokrzywinski of Morgan Stanley. Please go ahead.
Hi, good morning, guys.
Good morning, Josh.
Just coming back first to some of your comments on the channel replenishment that's necessary in rising appreciate that kind of side point on the on maybe some of the interruptions on the electronic side that that kept fulfillment maybe cap there.
Would you mind quantifying how big of a.
A replenishment still need to happen if I remember your comments last time, it was kind of through one Q now it sounds like early two Q, some maybe a bit of a push out there, but how many weeks of inventory or points of demand. However, you want to put it.
The channel need to kind of get back to normal levels on the right side.
So Josh.
I would.
Sorted out in my mind is we leave Q3 with record residential backlog.
Number one.
As I think about.
Bringing that backlog beyond the normal pushes us into Q2, it's not.
Inhibited by our ability for throughput just.
Just with the small disruption we have had we have expanded capacity of our residential capability significantly.
Demand is good we've done a good job picking up.
Builders expanding space at Big box E Commerce remains extremely red Hot and I believe it's our ability to keep up.
Our customers in product that has built that backlog.
I would say gaining share and a strong suite of electronics.
That has enhanced our position.
I'd add one other comment I would add one other comment allegiance ability to flex that supply chain is impressive as is impressive but anything that I've seen in my 40 years.
Manufactured.
Got it appreciate that color and then just a follow up Dave I appreciate even going back to eight.
April that you've been cognizant that the current environment, probably doesn't support an awesome 2021 for non Brad I think thats now much more apparent to to a broad range of folks.
If I kind of take some of your comments is a time series starting from the.
The first quarter earnings.
Doesn't really sound like much has changed in the outlook as you guys have seen more.
Data come through.
I've gotten closer to next year, if anything if some of the bond issuance commentary sounds a bit more supportive than what we would have known back then is that reading it right I mean I guess.
How do you feel versus some of those early observations when we were in the first half of the year and this is all still fresh.
So barring a rupture.
I believe we're lifting off the bottom.
I was extremely encouraged by the abiotic lift from 40 to 47.
Our.
Spec levels are just slightly lighter than last year. So I think thats, a net positive, but I've also got to be cognizant.
In our key markets commercial institutional.
Ashley institutional the priority is around keeping people say keeping people socially distance keeping people.
Capacities properly managed so in my mind, there small projects break fix preventative maintenance that get bill wave and I believe as co head winds down in Q2 were going to see a snap back and those types of projects and.
Things will move back towards normal as we get to 22.
Got it great color. Thanks.
The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks, Good morning, everybody.
Good morning.
Hey, Dave just said.
Yes harp on that on the Fourq, you commentary, but I just want to make sure I understand that add particularly in Americas. So it sounds like on the residential side of things things Theyre very strong right. Your backlogs at record levels electronics as it does to be up in the fourth quarter. So the implied step down then in fourth Q.
Is that just nonresidents getting get worse in Fourq versus Threeq, you and maybe just any color intra quarter on how trends played out and non res would be helpful.
I would say getting back to Patrick's comments.
The slowdown in some cases shutdown in Q2 set us up for a nice backlog to sort through in Q3, we did a good job in primary care.
Primary commercial institutional demand has softened and we see that in Q4.
That's how I described from a demand standpoint, as you look at the margin profile in that.
The Reds demand is extremely strong, but it creates a mix issue you know our commercial institutional is is significantly more profitable and those factors work through the fourth quarter.
Okay, Great I appreciate the clarification and then.
I guess just to the follow on question thinking about this.
A little bit longer term.
Ahead of the pandemic you guys were were pretty front footed in discussing some of the not just like supply constraints that really labor constraints in some of these projects moving to completion I guess as you think about the institutional or non res markets and what you have in your backlog.
How much how much more visibility do you have I guess into into 2020 wine and how much more backlog he has to complete.
Just trying to understand like how much we've worked through versus versus what's left to complete before we kind of head into into 2021.
So as I think a 2021.
Talked about spec writing, we're looking in our the incoming order demand, especially in our project related and the backlog.
Okay.
Incoming project quotes again muted our backlog if you look at it over 36 months.
Is in the low end of the range, it's not unhealthy, but we would typically go into a softer backlog vis timing time of year, but again its on the low range then you've got to get your Crystal ball out my Crystal ball, the economics that we consume.
To look at suggest softness and that's what we suggest.
Okay, great. Thank you. Thank you all.
The next question comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning.
Good morning.
Maybe just moving away from the topline for a second and very good productivity performance in the quarter, but the margins are.
Year on year, you booked some more restructuring charges and maybe as we look at 2021.
Is there any way that you could describe the sort of carry.
Carry out of a fixed cost savings into next year that should support margins.
