Q2 2021 Allegion PLC Earnings Call
Good morning, and welcome to the Allegiant second quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2.
Please ask 1 question and 1 follow up and after that you're welcome to enter the queue.
Please note. This event is being recorded I would now like to turn the conference over to Tom Martineau. Please go ahead.
Thank you Andrew.
Good morning, welcome and thank you for joining us for Allegiant second quarter 'twenty 'twenty 1 earnings call.
With me today are David Petraeus, Chairman, President and Chief Executive Officer, and Patrick Shannon Senior Vice President and Chief Financial Officer of Allegiant.
Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to 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 2 and 3.
Statements made on 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.
You can 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 in the financial tables of our press release for further details day.
Patrick will now discuss our second quarter 2021 results, which will be followed by a Q&A session.
Please for the Q&A, we would like to ask each caller to limit themselves to 1 question and 1 short follow up and then reenter the queue, we would like to give everyone an opportunity given the time allotted please.
Please go to slide 4 and I'll turn the call over to Dave.
Thanks, Tom.
Morning, and thank you for joining us today.
Allegiant delivered a very strong quarter and I would like to thank the employees on leasing for their contributions on effort. Our employees are the greatest strength I believe their dedication to safety and customer excellence is outstanding.
Our teams have moved quickly to adapt to opportunities in a dynamic market.
Before I jump into the financials I want to give you a high level update on recovery trends in the business overall.
The pandemic has changed our world and created volatility throughout the last 18 months.
Both in terms of the economic contraction last year and the current economic rebound we are seeing.
Starting in Q1, and accelerating in Q2 demand surge faster and stronger than expected.
This is a positive sign and provides confidence in this sustainable economic recovery.
In fact, Allegiant has already returning to pre pandemic demand levels.
At the same time, the robust demand is constraining the global supply chain's ability to fully meet the poll for labor and materials, especially electronic components.
Allegiant has built a record nonresidential backlog in 2021, which is a healthy sign of strong demand and we believe allegiant will be well positioned for the marine or of this year and for 2022.
And another positive sign of recovery are Americans electronics grew more than 20% in the second quarter.
There was strong demand for electronic resident interim products and in the nonresidential retrofit repair and small project opportunities.
Allegiant is not immune to inflation and the supply chain constraints impacting the industrial markets.
Allegiant navigated well during Q2, but these industry wide constraints will persist for the remainder of the year and put pressure on margins for the short term.
We will leverage the strength of our supply chain management capabilities as well as price to mitigate these impacts.
During the pandemic, we were also able to restructure the business and make it leaner, while keeping our front facing and strategic investments.
Allegiant has stronger exiting the pandemic than when we entered it.
Now, let's turn to the second quarter performance for more details. Please go to slide 5.
Yes.
I am pleased with the Companys second quarter results, we delivered strong performance in all areas.
Revenue for the second quarter was $746.9 million, an increase of 26, 7% or 23, 8% organically.
The organic revenue increase was driven by the favorable comparable created by last year's shutdowns.
Solid price realization from the price increase announced earlier this year and the increased market demand, which returned to pre pandemic levels.
Currency tailwind provided a boost to total revenue and more than offset the impact of divestitures.
Adjusted operating margin increased by 70 basis points in the second quarter.
On the restructuring and cost management actions taken during 2020.
Along with volume leverage have offset the accelerated inflation.
We are also seeing cost creep back from reductions experienced last year during the pandemic.
Mix is also a margin headwind due to our strong residential growth.
Adjusted earnings per share of $1.32 increased 40.
For 43.
5% versus the prior year.
The increase was driven largely by the expanded operating income with some benefits also coming from a favorable tax rate and share count.
Year to date available cash flow came in at $249.6 million, an increase of $146 million versus the prior year. The increased cash flow was driven by higher net earnings along with improvements in net working capital and reduced capital expenditures.
Please go to slide 6.
Last quarter I shared with you allegiance build borrow by approach to accelerating seamless access.
Today I want to briefly focus on the borrow innovation engine and our strategic pillar to be the partner of choice.
Allegiant participates in recognize secure industry leading platforms.
We expand our reach through strategic relationships with recognized experts in tech innovators.
And we leverage open standards.
By doing this we not only set up a lesion as the partner of choice and a continued leader in the Iot marketplace.
We also ensure allegiant has its choice of strategic partners as well.
Allegiant has a growing breadth of strategic partners.
<unk> software and product integrators, our venture portfolio and technology Alliance an industry consortium.
We are executing on our partnership strategic pillar and here are a few recent examples.
Allegiant was showcased at apples worldwide developer conference, we are expanding our innovation with Apple in both the residential and commercial marketplaces.
