Q3 2021 Allegion PLC Earnings Call
Good morning, and welcome to the Allegiant third 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 today's questions.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then.
One on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you Andrew.
And then one morning, everyone. Thank you for joining us for allegiance third quarter 2021 earnings call.
With me today are Dave 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.
The presentation, which we will refer to in today's call are available on our website at Investor <unk> Legion Dot Com. This call will be recorded and archived on our website.
Please go to slides two and three.
Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the safe.
Good provisions of Federal Securities Law. Please.
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.
<unk> and commentary include non-GAAP financial measures.
Please refer to the reconciliation in the financial tables of our press release for further details.
Dave and Patrick will now discuss our third 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 one question and one short follow up we would.
I'd like to give everyone an opportunity given the time allotted.
Please go to slide four and I'll turn the call over to Dave. Thanks, Tom.
Good morning, and thank you for joining us today.
Before we go into our third quarter results I'd like to take a minute to acknowledge and congratulate my fellow Allegiant team members.
For their ongoing dedication to the environment Society and governance.
I'm humbled and honored to share that with just last week, a Legion was recognized for ESG leadership.
Through two different awards.
The Robert W. Campbell Award and the Jackson Louis diversity equity.
C N inclusion champion award.
The Campbell award is an annual recognition by the National Safety Council.
America's leading nonprofit safety advocate.
It is the Premier award for excellence in integrating environmental health and safety management.
Equity in the business operating systems.
Winners have strong processes and show measurable achievement over a five year period.
<unk> performance that leads to products <unk> and profitability.
And are expected to demonstrate.
A long term track record.
I have not just EHS compliance, but also a critical improvements.
This prestigious award is also known for its rigorous application process with the systematic review and audit attached to it.
Submissions are reviewed by management.
Kurt Labor academic and government experts from around the world followed by a meticulous audit format at three or more of our company's global sites.
With this in mind Campbell Award winners are an elite group of organizations.
Winners include Boeing Cummings.
<unk> Dow chemical Dupont, Honeywell Aerospace and Johnson <unk> Johnson.
<unk> is proud to have our names added to this best in class list.
We are also excited to have been named the Jackson, Louis diversity equity and inclusion champion by the Indiana Chamber of Commerce.
This is.
White honor that recognize as an organization, making significant strides in the workplace.
<unk> noted that a lesion was chosen as its first ever winter of this award because of our company's proactive and intentional diversity equity and inclusion efforts around the globe.
Stays strong momentum on our diversity efforts and we know there's more work to be done.
We're not asking the people of Allegiant agree on everything, but we need to be a place where racism and bias are rejected.
We're inclusion as a way of life and where all employees feel they belong and kings.
Contribute.
We added to our business success.
Importantly, I've shared before that allegiance ESG commitments are vital to how our company achieved results in the way we do business.
ESG excellence will give us better long term outcomes across the board.
Employee safety better.
<unk> engagement, better productivity, better creativity, better innovation and stronger financial performance.
We see this firsthand and external data points to it as well.
Please go to slide five.
During the quarter, we experienced continued strength in demand, particularly particularly in the Americas nonresidential market.
This trend began in Q2 and accelerating through Q3.
Leading indicators like Abi and Dodge new construction indices remain positive.
An employee increased demand for both discretionary projects and new construction and is across all verticals and product categories.
The recovery has been faster than we originally anticipated and is expected to continue into the foreseeable future.
Residential end market demand.
Also favorable across both retail point of sale and new home construction.
The strength and demand continues to constrain the global supply chain ability to fully meet demand requirements.
Similar to last quarter, this was especially prevalent in electronic components.
<unk> is <unk> in Q3.
As I'm sure you are aware this is a global issue and not isolated to allegiant or any single industry.
We have redid redirected resources and are taking actions such as Reconfiguring and redesigning products as well as developing alternative sources.
We can supply to help alleviate the pressures we are experiencing in procuring electronic components.
Additionally, material and freight input costs continued to accelerate during Q3.
We now anticipate material and freight inflation to be approximately $60 million higher.
As compared to last year.
In addition to the supply chain pressures, we're seeing for electronics. There are also widespread industry shortages of labor and other components.
Once again these issues are not allegiant specific and we expect the global constraints driving.
These shortages to continue beyond 2021.
These challenges led to margin deterioration in the quarter.
We will leverage the strength of our supply chain management capabilities as well as price to help mitigate these impacts going forward.
During.
During the quarter the continued robust demand coupled with the supply chain pressures resulted in record backlogs.
Approximately four times normal levels.
We estimate that widespread shortages have delayed approximately $80 million to $100 million of 2021 revenue.
We believe this impact.
EBIT is evenly distributed across the third and fourth quarter.
We do not believe this is loss revenue, but expect it will be recovered as supply chain constraints ease.
Now, let's turn to the third quarter performance for more details. Please go to slide six.
Revenue for the third quarter was $717 million a decrease of one 6% on both a reported and organic basis.
The organic revenue decrease was driven by lower volume in the Americas region related to the aforementioned electronics components.
