Q4 2020 Allegion PLC Earnings Call
Good day and bulk of each of the Allegiant fourth quarter and full year 2020 earnings conference call all participants will be in listen only mode.
After todays presentation, there will be and opportunity to ask question share do you need assistance. Please signal a conference specialist by pressing the star key followed by zero. Please note. This event is being recorded I would now like to turn the conference on where to Tom Martineau, Vice President Investor Relations and Treasurer. Please go ahead.
Thank you and Lisa Good morning, everyone welcome and thank you for joining us for Allegiant and fourth quarter and full year 2020 earnings call with me today are David <unk>, Chairman, President and Chief Executive Officer, and Patrick Shannon Senior Vice President and Chief Financial Officer of the Legion.
Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to on today's call are available on our website at Investor day at Allegiant Dot Com. This call will be recorded and archived on our website.
Please go to slides two and three.
And that's 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 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 and the financial tables of our press release for further details.
David and Patrick will now discuss our fourth quarter and full year 2020 results and provide an outlook for 2021, which will be followed by a Q&A session for the Q&A, we would like to ask each caller to limit themselves to one question and one follow up and then reenter the queue, we would like to give everyone an opportunity given the time allotted.
Now I'd like to turn the call over to David.
Tom.
And thank you for joining us today.
2020 was an extremely difficult year, perhaps the most challenging that I have encountered during my career.
I want to take the time to acknowledge the the sacrifice and hard work of our employees and helping our Legion deliver strong results and the face of the obstacles presented by the COVID-19 pandemic.
For your diligence flexibility and perseverance.
Go to slide four.
Despite the pressures posed by the global pandemic Allegiant experienced only a modest top line revenue decline in 2020.
And we saw pockets of strength during the year.
The business as you May remember performed extremely well and the first quarter.
And in the second half of the year, the Americas residential business the assignments of <unk> business and reflects.
And global portable security businesses, and Europe realized good growth.
Although revenue was down modestly for the year, we expanded adjusted operating margin by 20 basis points.
Aided by quickly implementing restructuring and cost management and management actions to mitigate the volume related COVID-19 impacts.
Allegiant produced record adjusted earnings per share and.
The increased available cash flow by more than $20 million versus the prior year.
We strengthened the fine.
And quite foundational elements of allegiance culture around safety and sustainability inclusion and diversity and engagement, which will help drive our continued success of the company.
I'm very proud of our commitment to employee safety and customer excellence, which remain top priorities.
In 2020, we made improvements in all of our employees safety metrics, which are already industry leading.
This has and will be our north star.
I believe that the time and resources, we had been invested and safety since spin paid us back in 2020.
We were able to keep our essential employees working and took extra protections to keep people safe.
Whether they were on the sites or working remotely and our dedication to customer excellence allowed us to better serve our customers.
Today, our Legion is greener and cleaner, reducing greenhouse gases and water usage throughout the year, we paid considerable attention to drive progress on inclusion and diversity, creating the strategic framework and leadership commitment to our action agenda.
Our team is significantly more engaged meaning of our global employees are more committed to our vision and our workforce than ever before.
Although Legion employees, our survey of annually by Gallup.
And their native language or.
Our engagement has seen solid improvements since we have been of Standalone company.
Please go to slide five and I'll walk you through the fourth quarter financial summary.
Revenue for the fourth quarter was 727 3 million and increase of one 1%.
Organic revenue declined six tenths of a percent.
Currency tail wins more than offset and the organic revenue decline and the impact of divestitures.
Organic revenue and the quarter included Americas residential Simonds Voss enter flex and global portable security and Europe.
And Australia, and New Zealand NDA Asia Pacific.
These gains were offset by expected headwinds experienced in our Americas non residential business.
Patrick will share more detail on the regions and a moment.
Adjusting adjusted operating margin increased by 150 basis point and the fourth quarter as we saw the benefits from restructuring and cost reduction actions mitigate deleverage from volume declines.
Adjusted earnings per share of $1, 49 increased 21 and more than 16% versus the prior year.
High operating income favorable share count and year over year tax rate.
Accounted for the increase.
Available cash flow for the year came in at $443 2 million and increase of over $20 million versus the prior year.
Higher adjusted earnings and lower capital expenditures were the driving forces for the increase.
I encourage all of you to review the body of work and execution of the Allegiant team globally versus our competitors and peers and 2020.
Solid top line performance in a pandemic margin expansion and record cash flows.
During the year, we leaned out our structure increased our investment and technology and retained our go to market resources and strengthen the engagement of our world wide team and a pandemic positioning and the Legion to exit the Covid plague as a stronger company.
Patrick will now walk you through the financial results and I'll be back to discuss our strategic agenda and 2021 outlook.