And any sense around perhaps temporary costs that might flow back into the TNL ready.
Really just trying to get a sense of any major moving parts.
Margins next year aside from from volumes.
Yes, Julien I would characterize it this way you may recall in the last quarter conference call, we kind of outlined what we are doing this year you know this 80 million.
Cost reduction take outs for 2020, and when we characterize that is kind of three components, which was the discretionary variable structural permanent type of cost savings and if you look at those specifically on the permanent structural cost savings to answer your question.
We've been at it.
Pretty solidly I'd say over the last couple of quarters. We are now hitting I'd say a full stride in terms of the cost takeout associated with that we've identified some additional measures as well that will help us into 2021, so theres carry over benefit, particularly in the first half of 2021 that will help.
Nope mitigate some of these variable components that boomerang back next year. So so I look at those maybe we're a little upside down if you kind of look at those two independently and some of them up.
We will continue to evaluate our cost structure going forward and adjust as necessary basis of future demands are always looking at that however, we will continue to invest in the business. That's a core part of our strategy, particularly on the seamless access and growth opportunities associated with that so.
Really position us well on the growth prospects associated with that going forward as we exit our COVID-19, so there's going to be some pressure there relative to those components and then you're going to have unfortunately unfavorable mix associated with strength in resin.
Actual better than anticipated and some continued softness associated with non residential markets.
Very helpful. Thank you Patrick and maybe my follow up would be.
Also away from the top line just on the balance sheets I think in the prepared remarks.
On cash you said you'd mentioned that the buyback.
Buyback may be resuming.
Maybe just help us understand the Apple.
The appetite for share buybacks, how quickly once again delay on that.
And how attractive M&A opportunities are today.
So first on the M&A I would say core part of our strategy to continue to evaluate opportunities that our core in our business expanding product our market presence.
Important.
We continue to evaluate where we can look at assets that help us from a technology perspective, particularly around this whole connectivity and seamless access and participating in that growth. So we're active looking at various opportunities I would say theres fewer assets on the market.
Specific and core to our business and so kind of if you assume that Theres limited M&A activity, we would pivot more towards.
More toward shareholder distribution, which we I just want to clarify we are in the market and will be in Q4 to help.
Continue to put cash to use for the benefit of our shareholders enhance shareholder returns. We think it's in good investment relative to where we trade today and so we'll continue to be active.
In the market.
I would add too.
From an M&A pips position, we can go where we need to go we've got you know the dry powder in fire power I think at some.
An enviable position leaning harder towards the electronics software that accelerate and add capabilities to our value proposition.
Great, Thanks, Dave and Patrick.
Yep.
The next question comes from Andrew Obin of Bank of America. Please go ahead.
Hi, guys. Good morning, good more.
Good morning, Andrew.
Hi, just wanted to dive in a little bit and institutional markets, specifically education and health care.
If I look at the bond issuance year to date I think as of end of September education Bond issuance was up almost 40% and health care I think was down 2% effectively flat so within those dynamics. So again on education. The pushback were getting is that okay.
Okay. So we are going to have bond.
We're going to have new bond issuance in November I guess people will vote for Ed.
But how what are you hearing from your customers on the education side about the fact is that I guess some people. They are good intuition, but maybe they are not getting rents for the dorm rooms. So how much pressure is education sector under and then for health care right. The issue there is elective surgeries, which are coming back.
But how are the conversations going with the health care providers in terms on whether they get back to normal so thats sort of part one education and healthcare.
What are you seeing in those two verticals into next year.
So I've had more dialogue on the educational side and I'd say generally optimistic and in line with the Bank of America Research.
As I've had new dialogues with a few university presidents their capital projects continue to move forward and.
Have funding at the state level or the private level, depending on the institution I think theres something to recognize within that though Andrew.
The small projects the brake fix the preventive maintenance dose.
Facility teams are added dated by just the problems of the day in dealing with students at all levels. So I tend to be net positive and in that college campus K through 12, Allegion will get more than its fair share of the business on the hospital side.
I see the opportunity the hospital system has been severely tested and investment will go back into that but it will be second half of 21 it into 22.
And just a follow up question can you just give us any color on what's happening. It was your market share in discretionary retrofit market I know it's been.
Sort of couple of years ago been a big initiative you guys have done very well I believe you continue to do well, but any color on what's happening there.
You know, we continue to execute our ground game in terms of the discretionary working with.
Our wholesale partners.
A large partner.
Just shifted completely to.
Allegion opening price point mid price point project. So it continues to be a net positive.
So continuing to gain market share slowly steadily.
Yeah, and I would say the command of our supply chain helps us there when things are locked up because of challenges in other parts of the world.
Again, you've heard me say, Andrew our supply chain is simpler and it gives us opportunities to have dialogues, we can keep the flow of product going.