<unk> and labor shortages currency.
Currency tailwind and the acquisitions.
The impact of divestitures.
Patrick will share more details on the regions in a moment.
Adjusted operating margins decreased by 330 basis points in the third quarter higher input costs.
Activity challenges and volatile volume deleverage drove the majority of the decrease.
Incremental investments important to our future growth caused 90 basis points of the decline.
Adjusted earnings per share of $1 56 decreased to 11 or six 6% versus.
Was the prior year. The decrease was driven by reduced operating income offset by a favorable tax rate and share count.
Year to date available cash flow came in at $327 7 million, an increase of $71 6 million or 28% versus the prior year.
PRASM increased cash flow was driven by higher year to date net earnings along with improvement in net working capital and reduced capital expenditures.
Patrick will now take you through the financial results and I'll be back later to discuss our 2021 outlook and wrap up.
Thanks, Dave and good morning.
Everyone. Thank you for joining today's call.
Please go to slide number seven.
This slide reflects our earnings per share reconciliation for the third quarter.
For the third quarter 2020 reported earnings per share was $1 58.
Adjusting <unk> <unk> for charges related to restructuring and impairment.
Paramount that 2020 adjusted earnings per share was $1 67.
Favorable tax rate drove a 13% increase in earnings per share the negative tax rate for the third quarter reflects favorable settlements of uncertain tax positions a benefit of mix of income as well as the nonrecurring.
Our favorable tax impacts in 2020 related to certain valuation allowances.
Reduced share count drove another favorable <unk> <unk> per share acquisitions, and divestitures had a positive <unk> <unk> per share impact.
Operational results decreased earnings per share by 21, driven.
<unk> on higher material and freight cost.
Activity challenges and volume deleverage, which more than offset the favorable impacts of price and currency.
Investment spend increased during the quarter and reduced earnings per share by <unk> <unk>.
As a reminder, the incremental investment spend is predominantly related to.
Bye.
Technology and market investments to accelerate future growth.
The combination of interest and other income drove another <unk> <unk> per share reduction.
This results in adjusted third quarter 2021 earnings per share of $1 56.
Decrease of 11 or six 6% compared to the prior.
Orange.
Lastly, we have a <unk> <unk> per share increased driven by a gain on the sale of an equity method investment offset slightly by the combination of restructuring charges and acquisition integration expenses.
After giving effect to these items you arrive at the third quarter 2021 reported earnings per share.
Prior to $1 59.
Please go to slide number eight.
This slide depicts the components of our revenue performance for the third quarter I'll focus on the total leasing results and cover the regions on their respective slides as indicated we experienced an organic revenue decline of one 6% in the.
Third quarter.
The electronics components and labor shortages, primarily in the Americas region had an impact on our ability to meet the continued strong demand.
Still we realized good price performance, which offset some of the volume decline.
Currency continued to be a tailwind to total growth and offset.
Set the combined impact of acquisitions and divestitures in total reported revenue reduced by one 6%.
Please go to slide number nine.
Third quarter revenues for the Allegiant Americas segment were $524 4 million down two 7% on a reported.
And 3% organically.
As previously stated the supply chain pressures, we are experiencing drove the revenue decline.
We are still seeing strong market demand, which has resulted in record backlogs, particularly in the nonresidential part of the business. The region continued to deliver good price realization.
Base latest price increase went into effect at the beginning of October So we expect the price realization to accelerate in the future.
On volume Americas, Nonresidential was down low single digits, driven by the electronics components and labor shortages.
America's residential was down high single digits.
<unk> was uniquely driven by the prior year being inflated by channel refill coming out of the pandemic shutdowns experienced in Q2 of 2020.
The shortage of electronic components also had a negative impact on our residential performance primarily in the DIY space of Big box retail and E Commerce.
<unk> electronics revenue was down high single digits, driven by shortages of electronic components in both the nonresidential and residential businesses.
Electronics, and Touchless solutions remain a long term growth driver and as an integral to our investment and innovation efforts.
Americas adjusted operating income of.
<unk> hundred $33 7 million decreased 19, 7% versus the prior year period, and adjusted operating margin for the quarter was down 540 basis points. The decrease was driven by higher material and freight cost productivity challenges related to inconsistent supply and volume deleverage.
100 incremental investments had a 100 basis point dilutive impact on adjusted margins. Please.
Please go to slide number 10.
The Allegiant International segment delivered another solid quarter.
Third quarter revenues were $192 6 million up one, 7% and up to 5%.
On an organic basis, we continue to see strength in our Simons Voss enter flex and global portable security businesses, which along with good price realization drove the organic revenue growth.
Favorable currency and acquisition impacts also contributed to total revenue growth and were slightly offset.
Set by divestitures.
International adjusted operating income of $21 3 million increased four 9% versus the prior year period.
Adjusted operating margin for the quarter increased by 40 basis points. The margin increase was driven primarily by volume leverage along with favorable impacts from divestitures.
Currency.