Thanks, Dave and good morning, everyone. Thank you for joining today's call. Please.
Please go to slide number six.
This slide reflects our earnings per share reconciliation for the fourth quarter.
For the fourth quarter 2019 reported earnings per share was <unk> 86.
Adjusting for two for charges related to restructuring trade name impairments as well as loss on divestitures, and Turkey and Colombia.
The 2019 adjusted earnings per share was $1 28.
Operational earnings were the primary driver for the year over year increase as indicated operational results increased earnings per share by 13, <unk> as favorable price productivity and material deflationary impacts more than offset reduced volume related to deleverage as well as plant and efficiencies due.
For the COVID-19.
Favorable year over year tax rate and share count drove another <unk> <unk> and <unk> increase respectively.
Interest and other income were slightly positive and offset the slight reduction associated with incremental investments during the quarter.
This results and adjusted fourth quarter 2020 earnings per share of $1 49 and increase of 21.
Were 16, 4% compared to the prior year.
Lastly, we have a 48 per share reduction for charges related to restructuring M&A costs impairments as well as a loss on held for sale assets.
This is related to our decision to divest the <unk> door business and the middle East, which is expected to close in Q1 subject to normal regulatory approvals.
After giving effect to these items you arrive at the fourth quarter 2020 reported earnings per share of $1 <unk>.
Please go to slide number seven.
This slide depicts the components of our revenue growth for the fourth quarter as well as for the full year 2020, I'll focus on the total Legion results and cover the regions on their respective slides.
And as indicated we experienced a 0.6% organic revenue decline and the fourth quarter.
As shown on the trending chart, we saw sequential improvement and the organic revenue decline as well as positive total growth of one 1% with currency tailwind and mitigating the organic decline and divestitures price continued to remain strong and helped to offset some of the volume decline.
With the fourth quarter performance you can see that total revenue was down four 7% for the full year with organic revenue decline of four 8%.
All three regions ended the year down organically with the Americas down for 2%.
EMEA of lower by five 1% and Asia Pacific off 10, 6%.
All regions experienced organic revenue declines from the prior year as a result of the COVID-19 pandemic.
Please go to slide number eight.
Fourth quarter revenues for the Americas region were $521 2 million down, 1% and and down 0.7% on an organic basis the.
The region continued to deliver solid price realization on.
On volume Americas residential was outstanding and <unk>.
Appearance and mid Twenty's percent growth boosted by robust retail point of sale, new home construction and electronics growth, which nearly offset the expected decline and the nonresidential business caused by lower new construction and discretionary project delays.
Electronics revenue was slightly down with good growth and residential offset by reduced commercial electronics, driven by delays and discretionary projects.
We continue to see electronics, and touchless solutions as long term growth drivers and expect the electronics accelerated growth to resume when market conditions normalize.
Americas adjusted operating income of $148 5 million decreased three 5% versus the prior year period, and adjusted operating margin for the quarter was down 70 basis points.
The decrease was driven primarily by volume deleverage.
<unk> and inefficiencies due to the challenges from COVID-19, and unfavorable mix, partially offset by benefits from cost reduction actions restructuring benefits and material deflation.
Please go to slide number nine.
Fourth quarter revenues for the EMEA region were $165 3 million up 10, 5% and total and up three 1% on an organic basis. The organic growth was driven by good price realization and strength and our Simons Voss enter flex and global portable security business.
Yes.
These businesses demonstrated resiliency throughout the year and are well positioned to continue profitable growth and 2021.
Currency <unk> added to the total growth.
EMEA adjusted operating income of $24 9 million increased 49, 1% versus the prior year period, and adjusted operating margin for the quarter was up 390 basis points.
Also note that these results of absorbed a $5 1 million of environmental remediation charge, which had a 310 basis point negative impact on adjusted operating margins the.
The margin expansion was primarily driven by the organic growth leverage and the benefits of the restructuring and cost control actions taken throughout the year.
Please go to slide number 10.
Fourth quarter revenues for the Asia Pacific region were $40 8 million down six 4% versus the prior year.
Organic revenue was down 11, 9%.
The decline was driven by continued weakness in Korea, and slightly offset by growth in Australia, and New Zealand, particularly in the residential business.
Currency tailwind is muted some of the organic revenue decline.
Asia Pacific adjusted operating income for the quarter was $8 2 million and increase of $6 3 million with adjusted operating margins up 570 basis points versus the prior year period, approximately $4 million of the income increase was attributable to a gain on the sale of the building.
Even excluding that the benefits realized from restructuring and cost control actions drove substantial margin expansion.
Please go to slide number 11.
The cash flow for 2020 came in at $443 2 million, which is an increase of 26 million and compared to the prior year period.