And the smart home space slag will soon be growing it's connected portfolio with a new device that allows people to easily and securely unlock their doors, which just tap using home keys for for the iPhone for the Apple watch at.
At the same time, we are extending our work with students in.
In the Apple wallet to offer more access control options to universities and colleges enterprises and their students plus employees.
Our leisure renewed our engagement with the matter where group a magnetek consortium.
Through this partnership we're working to establish a secure connectivity standard for the future of the smart home that will ultimately allow a more seamless connections between more Iot devices.
We announced the lesion venture investments in both men house and maps mapped to startups driving new value in a post COVID-19 world to revenue revolutionary experiences and technology.
And we completed a brand new cloud to cloud integration with open per leveraging on our engage technology and slug, Andy in the LTE mobile enabled smart alerts.
Through these partnerships we are investing in promising innovation.
We are leveraging developer friendly API and open standards.
Allegiant is building strategic commercial and technical relationships, we are collaborating with recognize experts who also understanding <unk>, how allegiant creates value by securing people and assets with seamless access wherever they reside work and for us.
Patrick will now take you through the financial results and I'll be back to discuss our revised 'twenty, 1 outlook and to wrap up.
Thanks, Dave and good morning, everyone. Thank you for joining today's call. Please go to slide number 7.
This slide reflects our earnings per share reconciliation for the second quarter.
For the second quarter of 2020 reported earnings per share was <unk> 80.
Adjusting <unk> <unk> for charges related to restructuring expenses for 2020 adjusted earnings per share was <unk> 92.
Operational.
Results increased earnings per share by 36, driven by volume leverage along with continued benefits from cost control measures and restructuring actions taken in 2020.
Favorable price and currency also contributed to the increase.
The combination of these items offset headwinds from inflation.
We expect variable costs related to reduced volume from the COVID-19, pandemic and unfavorable mix.
Favorable tax rate drove a <unk> increase in earnings per share <unk>.
Divestitures had a positive <unk> <unk> per share impact and offset the impact of other income and interest expense.
Investment spend increased during the quarter and reduced earnings per share by 5.
As a reminder, the incremental investment spend is predominantly related to R&D technology and marketing investments to accelerate future growth.
This results in adjusted second quarter 2021 earnings per share of $1.32, an increase of 40 or 43, 5% compared to the prior year.
Lastly, we had a <unk> <unk> per share reduction related to restructuring charges and acquisition and integration expenses after giving effect to these items you arrive at the second quarter 2021 reported earnings per share of $1.31.
Please go to slide number 8.
This slide depicts the components of our revenue performance for the second quarter I'll focus on the total lesion results and cover the regions on their respective slides.
As indicated we experienced organic revenue growth of 23, 8% in the second quarter as higher demand and a favorable comparable drove significant volume increases versus the prior year.
We also experienced solid price performance coming in over 2%, which is up sequentially.
Currency continued to be a tailwind to total growth and more than offset the impact of divestitures in total reported revenue came in at 26, 7% growth.
Please go to slide number 9.
Second quarter revenues for the Legion Americas segment were $549.4 million up 23, 7% on a reported basis and 22, 9% organically.
This strong growth reflects the impact of Covid related shutdowns last year. It is also the result of accelerated market demand.
The region continued to deliver good price realization on.
On volume Americas, non residential experienced high single digit growth driven by retrofit repair and small projects.
<unk> residential was outstanding again experiencing growth of more than 70%.
The significant growth from the prior year was primarily due to facility closures in 2020.
However, we continue to see strength in retail point of sale and new home construction.
Electronics revenue was up high 20%, we experienced electronics growth in both the nonresidential and residential businesses electronics and Touchless solutions will continue to be a long term growth drivers.
The accelerated demand coupled with labor and parts shortages, especially in electronic components is resulting in elevated backlogs as we entered the third quarter, particularly in non residential the timing of when we see the revenue could shift as the industry works through the supply chain constraints.
Americas adjusted operating income of $155 million increased 21, 3% versus the prior year period, and adjusted operating margin for the quarter was down 50 basis points. The decrease was driven by headwinds related to inflation bounce back costs and unfavorable mix more than <unk>.
Offsetting the volume leverage.
While the price productivity inflation dynamic was slightly positive on a dollar basis. It did have a 60 basis point dilutive impact on adjusted margins as did the incremental investment spend.
Please go to slide number 10.
Second quarter revenues for the Allegiant International segment were $197.5 million up 36% and up 26, 6% on an organic basis.
The organic growth was driven predominantly by strength across all European countries and businesses as markets continue to rebound.
Part of the year over year growth was due to the comparative impact of Covid related shutdowns in the prior year.
Favorable currency impacts also contributed to total revenue growth and were slightly offset by divestiture impacts.
International adjusted operating income of $18.5 million increased more than $18 million versus the prior year period.