A combination of price productivity inflation, where an 80 basis point headwind to margins incremental investments reduced margins by 40 basis points.
Please go to slide number 11.
Year to date available cash flow for the third quarter 2021 came in at $327 seven.
<unk>.
Which is an increase of $71 6 million compared to the prior year period.
The increase is attributed to higher year to date earnings and improvements in net working capital and reduced capital expenditures, our cash flow generation continues to be an asset to the company.
Looking at the chart.
Million Aten it shows working capital as a percentage of revenues decreased based on a four quarter average.
The business continues to manage working capital efficiently and generate strong cash flow.
I will now hand, it back over to Dave for some comments on our full year 2021 outlook.
Thank you.
To the right. Please.
Please go to slide number 12.
On October one we issued a pre release to our earnings and updated our 2021 full year outlook for revenue earnings per share it available cash flow.
We are reaffirming those updated outlooks.
Patrick we have talked at length about the demand strength in the Americas business as well as supply chain pressures that are having an impact on our ability to meet that demand, which will delay an estimated 80 to 100 billion of revenue.
The outlook for total revenue in the Americas is now projected to be at one to one 5%.
With organic revenue growth at 5% to 1%.
And the Allegiant International segment, we have not seen as large of an impact from component and labor shortages and our assignments Voss inner flex and global ported portable security businesses continue.
<unk> performed well.
For that region, we expect total revenue growth to be between 12, and 13% with organic growth of 9% to 10%.
All in for total Allegiant.
Total revenue is projected to be up 4% to four 5% and organic.
<unk> expect as expected increased 3% to three 5%.
We are expecting reported EPS to come in in the range of $4 95 to 505 per share and adjusted EPS to be between $5 and $5 10.
Our.
Our outlook for available cash flow is projected to be $460 million to $480 million.
The outlook assumes investment spend of approximately 15% to 20 per share the full year adjusted effective tax rate is expected to be approximately 9%.
The outlook for outstanding.
Nick read alluded shares is approximately $95 million.
Please go to slide number 13.
As we close the presentation and move on to Q&A I want to take some time distress allegiance strong long term fundamentals.
Sandeep just.
Even with the disruption caused by the global pandemic, our strategy around seamless access and electronic transformation remains strong.
We expect electronic and seamless access solutions to be the future of access control and we are using multiple innovation.
<unk> to lead the industry.
<unk> seen proactive work from a Legion.
Through Allegiant ventures.
Our recent acquisitions like <unk> and in our inner flex business accelerating our software and tech capabilities.
We're making investments and expanding partnerships with NEC, <unk> and leading access control platforms.
We are making significant progress on our ESG <unk> ESG journey. This is evident with the two awards that we received earlier this month the Campbell Award given.
By the National Safety Council is a very prestigious honor.
And we've joined an elite group of previous winners.
I'm also proud of the Jackson, Louis diversity equity and inclusion Champion Award, which we received from the Indiana Chamber, which recognizes our proactive leadership in diversity equity.
And inclusion.
Congratulations to the Allegiant two.
All markets in America remain robust, we continue to see positive trends from leading indicators like Abi and the Dodge New construction index and expect these trends to continue into 2022.
Two with the international segment, the strengthen our assignments vos and reflects in global portable security business persist.
We have aligned and adjusted resources to navigate and adapt our supply chain pressures that the world is experiencing.
Actions taken including the redesign of products the developments.
<unk> of alternative supply sources, and we continue to deleverage our pricing power.
Allegiance supply chain will continue to differentiate us and the strength in our backlog would indicate that our channel partners believe we will navigate through the global pressures measured than boats.
Demand remains strong we have implemented pricing actions that will carry forward into next year and a substantial backlog to work down with that backdrop, and assuming supply chain pressures related to inflation and components shortages begin to ease we expect solid revenue growth with year over year margin.
<unk> improvement and continued strong cash flow generation.
Into 2022.
The future of Allegiant remains bright now Patrick and I will be happy to take your questions.
Yes.
We will now begin the question and answer session.
I'll ask a question you May press Star then one.
One on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Again, please limit yourself to one question and one brief follow up.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Joe O'dea with Wells Fargo. Please go ahead.
Hi, good morning, everyone.
Morning, Joe.
First question is just related.
<unk> to any visibility you have around the timing of relief from supply chain constraints, you've talked about this extending into 2022, but.
Are you seeing anything out there and based on conversations with your suppliers that gives you confidence and when you start to see some relief.
So my first observation.
Your past record, sometimes as a predictor allegiant performed extremely well.
Through the first phases of this pandemic.
Number two is.
Some of the strength of our supply chain.
Adaptability was evident if we had not.
Not adapted made design changes over the last couple of quarters, our backlog would even be larger so feel very good about the performance and the adaptability flexibility.
It's clear the electronics is going to be a problem that all companies, including the Legion will have.
<unk> two.
Adapt to.
Through 2022.
I think.
An important element of the arrest and it's the complexity of the leads and supply chain is the return of the labor pressures to our partner suppliers.