The increase was driven by higher adjusted net earnings and lower capital expenditures.
Looking at the chart to the right. It shows working capital as a percentage of revenues decreased based on a four quarter average this was driven by reduced working capital needs from the lower volume the.
The business continues to generate strong cash flow and conversion of net earnings liquidity and our capital structure and a great position and we will continue to evaluate opportunities to optimize working capital and drive effective cash flow conversion.
And we resumed share repurchases and acquired approximately $1 1 million shares for approximately $115 million during the fourth quarter.
We also announced a 13% increase and our dividend payout later in March.
I will now hand, the call back over to Dave. Thank.
Thank you Patrick Please go to slide number 12.
There is no doubt that throughout the fourth quarter and 2020 years, the whole our vision of seamless access and a safer world continue the driver business forward.
Despite the pandemic and resulting market headwinds our vision and strategy are progressing on many fronts.
We continued our commitments and investments to R&D and 2020.
Caribbean robust pipeline of new product development projects across both our core brands and new electronics product offerings.
Our recent acquisition of <unk> is an example of its infusing outside thinking and yet and another way, we're making digital and software investments to meet customers' needs now and in the future.
You know me will accelerate our leads and student digital journey and product offerings.
And our vision of remains anchored in our strategic pillars, delivering new value and access and to be the partner of choice.
But also and the strength of our historic brands and fact throughout the pandemic Slagged on duper and Simon for Us and <unk>, among others and our portfolio demonstrated both flexibility and creativity to meet customers and.
Immediate and changing needs.
I couldnt be proud of and proud the team grounded our company and sound business practices, while strategic.
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Okay, I apologize for that audience will go to slide 12.
Theres no doubt throughout the fourth quarter and 2020 of the whole our vision of seamless access and a safer world continue to drive our business forward.
Despite the pandemic and resulting market headwinds our vision and strategy are progressing on many fronts.
We continued our commitment and investments to R&D and 2020, creating a robust pipeline of new product and development projects across both our core brands and new electronic product offerings.
Our recent acquisition of you know me as an example of infusing outside thinking and yet and another way, we're making digital and software investments to meet customer needs now and in the future.
<unk> will accelerate allegiance digital journey and product offerings.
And our digital remains anchored in our strategic pillars, delivering new value and access and to be the partner of choice, but also on the strength of our historic brands and fact throughout the pandemic slag on duper, and Simon's Boston and and flex among others and our portfolio demonstrated both flexibility and crew.
<unk> to meet customers' immediate and changing needs.
I couldnt be prouder of heart of our team grounded our company and sound business practices, while strategically investing for our future to position Allegiant for growth as markets rebound.
I've said this before and I'll say it again because of how we've managed our business and how we are investing and because of the engagement commitment and resiliency of our employees I believe we will exit the pandemic stronger than when we started and we are committed to advancing environmental social and governance topics. They are important to the <unk>.
Company and the communities, where we live.
Please go to slide 13.
Another example from the quarter that demonstrates our focus on the legions future and our vision of seamless access is the creation of a Legion of international.
As we announced in December Allegiant International officially launched this year on January one is the consolidation of the former EMEA and Asia Pacific operating segments.
<unk> is now leading Allegiant and international and we are excited the leverage his broad experiences there as a veteran of the security industry and high growth technologies and.
And as a longtime leader within our business.
Creating the lesion and international and the designed to drive speed and efficiency by moving decision closer to the customer simplifying our operating segments and by reducing overhead and our non U S operations.
While this updating and operating model in place, we expect to accelerate momentum and electronics growth software and seamless access and those international markets again, we have of lead brands with rich histories, and Europe and Asia Pacific.
While <unk> is now leading the way for Allegiant International I want to welcome Luis or of Grosso as senior Vice President of the Americas.
If you Havent already and I encourage you to read our press release or look up the <unk> bio on our leads and dot com.
Luis brings a wealth of diverse leadership experiences spanning multiple and just industries geographies and cultures and has a track record of guarding the street teams through transformation with a focus on operational and customer excellence.
And he possesses the deep understanding of smart home security cloud technology consumer access solutions, as well as commercial and institutional safety, which support our strategic priorities Needless to say, Tim and Luis are both dedicated to our leadership commitments delivering value to our customer and shareholders.
And driving our strategy for.
We are focused and disciplined heading into 2021. Please go to slide 14.
Looking ahead of the 2021 nonresidential business, it's important to understand the cyclical nature of this market and where we fit in.
In general we are of late cycle, meaning our products are installed up to a year, sometimes longer after new construction projects start.
Our views on commercial institutional markets have not changed and I expect new construction to remain soft this year with institutional markets recovering faster than commercial.