Adjusted operating margin for the quarter increased by 920 basis points. The margin increase was driven primarily by solid volume leverage.
<unk> from lower operating costs for the restructuring and cost control actions taken during 2020.
As well as favorable currency impacts.
All of these offset the higher inflation that bounce back cost, which had a 150 basis point impact.
And incremental investments, which were a 20 basis point headwind.
Please go to slide number 11.
Year to date available cash flow for the second quarter 2021 came in at $249.6 million, which is an increase of $146 million compared to the prior year period.
The increase was driven by higher earnings improvements in net working capital and reduced capital expenditures, our cash flow generation continues to be a strong asset for the company.
Looking at the chart for the right. It shows working capital as a percent of revenues decreased based on a 4 quarter average this was driven by improved asset turnover and both receivables and inventory.
The business continues to generate strong cash flow and is well positioned to deliver $500 million in available cash flow for the year on.
I'll now hand, it back over to day for an update for our full year 2021 outlook.
Thank you Patrick.
Please go to slide number 12.
At the end of Q2, leading indicators continue to be positive.
I am increasingly optimistic on the economic recovery.
The Americas residential business continues to be hot.
On the nonresidential side of America's demand accelerated for retrofit repair on small projects and as recovery in new construction.
However, labor and <unk> are proving to be challenging and we are building a strong backlog that will benefit us in the future.
With these parameters in place we are raising our outlook for total revenue in the Americas to be up for 5% to 5% and organic revenue to be up 4% for 5% in 2021.
And the Allegiant International segments markets continue to recover led by our dramatic and global portable security businesses.
Currency tailwind has more than offset the divestiture of our <unk> door business and contribute to total growth.
For that reason, we're raising our outlook for total revenue growth to 13, 5 to 14, 5% with organic growth of 8.5% to 95%.
All in for total Allegiant, we are now projecting total revenue to be up 7% to 7.5% and organic revenue to increase to 5.5% to 6%.
We are also raising the earnings we are also raising our earnings per share outlook with reported EPS at a range of $5.15.
To $5.30, and adjusted EPS to be between $5.25, and $5.40.
This guide incorporates price pricing actions to mitigate the inspected do you expect the impact on direct material inflation.
We anticipate these inflationary challenges will persist for the balance of the year and we will continue to monitor and adapt to changing market conditions.
Our outlook for available cash flow is also being raised and is now projected to be $490 million to $510 million.
The outlook assumes investment spend of approximately <unk> 20 per share the full adjusted effective tax rate is expected to be approximately 12%.
The outlook for outstanding diluted shares continues to be approximately 91 million shares.
Please go to slide 13.
Allegiant continued its great start in 2021.
We manage the business extremely well and leading indicators on specific market indices related to our business continued to be positive.
Looking forward, we are prepared to navigate the pressures related to accelerated inflation.
And labor and parts shortages.
We are encouraged by the positive resiliency of our supply chain and we will continue to manage these challenges for the balance of the year.
Thank you now Patrick and I will be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
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Again, please ask 1 question and 1 brief follow up.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from <unk>.
Josh <unk> with Morgan Stanley. Please go ahead.
Hi, Good morning, guys morning, Josh.
So I guess first question on the margin front.
Obviously, there is kind of on the tyranny of the math on on price costs, even though you're positive on a dollar basis and I would imagine you know a little bit on a mix headwind on the resi side as well, but if you just kind of take a giant step back in.
Some of the mechanical items aside do you feel like getting price or managing inflation in logistics and all the other kind of inflationary headwinds labor.
Is any different.
Then it is has been normally or is that it has gotten a little bit more challenging sort of hard to parse through some of the different <unk>.
Moving pieces there.
Yes, I would characterize it this way and Youre right Theres, a lot of tyranny and the math.
But what we've seen is an acceleration of inflation pretty.
Predominantly on.
Commodity cost material components freight packaging et cetera.
It's continued to be a headwind.
As you know, we're pretty aggressive moving on price.
We're taking similar actions in the back half of this year.
We went ahead and announced a price increase that will take effect at the beginning of Q4, so there's going to be some margin pressure I would say given the acceleration on inflation, particularly in Q3.
I expect price to offset material inflation. The issue is really on some of the other components as it relates to packaging freight those types of things will drive productivity to help mitigate those types of things like we have previously, but it's going to be a challenge there will be some margin per.
Russia and the back half of the year, but I feel very confident relative to margin improvement as we go into 2022 predominantly because of the carryover of price and we will continue to take pricing actions next year, we will have an improved mix profile.
As it relates to the non residential business growing faster and accelerating more so than the residential business and we're not going to have these bounce back cost, which were an issue for us in Q2, and we'll kind of linger. During Q3 Q4. This year. So I think.