Fantastic and congratulations on a well executed quarter.
Thank you Andrew.
The next question comes from Tim Wojs of Baird. Please go ahead.
Good morning, Hey, guys, Hey, good morning, Nice next step in the margins.
Maybe just really going.
Really the only question I have is just on pricing.
You know as you kind of look at 21.
Maybe some choppiness in non res continuing into next year any.
Any change in kind of how you guys think about pricing.
On.
In kind of the out year and Im really just asking because we are starting to see a little bit of incremental kind of raw material inflation that that's kind of popping up here. So can you just kind of commentary on how we should think about price.
So I would characterize it as solid performance.
In Q3 and year to date 2020, we.
We will continue to question remain competitive in the market.
You're correct there is going to be saw them.
Inflationary pressure associated with input costs on commodities things like steel and aluminum, yes, we'll continue to push the price dynamics to the extent, we can and again remain competitive, but I would think about it as well.
Were 1%, maybe a little bit lower realize kind of on a go forward basis.
Okay sounds good thanks, guys. Good luck on the rest of the year.
Thank you.
The next question comes from John Walsh Credit Suisse. Please go ahead.
Hi, good morning.
Good morning.
Just wanted to go back to the kind of the language you used around a snap back in the repair retrofit and small projects activity, you're looking at or anticipating next year.
You talked about that large mobile project, which will hit next year, but im curious today, if you're seeing your customers make those touchless upgrades in the back half of this year or if it's still more of a conversation with them anticipating.
Doing more of the projects next year.
We can identify projects and early adopters, but the momentum of those projects will pick up once we get on the other side of covert.
Unless theres a burning need.
Doug when you go in and increased or improve your infrastructure to talk touchless wave loss.
Connected it's a bigger project than somebody wants to take on in the middle of Firefly.
Got you know that makes sense.
And then just thinking about earlier when you were talking about the seamless opportunity you did use the term.
Talking about the readers.
You know as I kind of have historically thought about allegiance position in that product.
It was smaller relative to one of your competitors, but how important is having the reader as part of the solution.
As these customers shift into that seamless world.
Does that some place we need to get bigger or.
Just trying to understand how that works.
So when you think about readers kind of think about whites, which as you know they're ubiquity once theyre in every room.
Is one lytswitch differentiate another.
The answer is no.
It's important in the sequence, but what we're really after is to eliminate the card and.
And move that to your edge device your cell phone that is going to happen that's the opportunity that were.
Going to exploit which complements the touchless environment. It complements higher security levels, because you could not only have one level, but even triple while gross up off the authentication and you don't ever you get immediate.
What we call the arbitrator of access.
No.
With.
A click of a button accesses granted or to that.
Denied.
Eliminating that needs a card that's our opportunity.
Great I appreciate that color. Thank you.
The next question comes from Deepak regular of Wells Fargo. Please go ahead.
Hi, good morning, all.
Hey.
Good quarter by the way.
Two questions from me Firstly wanted can.
Can you talk about the momentum or the revenue growth that you are seeing in products that are driving this posco would will be and I guess touchless seamless you talked about contact lists Apple iPhone et cetera. Now these looked like strong renovation opportunity. So why would you not see continued tailwinds into.
Half of next year, what's your common shaffer to snap back only in second half and also can you touch upon how accretive these tech heavy products and software is to.
As to your margins and I have a follow up.
I think you have to put yourself in the in the middle of a college campus Hospital.
And you know the prioritization of their day and their project work.
In a coveted reality.
As I talk to school administrators, it's not.
That does preventive small preventive maintenance items small project and lets it severely broken it's just not part of the priority list. It's about people flow, it's about cleaning surfaces. So when you're in a firefight and you would be at the University of Florida today.
No that projects those small projects don't don't get that even the radar screen so that.
That's what I see in terms of this move in the second half.
Your follow up to your second question did you hear Patrick yes, so some people on the margin profile the electronics.
Would be similar type of margin as or traditional mechanical, but a higher selling price and therefore more EBITDA. So to the extent, we can continue to push electronics, which we are and we will that benefits us from up from an earnings growth perspective.
Great My follow up Patrick was more on the residential electronic slots performance at the mental mentioned yesterday their smart lock that move in residential grew high double digit percent.
In Q2, and did you see similar kind of fun.
Deep I would say this if we didn't have the supply disruption from.
Lets supplier, we would have had one of the strongest.
Residential quarters.
In the company's history.
Got it great. Thanks for the color.
The next question comes from David Macgregor of Longbow Research. Please go ahead.
Hi, Good morning, it's cold on for David Congrats on a good quarter.
Thank you.
I guess can you start by walking us through how the residential point of sale growth played out in the quarter in any new trends you're seeing there.
I would say our.