And I also believe that this recovery will be faster than the 2008 downturn and thus we have maintained our sales and specification capability and capacity, while continuing to invest and innovation.
Relative to the broader market and competitors are Legion continues to perform well we continue to provide innovative solutions and our core markets as well as underserved market opportunities to drive profitable growth.
As K through 12 schools college campuses and healthcare begin to normalize with regard to the pandemic, we would expect discretionary projects on the non residential side the pickup in the back half of the year as pent up demand begins to break loose.
The residential piece of the Americas business continues to be a bright spot and is expected to grow in 2021 as the under supply of single family homes continues to be corrected.
In addition, the builder and addition to the builder channel DIY projects will continue to drive opportunities as consumers invest in their homes and adopt electronic solutions.
We anticipate strength and residential to persist in the foreseeable future.
Seamless access software and electronics continue to be of long term growth driver and we will and will remain our top investment priority. They are the future of the Legion.
With the strength and residential and softness in commercial and institutional we project total organic revenue in the Americas to be down 3% to 4% and 2021.
And the Allegiant International segments markets continue to recover and we expect growth and our electronics and system integration businesses of assignments of boss and and reflects as well as global portable security business.
Currency tailwind has more than offset expected the expected divestiture of our <unk> business and contribute to total growth for.
For the region, we project total growth of 6% to 7% with organic growth of 2% to 3%.
All in for total Legion, we're projecting total revenues to be down.
A half to one 5% and organic revenue declined one 5% to two 5%.
Please go to slide 15.
Our 2021 outlook for adjusted earnings per share is $4 70 to $4 and 85.
As indicated adjusted operating earnings are expected to duty decreased 5% to 8% driven by reduced volume.
As a result of the nonresidential and markets incremental investments and inflationary impacts.
We are not immune to the macro inflationary headwinds, especially from steel and electronic components as well as with freight and transportation for 2021, we expect and EPS headwind of 25% to 30.
Related to direct material input cost and freight inflation alone.
We will continue to drive price and productivity to offset but the net benefit will be less than prior years.
Incremental investments continue to be of priority as we remain focused on accelerating electronics and seamless access growth and support of our vision and strategy. These incremental investments per predominantly rigs and relate to added R&D and engineering capabilities to further develop enhance and accelerate new.
Product development.
The combination of interest and other expense is expected to be of headwind as some of the more formidable items that we experienced in 2020 are non reoccurring.
Our outlook assumes a full adjusted effective tax rate of approximately 12% and an increase from the 11, 2% and 2020. It also assumes outstanding weighted average diluted shares of approximately $91 million.
The outlook. Additionally, <unk> 10 to <unk> 15 per share for restructuring charges during the year.
As a result reported EPS is projected to be $4 55 to $4 75.
We are projecting our available cash flow for 2021 to be and the $400 million to $420 million range.
Please go to slide 16.
We are pleased with our 2020 performance and of paying down.
And we saw expanded.
We saw.
Expanded we expanded our operating margin increased adjustable earnings per share and delivered higher available cash flow and a difficult macro environment and which we were operating.
We have taken actions that will allow leads you to be leaner and more focused on 2021.
As we and the rest of the world navigate and emerge from the pandemic Allegiant will be a stronger company and we are positioned for long term success.
As always our execution and commitment to driving solid results will remain high and <unk>.
Allegiance future is bright and Patrick will now Patrick and I will now take your questions.
And we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily.
And lead to assemble our roster.
The first question today comes from Andrew Oldman of Bank of America. Please go ahead.
Hi, guys good morning.
Can you hear me.
And here you are perfect sorry, if you're a brick and our delivery.
Don't worry about it. So first question I have is just how you think about North America.
Comps because if I look at the revenue.
It's just it's a highly unusual year and that Q1 was super strong last year Q2, very weak and then things sort of flattened out so as I think about comps getting positive into the second half.
Is the issue really first quarter being very strong and the second quarter.
You know you resumed positive growth from the second quarter or there is any sort of specific dynamics and the second quarter debt.
And that you see starting to get so granular, but it was just higher than usual year and I just want to understand you're on a sort of view on second half recovery in 2021.
I'll jump in here and Patrick can clean up.
I would say as we reflected on 19 and 20 actually saw some softening and the broader building markets as we exited the.
The first half of 19.
Again, we're late cycle and we carry the extremely strong backlog that really helped us through Q1, then you had the blow up and again, we use debt strong backlog and the wrap up of projects.
To really put up I think a respectable 22020 for a region as we navigated through that as we go into 'twenty, one and 22 the backlogs are softened.
The new project pipeline is down and we've got to reposition the Patrick can talk more about the comps on the quarter to quarter basis, Yes. So Andrew as you highlighted you got it right Q1 is going to be a difficult comparison, because we had really good growth, particularly in the non residential.