<unk>.
This.
We'll have to continue to monitor this is everything from castings to power supplies to.
Yes.
<unk> harnesses theres, a labor scarcity across the globe and <unk>.
Again, I believe our AD.
Our ability to adapt and our philosophy to produce in region will help a legion.
And then related to backlog and catch up and you made the comment about backlog being four times higher than normal.
How do you think about managing that so when you do start to get some relief in the supply chain.
Do you think about kind of ramping up to deliver to customers.
As fast as possible, which could then create some inefficiencies in our stream production system.
Think about managing that and maybe it takes longer to deliver.
Over time, but not straining the production system in that process.
So we've got a lot of experience and production systems.
Including.
Demand that runs the company my 41 years I think.
I like the backlog I think if components.
<unk>.
Is that regains health, we will actually pick up efficiencies, there's been growth inefficiencies through COVID-19 the supply chains and important element is our ability to bring on in flux around labor and I've got high confidence in our ability to do that.
Great. Thank you.
The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, Thanks, Good morning, everybody good morning, Joe.
Yes, you guys talked about clearly lots of challenges.
In the marketplace.
Place today, I know that as you kind of think about the Americas margins being down five to 600 basis points year over year B had investments of about 100 100 basis points impacting the margin can you maybe parse that out a little bit more for us.
Do we know how much of it is coming from higher material and freight costs.
How much of it is more kind of like the productivity issues just as any other.
Additional color around that would be helpful.
Yes, Joe so the significant portion of the margin degradation year over year is predominantly inflation and freight costs.
And then we've got productivity challenge.
Challenges.
<unk> with some of the.
Component shortages and those types of things, creating inefficiencies at our facilities.
So if you think about it relative to normal and we've done a good job in terms of managing the price inflation dynamic.
Were underwater.
Water today, as we kind of look at that price being lower than the incremental material and freight costs.
That will get better.
As we kind of progress here were putting it more price increases to make up for the delta.
One of the challenges as you know kind of given the high.
<unk> backlog and the fact that a lot of the backlog today is kind of price protected you don't see the benefit of the price increases coming through and offsetting the incremental inflation until going into 2022, So we're still going to be under pressure.
For the balance of the year, but inflation really excel.
Celebrated particularly when you look year over year.
You know on steel components and those type of things. So it's just it's one of these short term phenomenon. If you assume that inflation has kind of peaked today.
Going into 2022 things will kind of continue to get better then we would expect to be in.
On the positive end of the equation as we progress throughout 2022.
Got it that's helpful. Patrick and maybe just kind of following on there is as you think about then.
Sounds like Youre going to be underwater again in the fourth quarter as you think about like that.
The pricing.
<unk> that you're being you're putting through.
Do you typically include a fuel surcharge or is this kind of like stickier pricing that you expect to get in the 2022 time frame and then we've also gotten some questions from investors today around the fact that that pricing.
Step down on a year over year basis.
If you take a look at the second quarter versus <unk>. So curious like any comments around why pricing was a little bit weaker in <unk> versus <unk>.
So on your first question. So we've managed pricing broadly and it's really dependent upon product category.
Some of our products that are more steel related are you still doors those type of things where carrier surcharges.
Associated with that but mostly across the product portfolio is through list price increases is kind of how we management. So it is more permanent in nature.
The year over year Delta.
Kind of have to look at it again by product category, a little pressure in some of the discounts residential for example, a little bit harder to kind of pass through the price increases. So that's really what you're seeing there if you kind of.
Look at the bulk of our business commercial.
Year over year price increase.
I'd add to this.
Our hollow metal business.
List price increases answers surcharges.
Yes.
On the general hardware business.
Two price increases in the year, and we will adapt to the pressures as we go into 'twenty two and.
Certainly going hard at the residential products as well and my message here would be in the addition to freight surcharges, we're pulling all.
All levers on price realization and I think as we get past this momentary surge that occurred in Q2 and Q3 on inflation will.
Continue our discipline around price performance as we move into 'twenty two.
Thank you that's helpful.
The next question comes from Andrew <unk> with Bank of America. Please go ahead.
Yeah, Hi, guys good morning, Andrew.
Yeah, just to follow up on Joe's question on pricing I'm, just a little bit surprised by the pricing myself.
We did some channel checks was electrical distributors in the market.
Dave you would know very well one of the largest players in North America.
Rice in effect.
And then sort of policy at this point in order to sort of clinic lines out of the backlog I think HVA see guys that sell them a lot of similar channels.
Have had life for price increases this year.
Industry structure seems to be quite favorable.
Why is it so hard to get a price increase through or you know who is being aggressive, particularly as you seem to highlight residential is one player being aggressive people out of Asia being aggressive which was surprising because I would've expected.
And then it would have difficulties getting stuff on the boat just maybe a little bit more color there. Thank you.
So I'd give a completely different perspective Andrew.
The electrical quite well.
Think about the amount of electrical pipe wire and distribution gear that goes in in the first.
Six months of a construction project.