To your question Jos will continue to manage the business well.
Get through some of these supply chain challenges.
That in of itself will also put a little bit of margin pressure because of some of the inefficiencies at the factories, but we'll manage through it margins sequentially will improve in the second half relative to the first half still down year over year, but then in 2020 expect margin improvement to accelerate.
Got it that's helpful. And then I guess, just a follow up on the.
The comment David you made on on record backlog.
Maybe if you can unpack that a little because I would imagine some of that has raised the where you probably don't really want a lot of backlog there that's more indicative of.
Lead times and supply chain stuff than it is necessarily like a long cycle business. So can you maybe break down the components of that on how much is non <unk> is the market getting better and reopening and retrofit versus we're just carrying more backlog in rising because the whole supply chain lengthened. Thanks.
I wanted to be clear the backlog issue is not a residential problem.
Our residential backlog.
Slightly above what we normally run.
The backlog creation has been on.
The commercial side of the business.
The rapid build has really happened over the last 60 to 90 days.
The commercial backlog predominantly on the Americas business is double.
Normal.
On.
It was really driven by the acceleration of order demand we started seeing in April.
I'll give you some backdrop here you go back December January February March then we would have talked about this in the Q1 call.
Commercial institutional demand in the Americas business was down low double digits and it's like someone turned on a light.
It's.
Extremely pleased with the demand acceleration, we're doing a good job I think processing that through but there are supply constraints.
This resulted in a record backlog that I think will continue to see.
Theres been analyst out there that have said, we've done a better job of.
Managing this and I believe that to be true our supply chain is strong and we're going to benefit from that trend.
I would also share 1 other comment is.
The macroeconomic forecast on what I'd say.
The commercial.
Break fix was not particularly clear in fact, I've got economic reports that would suggest that the repair replacement would've been soft even today.
That switch came back on we've gained that opportunity.
So why couldn't we have seen it when you shut off the access to college campuses hospitals and commercial buildings for 400 days, you get pent up demand and Thats what were seen reacting positively in the marketplace.
Got it very helpful. Thanks, guys. Thank you.
The next question comes from Chris Snyder with UBS. Please go ahead.
Alright, thank you.
Hey, good morning, guys.
Thank you and I can I want to follow up on on the margin commentary, but maybe from a bit of a different angle.
So guidance implies a pretty material ramp.
In margins into the back half of 2021 my back of the envelope math puts.
On the low 21% range versus low to mid <unk> 19 in the first half.
Could you just kind of help unpack the drivers of this step higher.
This guidance does not implying much volume leverage into the back half.
This is more price catching up the cost rate normalizing mix normalizing any color on that step higher into the back half will be appreciate it yeah. So that trend is not uncharacteristic from a seasonality perspective.
Margins.
If you kind of look at it on Hooper historical time period stronger.
Back half of the year. So that's not unusual I think as we characterized.
Sequentially margins are expected to increase its the year over year comparisons that we would expect some.
Degradation, just kind of given some of the things we outlined relative to inflation.
Appreciate that and then I guess following up also on the record backlogs it sounds like revenue on some level was constrained.
Just by the supply chain issues that everyone is feeling.
And it also sounds like the back half for the full year growth guidance is also reflecting uncertainty as to when these backlogs will be released whether it's the back half of 'twenty, 1 or into 'twenty 2.
Could you provide any color on maybe how much or how significant revenues where may be constrained in the quarter, just because of those supply chain issues and then how we should you know what level of maybe supply chain conservatism is baked into the full year organic growth guidance.
So we when we look at the.
Demand relative to what we could ship I mean, there is going to be a disconnect. There just kind of given the supply chain constraints and I think youre aware, Chris you know.
We normally carry a light backlog highly specified engineered product quick turnover in our manufacturing facilities for the customer.
That has been elevated kind of given some of the constraints, but to answer your question specifically.
It could be 115%.
On a total revenue a legion.
That's constrained that we'll get the revenue. So it's not a question. Yes. It's just a question of timing. So we look at it as a timing kind of a transitory issue.
And if it is the supply chain.
Strength persists, we will get that in 2022, which means.
Revenue in 'twenty, 2 would be accelerated more so than the overall market demand.
I would thank you for that I would add a couple of other comments.
Clearly supply constraints and the rapid acceleration of demand that we saw help build backlog.
I would say.
We will over this entire pandemic in downturn the resiliency.
<unk> supply chain I believe was stronger than the competition.
And we're going to come out of this better.
So I feel good about that I think the other thing you've got to think about we're not alone in this in the retrofit community and new construction.
The entire project.
Is affected by this in.
We just got in navigating that environment.
I appreciate that thank you.