The business, that's going to be a really tough comp for US Q2, obviously becomes much easier, particularly on the residential business, where we had a plant closure and our Mexico facilities, and we're kind of playing catch up when they reopened and the back half of the quarter and.
And then kind of things, we turn I'd say more on a normalized basis and the back half of the year.
So first half and it's going to be say down Q1, Q2, and on and kind of more of a normalized basis, but continued strength and our residential business non residential challenged.
The first half of the year, but getting better as we progress throughout the year, particularly as it relates to discretionary project based business and when people start returning to work relative to the easing of the Covid impact we should start seeing some improvement on that side of the business.
Hopefully that answers what you're looking for and just the follow up I'll follow up question bigger picture question I think the market we've seen.
Some companies going public debt of sort of trying to address.
Building management software and sort of integrate software with hardware.
Some of your larger sort of competitors for the building systems.
Also focus on building management software and if you look at the numbers.
The end market growth opportunity and it just seems very very attractive and I know you guys have thought about it but I was just wondering how do you think about allegiant ability to participate.
And what seems to be a very exciting growth not just and hardware electronic hardware, but also the software market and that goes together with it that seems to be growing quite fast over the next several years. Thank you and I know you guys have thought about it but would love to get more color.
So I think Andrew we have thought very deeply about it as we rolled out our vision of seamless access.
Almost three years ago.
We see the opportunity we began the venture investments, which was amplified by our full acquisition of the of Nomi.
But we.
I think through the cloud and connect great connected products on theirs.
A key role here for a Legion deployed and we continue to invest and position I would also say the success that we're having the assignment and Boston enter flex as an indicator.
The.
The attractiveness and the market, where both software and really cool hardware it comes together.
And we're pointed.
Pointed right at that market and think that we can carve out a very attractive position for the company.
Alright, thank you.
The next question comes from Josh Chan of Baird. Please go ahead.
Hey, good morning, David Patrick and Tom Alright.
And good morning. My first question has to do list of all of the combination of international under 10, and I was just wondering if under his leadership the emphasis.
Any change in strategy or at least for cats.
Areas of focus versus the historical.
Pattern, there and their respective businesses.
So first the.
Creation of Allegiant International we've got great confidence and our general managers.
Thought there one of the key moves with the simplify and reduce the overall cost.
Of running the international segment to us.
And within those portfolios, we think we're well positioned to move ahead, especially as electronics as the driver are gainsboro.
Offerings are being up turret, David in terms of electronics.
And we continued to drive the assignments of Austin, and inter flex business with new products.
Debt and a supply chain debt.
I think that's helped us grow during the pandemic third is global portable security with.
The kryptonite Axa and trademark has performed into.
And nice operating position as demand for bikes and demand for growth as an OEM supplier have been nicely. So we expect tend to advance debt and lean into the electronics growth and potentially for further acquisitions in that space, Josh I would just.
Add to you saw any of the numbers we.
Exited 2020, and really good shape, good organic growth as Dave mentioned on the assignments Boston and reflects global portable security, we would expect that to continue obviously and in 2021 leveraging the good work that was done and the back half of 'twenty and then on the operational margin performance outstanding Q.
For <unk> and our <unk>.
Line has always been and hey, the continuous improve our margin profile associated with our international region, and we would expect that to continue going forward again relative to some of the cost actions. We took early in 2020, you saw that come through and the year and we expect that momentum to continue in 'twenty one.
No that's great. That's good color. Thank you.
And my follow up based on the non res.
The specification business recognizing that debt.
Longer cycle business are you seeing any sort.
Set of uptake in the early stages of the design process.
And then.
The in terms of on verticals might you be seeing any types of movement.
Moving on the improvement there in terms of the early stages.
Tom.
So our specification levels.
<unk> remains strong and we have continued to invest and digital capability and keeping that specify and capabilities strong. So we're in a good position.
On.
We expect to see.
The rebound in the second half.
And there has not been a lot of activity.
On the campuses of the world, especially the campuses of North America and.
And as we normalize we expect some pickup and the second half.
As we look of the overall project load, we see positive traction.
Does institutional products projects reload, but also in the hospital sector.
And we're very nicely positioned that all structure has been severely tested.
And clearly the economics would suggest that.
That will be of continued opportunity when we get to the other side of the pandemic Josh.
Great. Thanks, Thanks for the color and thanks Stefan.
Thank you.
The next question from David Macgregor of Longbow Research. Please go ahead.
Yes, good morning, everyone.
Good morning, Thanks for all of the color on.
On the outlook and as.
As you pointed out the cyclical business organic growth, it's going to be soft this year.
So I guess that raises the question given the strength of your cash flow.