We submit our quotes get orders at the same time.
And that those products are delivered at the end of that cycle, when we put a quote.
Thats carried for a period of time, but.
We honor that order and so.
So we eat that inflationary pressure the cycle for the electrical industry is much faster than ours.
<unk> been aggressive on the price increases as well as surcharges.
It's not apples to apples, we're both in new construction on new.
Quotes and bids were really raising the levels every day and.
<unk>.
I hope that color maybe it helps you understand.
Leading products, the electrical versus wagging products on the hardware side and I'll just add Andrew it's not a question of.
Realizations in other words, we will get the price increase it's more of a timing issue. So you will begin to see sequential improvement a.
Beginning Q4 relative to the price increases we put into the market and that will continue to accelerate into 2022.
Year over year.
Year and sequentially.
And 'twenty two you'll get some of the benefit of these 21 price increases so you'll get a bit later.
Got you and then just a follow up question just the difference in.
Performance between North America.
And I guess international which I sort of think.
Mostly.
Europe as I think about your brands.
Intra flags I guess it is most of the software, but it does have electronic components.
If.
If I think about I guess she says the one that's purely mechanical downtime on Baas, which you highlighted also have margin.
And a component.
Why are you able to avoid the kind of disruption related to electronic components and labor in Europe that you're experiencing in the U S. Because I would imagine.
Chronic components in Europe are also getting sourced in Asia. Thank you.
So electronics.
In electronic components tight in all sectors of the world.
The differences between assignments Voss, a lesser extent, an inner flocks in the core business in the Americas as pure suppliers.
We had designed around the Americas, Texas instruments NXP.
Texas.
Paul have had their supply chain.
Issues.
European products more around a different set of suppliers and.
It's those differences.
And.
The adaptability important here.
Yeah.
Many of the newest Allegiant products.
That drag just battery efficiency Wifi connectivity that mix us.
Leading products in the world.
<unk> are closer to the supply chain challenges in the Americas than they are in Europe.
Got.
I appreciate it thanks, a lot Dave.
Welcome Andrew.
The next question comes from Brian <unk> with Imperial capital. Please go ahead.
Yes. Thank you very much my first question.
I'm, sorry to keep asking about price increases, but I'm going to ask one on that one.
Got you a follow up on a different subject.
The first is on price increases.
Can you say.
Specifically, how much you've increased prices Asa has gone up about 15% in multiple in total this year.
NAPCO.
That 3% they've increased what have you.
One on <unk>, so far this year and what do you plan to increase.
On the year.
So I would say again, you have to look across the different product sets. So it varies.
If you are looking at all price increases I E.
We talked about theirs.
List price or surcharges.
Things related to freight.
Those that have heavier steel related I steel doors, those type of things we carry a much higher.
<unk> increased realization than your traditional <unk>.
Products locks and exits closers those type of things so.
<unk> list prices for the year would be with both price increases north of 6%.
With with more to come in the future I think you also got a.
Include the surcharges on top of that.
And this is a big event.
And our quote activities, we apply discount schemes that give us the ability to raise price based on the project. So again I feel very good on our pricing and analytics.
That gap in the backlog that we may have.
Have quoted over a year ago, we honor those firm orders and they are delivered.
Times over the periods of years.
As we move into 'twenty, two we will reassess this again and be early and aggressive to make sure that price.
Continues to.
Cover our input cost as we've done since the creation of the company.
Great and then just as my follow up real quick.
On Opex, just real quick maybe make a comment about there.
Move with AK Jain from spectrum.
And how you anticipate competing on that I know, we've spoken offline on that but one just here what you think.
How that's going to impact our allegiant moving forward.
So you never want to see.
Your number one competitor market leader getting bigger.
Rest assured that we also looked hard at the quick HHR assets over the years.
And I think.
If you really step back and study the dimensions of quickset and how they performed under Hhr's I believe.
We will actually bring a level of discipline to the market.
Certainly.
Our grade slag brand the quickset brands.
You know theres plenty of room to compete.
We met this challenge I think credibly you know over the last several.
<unk> also gauge.
Slugged in terms of its electronic leadership.
If you look at consumer reports electronics that I think was published in April this year three of the top eight locks are ours.
We're the number one replacement work in.
It's.
<unk>.
Going to be continued.
Competition against two world leaders.
Thank you.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning, maybe.
Maybe just.
Our first question perhaps on the.
Demand outlook, which hasn't really been touched on yet.
I remember in that upcycle in U S. Non res in sort of six seven and eight.
Up cycle in terms of projects.
Did suffer some headwinds because of cost inflation in labor.
Let developers to delaying projects and so forth.
So you had these kind of rolling push outs and delays.
Just wondered what your perspectives on the risks of that type of phenomenon recurring in the current environment when you're talking to developers.
At your quota.
Activity and so forth.
Okay.
Each bus.
Boom cycle.
So that's its own history.
Yeah.
We're still living this aspect of it but as I reviewed the macro demand factors.
Our backlogs.
And then recent travel I would think I was in five states last week.