The next question comes from Brian Ratzenberger of Imperial capital. Please go ahead.
Yes, thank you very much.
I have 2 questions.
Can you talk about the commercial office performance in the quarter, how much was this sector down year over year, how much did commercial office represent in terms of revenue in the quarter I'm just trying to get a data point, where you are.
Yes, so we don't really provide revenue by vertical market.
But I would just say in terms of market demand.
Order intake activity, what we're seeing specification et cetera, commercial office space is lagging institutional segment.
And.
A lot of that is just not kind of keeping pace with what we're seeing in terms of the rebound in repair retrofit and new construction.
So hopefully that provides you with ample color on maybe give you a little bit more.
Again, we don't split out that.
Commercial segment as a standalone, but the strength that we saw in the first half was really driven by strong wholesale.
A small project.
Retrofit business.
Where that business soon.
I don't have precise data on but there is the snapback of that volume would say.
Even in the commercial office space.
There is there is.
Investment going in there to repurpose to reposition.
I like the opportunity for Allegiant as we move through there from an electronic standpoint.
You go back 6 months ago I was concerned about the return to office.
We're going to have a lot of vacancies out there.
Capital will go in and redefine that space and it's going to be good for our industry.
Great well. Thank you. The second question I have just coming off of ISC West.
Meeting with a lot of companies private and public we see a lot of competition coming on access control with a total solution white and they are 1 of the trends I am seeing is white labeling of hardware.
At a discount and integrating software. So it's all about delivering a total solution. The hardware may be named doesn't mean as much and that's what I'm hearing at least I assume some of these companies that are investing large sums of money and that's total access control solution.
That's what we're seeing can you address what youre seeing in the industry and how you're addressing this.
On the threat.
Okay.
Today's presentation, we tried to emphasize our build borrow Bob <unk>.
Infosys and our partnerships with.
On the Mega Techs.
I certainly see this.
Private labeling white labeling phenomena.
I would just suggest the core part of our business has a level of connect complexity and connectivity that.
Yes.
I'll bet on.
Over the long haul.
When you get into a complex business or a complex.
Event space like you were at at ISC West.
It's easy to look at this and say, okay. I can have a small offering of white label products, but when you start adding code requirements Master key systems that connectivity with an apple or Google.
I will now.
On the game gets a lot tougher.
Great well. Thank you very much for addressing those I really appreciate it I'll get back to welcome.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, Good morning, just wanted to circle.
Circle back to the Americas.
Revenue guide for the year.
Youre embedding I think may be very low single digit growth year on year in the second half in the Americas, just trying to understand what's embedded in that for residential losses.
Nonresidential.
And what sort of pace of slowdown of residential growth.
Yeah, So julien.
Just as a reminder.
Last year, as we were coming out of the pandemic.
And demand started to surge.
For replacement demand on residential products backlog accelerated channel inventories were depleted.
And so a lot of the revenue growth last year was channel sales.
Big box retail e-commerce et cetera.
So youre getting a tough comp, particularly in the second half as it relates to the residential business and so thats going to impact how the comparability, particularly when youre looking at overall Legion Americas business as we indicated nonresidential business starting to.
So good demand.
Little bit constrained relative to the supply chain issues, but we will start seeing some growth kind of year over year. So.
It's really that the guy you have to take into account last year had a higher growth component associated with channel fill related to the residential business.
Sure, but I guess I'm trying to understand are you assuming that residential revenues are down year on year in the second half for.
No there is still increasing.
Okay got it that's what I wanted to check. Thank you and then on the margin front.
We're looking at yes, we keep attacking it different ways, but let's look at it sort of second half margin year on year, because I think that makes more sense in terms of the information you provide in the 10-Q and so on so it looks like your second half operating margins firm wide, maybe down something like 100.200.
EPS year on year in the second half.
Is the way to think about that it's about 200 bps headwind from inflation net of price productivity and then maybe another 100 bps headwind from investment spend but there's roughly the right orders of magnitude yes.
I would just a little bit more color on the price productivity.
Activity inflation dynamic.
Closes in that guide would include some of the effect of these bounce back costs that we have.
Been highlighting.
It was much more pronounced in Q2, but you've got kind of some of those costs that continue in Q3 Q4. So that's some of the pressure as well year over year.
Perfect. Thank you.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Hi, This is Joe Nolan on for David Macgregor.
Good morning, Joe.
Good morning, I was just wondering could you talk about field inventory levels in both the residential and commercial business.
And then just how you expect the timing of the channel restock play out.
On the residential side.
Big box, our <unk> probe partners I think.
On the restocking of that supply chain is essentially.
Essentially complete.
There is pressure on any type of electronics related product again, which we're navigating well but.
That will be a problem that move through in the next 4 quarters.
On the commercial wholesale side.