With inorganic growth and so I'm just wondering if you could talk a little bit about how youre thinking about the acquisition growth opportunity and 21 do we see.
And a departure from the pattern of more bolt on transactions do we start leaning into perhaps larger deals as a way to.
For that acquisition growth and.
And I guess how.
Overall, just how confident are you of your ability to deliver growth by acquisitions.
I'd say number one strong message from our board of directors and pulled this lever.
Two.
We've been active and we continue to have a pipeline of assets that we aspire for and.
And sometimes you got to be patient I've always felt that our execution as a company puts pressure on that acquisition pipeline that we aspire for.
And I would say the pandemic.
Will force decisions.
Among some of the those targets that we acquire debt move up into the mid major range.
We certainly have made numerous acquisitions here more of a string of pearls, we tend to like things that look more like Simon to Boston and enter flex Tek.
Technology that.
Can help enable our capabilities and as we think about this world of seamless access going in with accretive.
<unk> targets that will solve new problems for multifamily for college campuses, where we have a unique position on the door that must be connected David I remind myself.
The hardware is hard and we're doing a great job of connecting that and we've got the opportunity to come in there with connected devices that will be accelerated through you know me Tim cloud opportunities that open up on.
Opportunities for growth for our Legion.
Thanks for that.
Just the second question I guess of two part.
What's your tax rate risk around <unk> rate increases if those should come to pass and then secondly are you kind of.
Is there any aspect of your story that you consider to be an infrastructure play such that if we get infrastructure stimulus and infrastructure support legislation.
And there could be.
Growth drivers there that are not currently reflected in your guidance. Thank you.
And so on the tax rate.
Like any company multi industrial company, we would be exposed to.
Two a rate increase legislative change.
We will have to see what happens, but that would put obviously pressure on the rate going up.
And.
So we'll just have to kind of see where that goes right now our guidance assumes no legislative changes.
On the infrastructure spending obviously with any money.
Money kind of kicking back to the state local governments for those type of things I think what benefit of Allegiant down the road I would say in particular.
There is still great our large infrastructure needs K through 12 schools. So I think the average school and the United States of about 40 years of.
And the security needs and certainly.
<unk> always there and.
The state and municipal government, we'll be investing in the as well as rethinking.
Some of the challenges that they face during the pandemic.
We clearly have the ability to control capacity inside of building.
The increase of the security through electronics and we.
We think we're in a great position as a company and infrastructure and.
Investment I think will naturally follow and those those public spaces.
Okay. Thank you very much.
Thank you.
Yes.
The next question comes from Josh for Cohen <unk> of Morgan Stanley. Please go ahead.
Hi, Good morning, guys, Hey, Josh.
And just a couple of questions here I guess first on the the residential side.
I know theres, some inventory sales thats still going on clearly strong growth and the quarter.
Where do we sit on that and I guess.
When do you expect to get back to normal Dave I think you said it was going on one through mid year.
And I know Patrick reminded us earlier that theres going to be particularly easy comps on <unk>. So.
Anything we should keep in mind on channel fill or anything else.
Kind of add some lumpiness to the the resi gross profile here.
Think the mid year target to normalized backlog of and still law.
And the aspiration, we saw our backlog of shrink a little bit in December but we've got work to do in terms of replenishing that channel. We sent a very strong message to our building partners that are non or non standard product lead times have been reduced dramatically. We think that will help us grow versus the cash.
Competition, and we've got new electronic offerings coming out and the second half of the year to match, our industry, leading slag and.
Code products, so feel good about it but normalization Josh.
Certainly by mid summer borrowing any blow ups and.
I'd say, there's pressure on all manufacturers.
Especially around the chip thing.
Our supply chain and navigating that well.
I don't see it and giving material materially worse for the.
The pandemic.
Still is having the effect on global supply chains.
And again our strength.
Showing pretty broadly there, but mid year of will be will be out of this and normalized.
Okay, Perfect and then just just follow up here.
On the decremental is have a lot of things going on between inflation and mix.
You mentioned freight.
And as well.
And maybe some way to kind of gives us and sensitivity.
They look pretty heady, especially including the.
And the investment, but we're also talking about small decline then.
The lower mix of business growing and a higher mix of business declining.
If non lazy does show some upside through the year, what sort of incremental should we put on that growth is it kind of the that 40% to 50% debt, we've kind of grown accustomed to since that number has already fully loaded for investments or is there something else working here again.
And small numbers on the top line in terms of movement kind of distort the the margin line.
So I would characterize it this way and hopefully this is helpful. As you think about the margin profile for for next year or for 'twenty, one as it relates to Americas.
So a couple of things and you touched on one specific relative to our investments that are incremental associated with R&D and engineering to really push for the electronics enhance our product offering going forward.