The sentiment that I feel see and.
Living here you know everyday at Allegiant is I'm extremely positive.
I think we've got you now.
Three.
Solid years ahead of us as I think about you know the strategic planning period.
Working through the supply chain issues.
There's.
Key infrastructure needs and we have a housing economy.
Significantly under inventory.
Sorry for a single family homes, which also is a generator for commercial and institutional development. So you know I'd packed out all together and barring another disruption.
I like to go ahead in terms of the.
Business conditions are uniform.
Structured and for Allegiant.
I see so you have not seen major projects being deferred or postponed we.
We track cancellations.
And I'd.
I'd say it's.
At a normal level.
That's helpful. And then just a quick follow up.
Trying to wrap together your comments on pricing.
If you look at your sort of you know your operating income bridge that line for inflation in excess of pricing and productivity. Obviously, it's been negative for a couple of quarters now when you look at the.
Margins in the backlog and the pace of completion could.
We assume that that line can go back to sort of breakeven.
Sort of third quarter of next year is that the rough timeline.
Yeah.
Would that Q3 next year or positive.
Is what.
What I would anticipate basis of.
Constant inflation relative to what we're seeing today.
In terms of no further increase year over year.
But the delta.
Either gap between price inflation, improving you know up until that point.
<unk>.
The rate of change will get better as we progress.
Yes.
Julian.
Also.
Yes.
As you think about that backlog some of the highest margin products that we produce electronic locks and exit devices are.
Elements heavy elements of that backlog.
C exit devices heavy complexity, you know, which we.
The supply chain prep.
Pressures create some challenges in that but.
Those supply chain pressures will improve the mix of that will roll through in addition to the price increases I like.
Our opportunities.
So it was before.
Great. Thank you.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Good morning.
Hi, maybe just a follow on jewelry.
Julien <unk> last question there if you look.
In your bridge I know, it's called volume and mix, but it was a headwind year over year, but you actually had non residential declining less than half than residential in the Americas. So maybe it has to do.
The mix within non res and you talked about some of your higher margin products now growing backlog, but would just love to unpack that a little bit why the mix was negative despite the non res growing.
Better than than residential at least on a relative basis, yes, so you've hit on it.
Do with really within the product portfolio of nonresidential products.
As Dave indicated.
High margin products being impacted more and that's kind of what we're seeing in the backlog.
Due to.
Shortages of components and.
And so it's really within the nonresidential.
The business that you're seeing a mix element.
Given that our non rescue was higher than resi for the quarter.
Great and then I'm going to take a stab at this I think earlier in the year. You know you kind of pointed our international margins.
<unk> up low double digits, obviously, you've seen really good progress there through the year, you've given us the midpoint of your guide a lot of other information. It does seem like that implies that Q4, Americas margin kind of steps down more than seasonality would assume.
Assume in Q4, and also just thinking about the decremental still being pretty challenged there any color you can help us on how to think about that from the model perspective or.
I'll just leave it there however, you'd like to help us out with that.
Sequential decline implied.
Yes, so kind of we touched on a little bit earlier, it's predominantly given the price inflation dynamic still under pressure some of the inefficiencies from a productivity standpoint will continue given the the component challenges supply base.
That's really the.
The.
You know youre going to see some decrements sequentially.
But then as we kind of continue to move into 2022.
You wouldn't see obviously that big.
Big of a change you know in the first part of the year and then improving certainly in the back half.
I appreciate it broke up.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
Patrick you made reference a couple of times now to the expectation that maybe inflation has peaked.
I guess im just interested in what gives you confidence that that would be the case have you provision.
Provisions in place to some of your procurement agreements that.
Lock pricing now our hedges that are in place to give you the confidence to say that but if you can just elaborate on that I'd. Appreciate it. So so that's kind of the.
The commentary.
It was more around kind of our assumptions right now I mean, if there is continued pressure.
And the marketplace too.
Some of the component challenges than.
That would certainly put pressure on our assumptions as we look forward to 2022.
But if you kind of look at some of the.
The <unk>.
We're forecasting information relative to steel and those type of things.
The expectation is is that as we go into next year. It starts to alleviate itself and maybe trend down and that would be positive to what we're thinking to that.
Can you just remind us what.
Four.
How much of your business is locked up with.
Annual contracts and supply agreements for spot purchases.
Oh can you can elaborate a small small portion, but it's mostly on raw steel.
We kind of look forward and we've got some arrangements with some of our supply base that has fit.
Fixed rate agreements.
Those that kind of fluctuate based on changes in the market on a forward basis and so it's small a lot of our supply base is.
Indexed to steel if you will and so it's really just on the purchase of <unk>.
<unk>, which is a small component relative to where all overall purchasing.
Okay. Thank you for that and then just as a follow up.
Can you just talk about installation labor and the extent to which that maybe sort of frustration at this point, how you see that developing as a potential bottleneck or impediment in 'twenty.
Yeah.
Some broad comments on labor.
And it's you know from a general labor you know through the trades to professionals labor is tight professional help on a worldwide basis.