As I've talked about.
The bounce back in demand I think part of that as wholesalers seeing the confidence in the marketplace and restocking, but I think much of it's going straight through.
Because of the availability.
Our really green light on small projects that were delayed.
Delayed over a continued period so.
I would suggest that the restocking of the wholesale and contract supply chain will be.
<unk> over the next 2 to 3 quarters.
Okay. Thanks for that.
And then also just on your education business, given a year ago pull forward and the timing of seasonal maintenance into <unk> 'twenty was that a growth headwind that you experienced in Q2.
21 this year.
That becomes a tailwind here on <unk>.
State Your question again, you broke up.
Oh, sorry, just on the advertising business, given a year ago pull forward and the timing of seasonal maintenance into <unk> 'twenty.
Was that a growth headwind this year into 'twenty, 1 and does that become a tailwind here in the third quarter.
I would look at the.
Opportunity in K through 12.
As part of the bounce back.
But more a positive as we move into 'twenty, 2 and 'twenty 3.
America is going to continue to invest in its K through 12 infrastructure firm a variety of reasons age increased security.
More automation in our region will benefit from them.
It's clearly a positive.
Okay. Thanks.
The next question comes from Andrew <unk> with Bank of America.
Please go ahead.
Hey, guys. Good morning, good morning, Andrew.
For a while I thought I would have to use the word on pack and my question I was wondering if there was a memo that 1 out.
On Pac Man, that's correct yes.
Yeah, I thought you were going to remind me that you had it right on this bounce back Oh.
Oh, well I'll take that too.
I guess the question is on pricing historically, you know your pricing has been fairly close to that of your large competitor in North America on this.
This quarter they seem to be ahead of you and I was just wondering is there a difference.
In our approach to channel between the 2 of you or its just a matter of timing.
Timing as I said, because the industry seems to sort of move in lockstep.
I wouldn't say, they're ahead of US you know my my words.
Our leaders worldwide is use all tools required.
2.
Address the extraordinary inflationary forces.
We were out with a normal.
Q1 price increase we've added surcharges on certain products and we've announced.
End of Q3 price increase.
2 price increases on a year and the other tools that we're using to mitigate price.
I think the industry has been disciplined.
Our stewardship of making sure that we respond to the incredibly incredible inflationary forces will work for us.
Gotcha. Thank you.
On the second question as you and I I think I asked this question a couple of times, but as you face a supply chain constraints are you rethinking.
Either your approach to your internal supply chain I E.
More automation or I use sort of rethinking sort.
We're seeing you know any long term impact from sort of current disruption in the channel.
You know once we sort of get rid of the bullwhip effect things go back to normal salary fast.
I think.
We can supply chain is always a strategic item as we think about positioning.
The business 1 number 2 I'd point to our Decrementals during the downturn, our decrementals on the topline basis were softer than any of the competition meaning.
As the markets collapsed, our revenues were stronger on those decrementals and I would point to supply too.
Third as I think.
Clearly a lot of work going on I'd say, managing the complexity of what we do.
Uh huh.
Everything from boards to Grommets to casting.
Part of what <unk> franchise is built on is managing this complexity.
Our supply chain does an important part of you know it plays a critical part of that but it's.
Rethinking those partnerships, making sure you know that.
We've got the availability of.
On any type of part to be able to move it.
We've made some pretty significant industrial investments in automation and those will continue I think as we go through this labor availability.
He is going to be a.
In scarcity on a worldwide basis, and so automation investment.
Investing with.
Strong suppliers and producing in region are key drivers for Allegiant Andrew.
Okay. Thank you so much on I appreciate compliments I don't get those often thank you.
I'm going to I shouldn't read that twice I did read it twice.
The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, guys and no need to fish for compliments on this 1 just a quick quick a quick question here on the margins.
On the if they take a look at the Americas margins in your commentary around pricing for for Q.
When we think about the sequential change in margins in the Americas is there kind of like embedded in your expectation that that sequentially margins potentially step down in <unk> because of these inflationary pressures and then back up in <unk>, just trying to understand the cadence a little bit better.
Yes, So you got it right Q3 margin decrease year over year much more pronounced.
And then Q for Q4, because of the price increase and some further actions still down.
But but improving non.
As far down as Keith.
Okay, Alright, that's super helpful. And then I guess, maybe just 1 maybe 1 broader question and I know that you guys can do.
We get compared to your <unk>.
European here in the U S, but if we take a step back and just thought about the industry as a whole and the potential consolidation in the locks market in the U S.
And do you guys view the market as being.
Fairly well concentrated today there are opportunities to continue to expand either via M&A.
Within the Mark ADT feature consolidation just curious on your broader thoughts there.
I think over the last decade. This is an industry that's consolidated.