Most of that incremental spend is attached to Americas.
And so that alone will put pressure on the margin profile associated with the Americas.
In addition to that you have the incremental inflation that we highlighted 25% to 30 pressure on material input costs.
We will do our best to offset that with pricing.
But if we break even on just the tyranny of the math would suggest for GAAP margin pressure and attached to that and then you layer on top of that the mix component E residential growing faster than non residential and nonresidential business profile, having a <unk>.
Higher margin profile of which suggests some additional mix there so americas margins will be under pressure and 'twenty one associated with those three things we will continue to drive productivity.
And and those type of things to help mitigate that but.
There's going to be margin pressure.
And your second question relative to any growth and the increments associated non residential yes.
There is going to be some improvement if we can experienced growth and the back half of the year and you know how we have leveraged.
Historically I would expect that to continue and let me make one more point the.
And the margin profile for 'twenty, one being under pressure I view as temporary okay. This is a market dynamic its not a structural issue associated with the Legion when business comes back and it will margin profiles will get better. Okay. We will continue to grow margin and.
And we're not in a situation, where we maximize our margin going forward I would also add.
And we certainly got cost out in 'twenty and consciously cap my foot on the accelerator on our specifying and revenue generating the resources.
We've taken care of these teams through the downturn and I expect us to get more than our fair share on the upside.
Perfect. Thanks for the color David Patrick.
The next question comes from Chris Snyder with UBS. Please go ahead.
Good morning. Thank you for the question good morning so.
So just following up on the 2021 of America's seasonality is it fair to think that the first half of the year could be up year on year just given the.
The Q2 comp and then typically you get some level of positive seasonality into the quarter.
Or is that just going to be overwhelmed by the cyclical pressure and if.
The first half of the year is up year on year, the guidance would suggest pretty material declines in the back half. So hoping you could provide a little bit of color on that.
Yes, so it is.
So yes to answer your question succinctly for staff can be up relative to 2020, why it's because of Q2.
Kind of given the easy comps there and as Dave mentioned earlier, we're still.
Working off the backlog if you will associated with the residential business the residential business and Q2 2020 was.
Severely depressed because of our plant closures and as we progressed throughout 2020 and the markets Pos continued to accelerate.
We're having a hard time catching up with demand that's going to be worked off if you will and the first half and.
And so the residential business and of itself will be up significant way non red the tough comp in Q1, but it kind of normalizes and the back half of the year. So.
I appreciate all of that color and then just kind of following up so for the Americas the guidance of down 300 of 400 bps year on year.
So just pretty material duration for Q4 of which was down 70 bps organically and the Americas is this the result of deeper declines for non res and from the low double digit level. We saw on Q4 or is it just that residential is normalizing from I think mid 20% growth realized in Q4 of the ladder. So.
<unk>.
Okay.
On the double stack on 25% growth year over year much harder comp if you will keep in mind Q4, working down backlog and.
And for filling stock orders getting inventory into the channel.
And that our assumption is not going to repeat itself for 'twenty, one and consequently.
A much difficult comp non Reds.
I would expect the rate of decline to improve as we progress during the course of 'twenty, one because of the discretionary business should begin to recover and the back half.
Very helpful. Thank you.
The next question is from Ryan Merkel William Blair. Please go ahead.
Hey, everyone.
First off I had a question on mix and price cost so what the 'twenty one guidance assume for the mix headwind and then just clarify did you say that you expect price to cover costs and 2021.
So on the price cost dynamic, we would expect price to offset.
The material.
Cost and.
And outbound freight, but we're going to be under pressure to mitigate other inflationary impacts I E packaging and those type of things that are also escalating and some of the the.
And the carryover of cost that kind of boomerang back and in 'twenty, one relative to 'twenty.
But as it relates to the price direct material and expect to be neutral there.
And I'm sorry of what was your other question.
Mixed headwind what are you assuming in guidance for mix headwind.
Yes, so we don't give specific.
Guidance on that but theres going to be headwind again, the non res business being our most profitable segment.
That being down residential up will create kind of the mixed headwind that is a component of the margin degradation and as it relates to Americas for 'twenty one.
Alright fair enough and then secondly, just high level, David If you think about for 'twenty. One what is the biggest variable is it vaccine timing or is it how customers respond to building investments and a post COVID-19 world.
I think.
We need to continue to accelerate due of the vaccine.
Delivery.
The the faster, we can get campuses to normalize and hospitals to normalize that pent up demand of discretionary projects Bose back I think it puts confidence and our channel, which is restocking and <unk>.
People will get back thinking about the management of their facilities long term so.
On.
Yes.
We can see that.
And actually feel better about state and local budgets than I did a few months ago and the.