Second when you look.
Particularly of construction labor.
The gap has grown.
Skilled trades.
Were a problem going into the pandemic.
The problem has has widened slightly.
In my mind.
Extend.
Cycle times, you know for construction projects and snow Plows, you know what I think are strong business conditions well into the future.
Yeah.
Would you consider at all investing in.
With the development of that labor for the market as a means of.
Eating that.
Our constraint.
We are investors.
I will get off the phone here today and its manufacturing months.
In the United States a Legion.
It plays a very active.
Our role in promoting our industry, leading culture diversity opportunities tuition reimbursement programs healthy lifestyle to attract people and have done. It you know sensitive creation of the company number one.
Number two.
I think.
You know manufacturing I'm I'm extremely proud of is a great place to you know to develop.
Talent, and we will make investments in our wage structures to continue to keep a legion as the best employer with wages and benefits and the communities we operate.
Operate around the world.
Yeah.
Hum.
The next question comes from Tim Weiss with Baird. Please go ahead.
Hey, Hey, guys. Good morning, good morning, Tim.
Maybe just dovetailing.
Off of David's question. There could you just when you think about the new non res cycle and how investors should kind of think about it.
The leading indicators if I've, obviously been really robust over the last seven or eight months.
How would you think about converting those cycle it was kind of leading indicators into into.
Killing Eve for you guys I mean are those.
New construction projects that could contribute to you in the second half of 'twenty, two or do you think at this point its probably more prudent to think 'twenty three.
I think you've got to take the strong cycle and you know as I look at the macro indicators that you did positive gotta lay on that.
Backlog.
You know, which will take the better part of six seven months for us to eat through.
And I think you know extremely robust you know IC education, I see health care.
I think you've also I've always been concerned about commercial.
Our revenue, namely positive in terms of the macro.
Theres lots of money on the sidelines to go reinvent this commercial real estate.
The new office of the future. So as I look at education healthcare commercial even multifamily has hung in longer.
And.
I think.
Extra investment is is going to come in needed infrastructure, we could get an infrastructure bill so as I look at that time I like it you know for the next three to five years.
Okay.
And then and then maybe more of just a modeling question. So you guys.
The split on the deferred sales.
I think it was kind of even between Q3 and Q4, but I think if you just kind of roll that into the model I mean, there's a bigger I think youre down double digits or that's the implication in the fourth quarter versus down maybe low single digits in Americas in Q3, so and any any perspective, there you can kind of add as.
As to why that is is it just seasonality in comps.
Yeah seasonality cops.
The component shortages plus last year, you may recall with the rebound in our residential business was coming out of out of Covid. There was channel refill.
And the business.
<unk> right.
Stocking.
Shell is on retail and e-commerce and <unk>.
So that certainly had a fairly significant impact on last year, so you're getting into a difficult comp as it relates to our residential business. Okay. Okay, Gotcha, and then $80 million to $100 million of deferred revenue I mean, how does that.
That kind of come back next year I mean is it.
Is there some sort of bursts that kind of happens and you kind of convert that in 'twenty two or is it just kind of result in a little bit of a longer cycle.
No I think you need to think about it.
Depending on the flow of components and.
Labor.
<unk>.
It's a tailwind as we roll through the year and.
In a manufacturing environment, you can step up about 20%.
Just by working Saturdays.
Think about it if I go to Sundays I get 40%.
People want to work seven days a week.
You know for six months and you got to think about it will step up its a tailwind.
Barring.
If you get if we get improvement in components, both electronics and general components, we're going.
That is a tailwind as we roll through the first half.
<unk> of next year and.
If it.
If the components situation labor improves work of art.
<unk> sure.
Okay.
Okay, great well good.
And luck on the rest of the year guys. Thanks. Thank you.
The next question comes from John Poker Winski with Morgan Stanley. Please go ahead.
Hey, good morning, guys good morning.
So electronics are.
Now the EUR 100 million that you talked about does sound pretty bias to <unk> and I guess, what precipitated out of that is it's pretty high percentage of electronics like that virtually electronics going to zero or how should we think about the split of that headwind between the electrified product versus.
First is the mechanical products.
I'd say, 40% of electronics.
60% on mechanical I'd also I think you've been in our factories here in Indianapolis compliant.
When things are.
Harman right is our friend.
We'll make 'twenty 200 variations of the von <unk> exit device today.
And any one of those components in shortage, whether its a casting the warehouses are power supply and electronic board.
Puts pressure on that supply chain and that's what we're living today.
And are confident in our teams to work through it remember too it's not necessarily my ability to put labor in the sea. It's also my supply chain.
We pulled hard on redesign shifting over 100 engineers.
To redesign.
Brent predominantly boards, but other components.
And.
The second thing.
Say as you know our flexibility we've offered to put our people insights to help.
Strengthen our supply chain.
Vendors.
I share that example, just because.
The labor thing goes across transportation supply chain getting it through the ports.
Level of complexity that I'd, maybe never seen in my 41 years.