I would suggest that that's not moved at the pace that other industries have so there's opportunities half Steph adjacencies.
I think the brightest growth aspect for Allegiant is in the seamless access technologies.
The corporate spend this year is.
We're investing to try and better understand the future of seamless access and where it could be 5 to 10 years out because of our unique position.
My message to you or the industry is going to continue to consolidate it but I believe through innovation of our unique position on the door electronics your edge device.
It will continue to drive nice growth for Allegiant.
Okay. That's helpful. David Thanks, guys.
The next question comes from Tim Weiss with Baird.
Please go ahead.
Hey, guys. Good morning, good morning for you.
Maybe just cause.
First question on investment.
And I guess 2 parts. So I guess first could you just elaborate a little more on where you're making the actual incremental investments. This year and then secondly could you just talk about the pipeline build for.
For future investments and how the paybacks on those are kind of prospectively for consistent history of are they the same better or worse, just kind of curious there.
Yeah, Tim So the majority of the incremental investments would be centered around R&D technology type of investments centered around driving electronics revenue growth.
And market segmentation, where are the opportunities, where we can expand our business and leverage our franchise globally.
So think about that in relation to some of the things Dave talked about in terms of enhancing our partnerships.
To have broader connectivity into electronics seamless access ecosystems and solutions.
Important for the business going forward, so, we're putting monies and those that I think will position us extremely well.
For our growth going forward and will help us continue to grow faster than the broader market is the plan. There youre question on ROIC, it's always been a really good.
Payback not only.
On investment, but on a cash on cash basis.
Good things to do that will position us in the marketplace for further growth.
Historically, you've kind of seen our revenue kind of trend, probably a little bit north of our peer set.
And would expect that to kind of continue given the level of investments that we're making to position our franchise going forward.
Okay, I'd build on that a bit tend to say.
We've had you know take out the pine pandemic, we've had 5.6 years of double digit electronics growth.
Clearly the market moving that way we've got over the next 24 months, a nice pipeline of <unk>.
Connected products.
Coming out that will enhance specific investments in software capabilities, what I call software stacks that enhance the partnerships that we talked about today.
You have to have the API SDK that allow our locks to work on our own ecosystems and work in the complex ecosystems that may be present at a hospital on college campus. We believe this differentiates us versus.
1 horse ponies.
<unk> come.
Come in with a solution.
On an important part of our future growth I'd add 1 other is.
Segmenting the market and understanding the future 510 years out in multifamily K through 12 college campuses and hospitals, we think we have an important role to play.
Our installed base on this connected.
Environment will leverage allegiance growth.
Tim also just think about the movement in technology, how fast things are changing and being part of a broader ecosystem, where we can on.
Our products can seamlessly plug and play into a broader set of solutions very important and so investments incremental investments will continue.
It's part of our DNA in terms of how we think about accelerating growth.
And.
Things are moving quickly and we want to be a market leader in that segment on.
In the debt.
Partnerships with the Magnetek, which are important.
Partnerships with the integrators like on now.
Our venture arm I think you saw the announcement on open path to sales to.
To Motorola solutions and extra on an example of how we're playing that game and then.
Continued investments in the digital players that helped drive our growth.
Okay, Great no I really appreciate out on all makes sense.
I guess the second question just on on maybe bigger picture could you just frame for us how you're thinking about a recovery and maybe revenue contribution from the specification business. So youre, obviously seeing on.
Uptake on the specification side, but when do you think you could start to see that be a meaningful revenue contributor or is that a full year benefit next year or is it skewed towards the second half.
I think youll see that really gaining some speed Q2 of next year and through the traditional construction season.
It's been up for.
3.4 consecutive months at really record <unk> 60, I think we were for their for peak takes about 12 to 18 months based on the scope of those projects for us to really start seeing the momentum.
Okay, Okay, great well good luck. Thanks for the time day. Thank you.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Yes.
Maybe just 2 follow ups here.
1 you had a little bit of a discussion there on PK through 12.
Talked about the age the security Automorphic Imation, but 1 thing you didn't mention was stimulus and just curious we're hearing that there's a lot of stimulus already been.
Proved for that vertical a lot of focus on each back but there is a big demand on the infrastructure side for access control or are you seeing any of that benefit yet or is that what youre kind of talking about might come through in 'twenty 2 and beyond.
As we try and unpack the stimulus package, we certainly see access control school security as a part of that again, it's dominated.
Thank you.
By monetization things that you talked about HVAC, we're going to benefit as a result of that stimulus.
I would also say there will continue to be a drive in the K through 12 sector to modernize the average K through 12 structure is 40 years old.
Security.
Threats persist.
Access into schools is becoming more sophisticated because of people's edge device electronic locks and Allegiant is going to benefit from the.