You have done a lot of looking into the the drivers of our business coming out of the last downturn the financial crisis.
<unk>.
Overall macro economies are in better shape, the commercial will go through.
Certainly of churn what do we do with the retail space not necessarily our sweet spot, but there'll be opportunities as those spaces are reconfigured.
Thanks for the color.
Thank you.
The next question is from Julian Mitchell with Barclays. Please go ahead.
Thank you for joining this is Trish Gorman.
Thanks Julien.
And so maybe the first question on the <unk> sales can you guys talk a little bit more about the rationale behind this business.
Function of financial profile was it a function of the end market exposure of product line and then maybe any financial and tax do you expect from that near term.
So I would say one <unk>.
Look at the the.
And the market for oil and gas and things are going to drive that part of the world.
Clearly a question Mark and soft.
I'd say too where did we want to spend our human capital.
Clearly there was pressure and those end markets and.
And our ability to bring together hardware and door solutions.
Didn't feel it was the optimal time and and during the downturn as part of our strategic review.
That came up on the portfolio and we chose to exit so that's how I would describe that situation.
Got it that makes sense and.
And then maybe just one on the free cash flow guide and kind of high single digits for 2021 can you talk about the moving pieces there and how we should think about Capex and then maybe if I keep capital for the year.
Yes, so down and it's really down commensurate with the earnings guide and.
Capex is up a little bit year over year, we can kind of hover around this 2% of revenue.
Working capital and don't see any significant.
Movement, there I mean, we will be under a little pressure, we did benefit from the cares Act.
And there'll be some payments coming and some deferrals we had in 'twenty.
So net net I still think pretty good conversion and we will continue to drive that and maximize the to the extent we can.
Got it thanks guys. Thank.
Thank you.
The next question is from Jeff Kessler of Imperial capital. Please go ahead.
Thank you and I.
I want to give a quick so luis who I know from a as ADT days.
Hello, Louisa and welcome aboard.
And.
PBT of exposure as well and you also spent some time and UTC with will now for yes, yes, UTC as well right.
The first question is.
As of specific too.
Can you can you go back over and give some of the divergences between.
The major divergence between GAAP and non-GAAP reporting for that Youre expecting for 2021.
Yes.
Yes, it's predominantly restructuring.
So it's a continuation of some of the programs we announced when you just can't book the charge until it's actually occurred and so we have some continuation of those type of thanks, and expect some continuation of perhaps one or two.
New smaller type of programs going forward.
Alright, and then I wanted to get back to that question.
It's called the general question of.
Of the.
Becoming more seamless into <unk>.
Along with all of this.
Some of the cost of building software.
In my travels and obviously and some of the presentation.
We've been talking a lot and this is internationally. This is not just here in the U S.
You can't you can't help but run into now hundreds of companies and some small some tiny but some real.
Almost mid size now that are stressing that.
And while hardware is hardware is the mainstay and software as a tool that it uses this may reverse and the course of the next year.
Let's call it five to eight years and that kind of say two to three five to eight years, probably and which.
The handle and which the analytics and <unk>.
Visitor management and.
And the entire.
Call it the entire and.
Tire realm.
Of the software being used is going to be what perhaps what drives value and what drives margin.
For the.
And when the end user, particularly when they may start making discretionary.
The decisions.
Can you just elaborate on that I know you've talked about the <unk>.
In the App.
Acquisition.
And that's one step without obviously naming names what are the types of one of the types of Adjacencies, where the types of reaches youre looking for here.
So I'd say number one.
I look to companies Rockwell automation.
For Schneider, where I spent apart of clear opportunity to take our legacy positions and thrust of them into the new world of connectivity cloud management to solve customer needs. So I think thats important there clearly will be.
People coming out of it from different angles and levels. So I think.
Our aspiration to be the partner of choice to have open platforms important here with that said I think theres new problems to be solved.
And the access and security.
Our security.
Arena and the.
I think our unique position on the door along with partners investment and further development. We can go in and solve new problems.
Why does the building have to be opened 16 hours a day why don't allow that access through edge device or think about how people move through complex buildings, and then I know you have Jeff.
And our unique position with connectivity.
Apis and the SDK that connect and the tune cloud opportunities.
And that we can get more than our share of the growth and these markets.
And this is and yours and you're staging of the saying. This is this is worldwide.
Absolutely I think.
<unk> look at our success with Simons for us and <unk> versus.
And some pretty strong players in that space.
The incredible for Allegiant and those trends are going to continue.
Alright, great.
Thank you very much I appreciate it alright, alright, good to hear you.
Concludes our question and answer session I would like to turn the conference back over to Tom Martineau for any closing remarks.
Thank you and we'd like to thank everyone for participating in today's call have the safe day.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.