And then just thinking about the kind of the unwind of this current tightness I think an earlier.
Just wanted to ask about trade labor is that the biggest governor of how much the business can grow next year because it seems like you have the ingredients. The demand is there may be a bit more backlog than usual.
Just how quick can we get installers, both on new construction and retrofit that sort of the kpis that we should be focused on.
I think I would describe it Josh is theirs.
Pacing constraints on labor.
From the design phase.
Saw a record Abi through the installation phase.
I think projects will have longer lead times in an environment.
Question, that's extremely positive in terms of their willingness to invest.
Got it thanks, Good luck guys Youre welcome.
The next question comes from Chris Snyder with UBS. Please go ahead. Thank you.
Thank you so my first question.
On the deferred $80 million to $100 million of revenue. It seems like the majority of this is coming from the Americas previous commentary I think said that it could take six to seven months to work through this elevated backlog and you know I think the ability to ramp manufacturing, 20% by working Saturdays.
This suggests that this could be.
<unk> lives. This 80 to 100 million in 2020 two.
Honestly I know, there's some uncertainty around the ability to source components, but I guess is that reasonable to think that this could be realized next year, because it's a pretty substantial kind of mid single digit tailwind to the Americas segment.
Do you think about 'twenty two the backlog.
Backlog will be a tailwind.
Constrained by availability of electronics.
Tightness will run into 'twenty three.
And then the overall labor you know we see.
I don't know if you ever.
And industrial game, we call it the beer do bottlenecks.
Move.
There's bottlenecks at the ports Theres bottlenecks in labor these things are going to be moving throughout the year, but.
You know my fundamental belief is you know allegiant has a superior ability to navigate the nation and the world will navigate it and we will see these things ease.
As we go through and it's a tailwind to push that backlog through.
Appreciate that and then second question on <unk>.
It sounded like from the prepared remarks that there maybe with some demand softening in the quarter I think you guys called out a do it yourself or DIY slowdown.
I guess my question.
Was this maybe the resin softness part of the second half of revenue cut and I guess is there any reason to think that this gets better in 'twenty. Two is it seems like that could be more demand related in supply chain related.
So again I want you to think about the.
Demand game.
No.
The supply chains on res.
For all supplier was.
Heavily disrupted in 'twenty.
Were shut down for 15 16 days.
You had a demand surge and this is very evident.
From the Big box.
Oh Lowe's reports in terms of increased investments in do it yourself projects and then you had.
Also housing picking up pretty rapidly.
<unk> created a demand surge as we started coming out of the Lockdowns.
<unk> backlog in residential which we have worked.
Through so I look at overall demand for rigs as we move into 'twenty two is net positive.
Based on continued starts of new construction solid repair and replacement and good multifamily.
So that with this going on the supply chain mixture you think about.
Some deep in your models because.
I think a year ago I'm sitting here talking through record backlogs in residential we worked through that and I would suggest if you look at.
Our performance versus our competitors that we gained share throughout the last.
Eight quarters.
I appreciate that thank you.
And the last questioner will be Ryan Merkel with William Blair. Please go ahead.
Hey, everyone. Good morning.
Good morning.
So I wanted to follow up on the timing of supply chain getting better is it fair.
Say that margins are bottoming in the second half of 'twenty, one such that as we get into next year, you could see margins increase year over year or is that maybe more of a second half 'twenty two event.
Probably more backend loaded but feel very confident.
If you kind of look at the moves we're making on.
To sites.
Again, assuming inflation has peaked I mean, that's still a question mark right, but I.
I feel very confident relative to.
Pushing through the backlog getting some efficiencies at our factory productivity. These type of things we will have margin.
Incremental improvement in 'twenty, two compared to 21, no doubt in my mind.
Alright, that's helpful. And then just stepping back maybe this question for David but can you discuss the adoption curve for electronics is it faster now and also how are your customers rethinking access control in this new environment.
Electronic access electronic locks.
The power of your edge device and its ability to.
For the coming decades.
The electronic adoption is a what.
What I would describe as high single digits in normal times.
Our pre pandemic, we've been able to deliver on that growth at mid or excuse me low single digit or low double digit growth sub market growing.
Single digits were in a normalized time low double digits. So.
A clear trend.
You can see it in your everyday life.
They're all market still there's 40 billion openings in the world.
Watson tenant for some of those integrated so bright for.
<unk> theory and breakthrough illusion.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Dave. The traders are chairman President and CEO for any closing remarks. Thanks for your questions today.
Industrial.
So I want to thank our employees for their continued commitment.
Steadfastness in navigating the challenges of the last 22 months.
Some final messages.
Allegiant remains a white house for our safety performance.
Today in our ESG.
Advancements.
Demand in our business remains robust and leading indicators are positive supply chain constraints labor availability and inflation are challenging I'm confident in allegiance supply capability to adapt.
<unk> ability to be strong and the long term fundamentals of Allegiant remains bright and strong.
Thank you for your time today have a safe day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
<unk>.
[music].