Impressive strength in the E commerce.
Would indicate check.
Share gains if we look at point of sale.
We continue to gain momentum and strength.
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And it's really across all sectors I don't think.
When people are spending more time in their homes. They are they're thinking about how to upgrade and improve my space.
I think our cross DIY why you see that extremely strong trend.
Juan I think to the rise in demand for single family home, whether existing or new we're benefiting from that remember allegion tends to be the replacement lock of choice.
And then we have a suite of electronic products.
That may be the best in the industry and then our supply chain, we have product available have been able to provide it.
So all of those channels in.
In some cases are specials, our lead times are extended because of the increase in demand, but I think you know several factors there that are.
Really showing off some rest performance I'd add one more too and I commented on it.
Our ability to take our demand is good.
Is is good as I've seen in 40 years manufactured.
That's great I appreciate that and then as a follow up you mentioned some supplier headwinds in the third quarter related to electronics can you give us an update on where your supply chain stands today for for the segment and if there are any risks excellent growth in the near term.
With the exception of that one supplier.
Uh huh.
No disruptions that doesn't mean that supply chains are not under pressure, but we.
We tend to produce in the region and that certainly helps US just spent time on the boat.
But it's one.
It's one of the proud points of Allegion.
We've been working on that supply chain, even under Ingersoll Rand.
The.
Simplicity of it the leading to solve it.
Some of the vertical integration that we did over the last few years as we invested in the Norwegian has really come back to pay dividends.
Well.
Great. Thanks for the color.
The next question comes from Jeff Kessler of Imperial capital. Please go. Thank you. Thank you and good morning, guys.
Our injection more.
Morning.
Can you can you break out EMEA and in Asia Pacific just a little bit in terms of.
And granted there is small but the fact is is that.
At some point EMEA has to grow again.
Were very let's call it vertically and geographically what was stronger and what was weaker in the in EMEA.
So.
I think a very good quarter in EMEA number one number two is strengthen our simonsvoss franchise, which would be Simon's boss Center flux.
Our leader there Bernard So me really put his foot on the pedal as we went into the pandemic had some supply chain.
Strengths that when it went in and allowed him to capture projects.
I also thought our inner trucks business did extremely well, which is access software control time and attendance.
That business are under some pressure because they do a.
A very good job in servicing large manufacture.
Manufactures, especially the auto aerospace industry executed well and I think the numbers suggest that the other one that the hidden Jeff is our what we call global portable security.
Excellent execution and leadership by John Stanley I think about it you can't walk into a bike shop today and find a bike and.
And that demand has come right into our wheelhouse, we also.
Having investing in connected technologies that help the location of your bite platform.
One some nice business because of that connected capability in the GPS business that'd be my comments in June.
For the Europe business.
Okay.
Great and.
In the.
In the in the US now that now that and I think you alluded to you used the word NFC, but I'm, assuming that NFC becomes a key part of the of the touchless wireless three levels of authority technology are there are you going to be using multiple technologies in terms of getting.
Getting those those those projects going and.
It will be it will be mainly around NFC or will you be adding various types of Bluetooth to it I mean, I know I'm getting down in the weeds here, but.
Question. The question really involves how flexible are you going to be in terms of.
In terms of those technologies and what is the what are you what are add people asking for or what are people of negotiating with the floor or they just heard the word that Apple is has taken design as well and now it's basically going to be a standard or are you getting different types of demand.
For different types of wireless technology per per either vertical or or per type of end user.
[noise] NFC remains important we're investing and partnering in technologies like threat that you're probably the only person on the phone that they were of a thread technologies and I think we continue to.
Be very comfortable on our foundation of being opened.
And making good segmentation decisions that allow region to grow but also servicing our customers.
Yes.
This.
Yes, just just just just as a last follow up to this.
As far as getting this out there is this at the end.
At the beginning going to cost you more.
To get these technologies I mean, you've obviously had you've obviously had wireless technologies coming out into your bid into the marketplace for several years now but is.
These new technology is going to cost you more as you get out there or is this is as you as you said before the March ultimate margins remained about the same.
Where do the where the where do the innards of those margins differ from mechanical.
[noise] again margins consistent at a higher selling price what fascinates me is.
Is our.
Our position in seamless access opens up new business opportunities.
In terms of helping customers simplify their world. So an example of this would be at the University of Texas, Austin, where we are the.
Are the sole supplier by supplier on the access they manage 80000 credentials today.
I can get them out of that business and provide new value prop propositions.
Higher level of security that I think customers will be more than willing to offload, creating new revenue streams and ecosystems for a week.
Great. Okay. Thank you.
Thank you very much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Tom Martineau for any closing remarks.
Okay. Thank you and we'd like to thank everyone for participating in today's call have a safe day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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