Great. Thanks, and then.
Obviously, you've lived through several inflationary cycles.
We could argue this one's a little bit different but can you talk about your ability to hold price. When you come out of these inflationary cycles. There is probably some regular pricing activity I think you used the term surcharges for some things as well that maybe those are a little bit more <unk>.
<unk> go away when inflation abates, but can you just talk about your historical experience there.
Think about margin next year, yes, sure John So historically.
The price increases announced that are permanent in nature stick.
Going forward Okay.
Even in deflationary periods.
Rice's remained the same.
And fairly disciplined industry here.
Did announce some surcharges on particular products that are more heavy in steel.
And related components.
And those of course go on.
Away, assuming the price of steel comes down, but the majority of our price increases are permanent price increase that we expect will stick going forward, even when inflation comes down.
I would add to that.
Yeah.
The you know the majority of my industrial control.
In the electrical industry and now security.
We have as a guiding management principle as our input costs.
Go up I expect to capture that.
Plus.
We're very driven on the inputs as well as the pricing systems here and.
As part of R&D on the.
It's never.
<unk> never been more important as we face inflationary pressures.
Thanks appreciate you taking the questions.
The next question comes from Jeff Sprague with vertical research. Please go ahead.
Hey, Thank you good morning, everyone.
And maybe just a couple of loose ends here a lot of ground covered first maybe a little setup for your international friends.
Wonder if you could give us a little bit of color.
How youre thinking about the margins in the back half there right usually we start.
Fairly low on the first half and step up materially.
I'm, assuming from this kind of better run rate here in the first half day not expecting the same magnitude of step up by assuming margins are going higher could you just elaborate on.
The trajectory there the price cost dynamics in those markets collectively and what if any other restructuring benefits coming through yes, Geoff so thanks for bringing that up for outstanding performance by the international team, particularly when Youre looking at not only margin.
Inquiries, but the topline growth and that's been a key contributor to the margin expansion there as well, but you may recall.
You kind of look at that segment in isolation.
We're probably out in front of this pandemic quicker in terms of reducing costs managing that side of the equation restructuring programs that kind of went through both in Europe and Asia Pacific. We also are seeing the benefit of the amalgamation of both the Asia Pacific.
Vic and European segments, coming together Allegiant International.
All of that combined has really accelerated the margin improvement year over year.
The restructuring actions the benefits we saw on the first half kind of lap. If you will beginning in Q3, so youre not going to see the step up in margin expansion.
Year over year seasonally you know this Jeff that the.
The margins expand in Q4 for that segment in particular, we would expect the same seasonal increase.
The year over year margin improvement.
Youre not going to see there was some 1 time benefits in Q4 that are non recurring this year bounce back end costs higher inflation on these type of things but.
Great performance first half, we would expect kind of this kind of continuous margin improvement going into next year or 2 and so really like.
What the team has done there how they're executing driving topline growth those type of things great performance.
Right no understood and then just back to kind of on the whole backlog topline calculus here.
Your guidance essentially.
It indicates revenues in Q3, and Q4 will be similar to Q2, which is not atypical for your business.
I.
I guess I'm also hearing, though that perhaps you're suggesting that top line is just dub burned here by the supply and other constraints is that is that really the message that there.
Kind of a normal circumstances, there would be more upside into the back half just unlocking this backlog, but just the physical ability to get it out the door, whether it's your own factory.
Puts from suppliers, just keeping a lid on on what you can actually execute on in 2021.
You read that correctly.
I think we've assessed okay, what's possible here will move that backlog through.
I think.
We are mindful of the constraints on our supply base. We're also I think <unk>.
Rounded that labor may be the tightest element in all of this and it affects our customers and suppliers. So you've got to kind of take a stiff.
At this when are people going to come back to work on availability improve we think that's a long term problem.
We think the culture of our Legion.
How we run our business and the strength of our supply chain, we will do better on the competition in that.
Battle.
Great. Thanks for the color. Thank you.
This.
<unk> our question and answer session I would like to turn the conference back over to date for traders for any closing remarks.
Thanks for joining today's call.
Allegiance future remains bright and I'd like to leave you with some key highlights of our call marketing demand is robust and has returned to pre pandemic levels faster and stronger than anticipated. This is extremely encouraging.
Inflation has accelerated and there are industry wide supply chain pressures. These.
<unk> are not unique to us and we will actively manage both of these dynamics.
The resulting backlog.
We are building sets us up well for the remainder of 'twenty, 1 and 'twenty 2.
Last Allegiant is stronger more structurally sound as we continue to invest during the pandemic as a result, we are positioned well for profitable growth and we will continue to aggressively execute on our strategy of seamless access.
Great day to day, thanks for your attendance.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
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