Q2 2023 Allegion PLC Earnings Call
Good morning, and welcome to the Allegiant second quarter, 'twenty 23 earnings call.
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 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 Joe be coil director.
Of Investor Relations. Please go ahead.
Thank you Jill good morning, everyone. Thank you for joining us fairly than second quarter 2023 earnings call.
With me today are John Tsai, President and Chief Executive Officer, and Mike <unk>, Senior Vice President and Chief Financial Officer of LBJ.
Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call are available on our website at investor that Allegiant Dot Com. This call will be recorded and archived on our website. Please go to slide two.
Payments made on today's call that are not historical facts are considered forward looking statements and are made pursuant to the safe Harbor provision of federal Securities law.
Please see our most recent SEC filings for a description of some other 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.
Please go to slide three and I'll turn the call over to John .
Thanks, Jody and good morning, everyone. Thanks for joining us today.
My how time flies its hard to believe this time last year I was joining you for my first Allegiant earnings call I shared that my belief in our company's mission our people our culture and my excitement around this chapter that we're writing and allegiance history together at.
One year and I'm, even more energized about the future and even more proud of our global team who has just delivered another quarter of outstanding operational performance.
Let's go to slide three and talk about some of the highlights.
The Allegiant team delivered 18% total growth and we drove strong margin expansion.
In Q2, we increased margins across Americas, and international business segments, both sequentially and year over year, resulting in 130 basis point increase in adjusted operating income margin for the quarter.
We see electronics continuing to be a key growth driver for our leisure demand was strong for our electronic solutions in the second quarter fueling allegiance overall revenue growth in Q2 strength across both residential and nonresidential business in our Americas segment totaled nearly 40% electronics growth over the prior.
Period.
We also saw strong electronics and software solutions performance in our international segment as we work to shape the transformation taking place in our industry. We continue to see electronics as key to our overall growth.
Our non residential markets remained stable and electronics demand continues to be a bright spot in North America and international segments.
However, we did see some softness in nonresidential mechanical demand as customers and distribution partners adjust their ordering pattern to a reduced lead times due to much improved supply chain and operational execution the.
The Americas residential business was bolstered by very strong electronics sales, but we're still seeing soften mechanical demand Sir.
Certain international end markets, particularly in the portable security business also remained soft.
Overall, our team delivered another strong quarter, resulting in a solid first half of 2023, we're operating at a high level and as a result are raising our outlook for the year for adjusted EPS, which is now expected to be in a range of $6 70 to $6 85.
I am very proud of the amazing teams operational performance I'll provide more color on the outlook later in the presentation.
Please go to slide four.
Now, let's move to our vision and strategy. This is a slide we talked to you at our Investor day, and while it's a simple overview. It reflects an important foundation for our company.
Our vision of enabling seamless access and a safer world what does that mean it means if you have the right credential, whether that's our metal key and encrypted proximity card or a digital identity in a mobile wallet.
We will provide you the most convenient and secure experience possible.
Why is this the right strategy and why is this the right strategy now because our world is increasingly digital mobile and connected because touchless and contactless experiences and technology were clearly live well beyond COVID-19.
Because digital credentials and smart hardware not only provide more seamless access experiences. They also provide more rich data to the end user customer and added layers of security. We feel this transformation has a long runway ahead.
Our vision is supported by our strategy of creating value as a pure play provider of security and access solutions. This is how we differentiate our company and drive innovation for a safer world forward.
Building on our legacy delivering new value in access being the partner of choice and operating with excellence.
Please go to slide five.
So this month also reflects the first anniversary of the Stanley access technologies acquisition acquiring the access technologies business was a direct reflection of our seamless access strategy, making the world more accessible.
Expanding our presence and access and security markets and unlocking greater long term value for our customers our shareholders and our employees alike.
And your one our teams have integrated very well together, we've taken very good care of our customers and you can see this in our results, which reflect operational performance in line with the business plan access technologies generated revenues of approximately $385 million, which represented approximately 10% growth. This was 11 <unk>.
<unk> to adjusted EPS for Liza in its first 12 months.
In addition, when we made this acquisition, which is our largest to date. We are committed to deleveraging quickly you can see the results our leverage ratios are back to pre acquisition levels.
Overall, we feel great about this highly strategic combination the automatic doors product portfolio is a hand in glove fit with our demand creation and specification engine. This acquisition has greatly enhanced our leads and service capabilities and we look forward to much more long term profitable growth opportunities together.
I'll ask Mike now to walk you through second quarter financial results and I'll be back to discuss our updated 2023 out. Thanks.
Thanks, John and good morning, everyone. Thank you for joining today's call. Please go to slide number six.
Allegiant delivered another strong quarter with both top and bottom line growth as well as improving cash flows.
Revenue for the second quarter was $912 5 million, an increase of 18% compared to 2022.
Organic growth of five 6% was driven by price realization along with strong growth in electronics offsetting lower volumes in mechanical products.
Our access technologies acquisition contributed approximately 12% of total growth.
Adjusted operating margin and adjusted EBITDA margin in the second quarter increased by 130, and 110 basis points respectively.
These increases were attributable to strong operational execution, and favorable price and productivity, which more than offset inflation and investments.
Excluding our acquisition of Baxter's technologies, adjusted operating margin was up 270 basis points.
Adjusted earnings per share of $1 76 increased 33, SaaS, where approximately 23% versus the prior year.
Operational performance drove 20% earnings per share growth with additional earnings per share growth coming from acquisitions offset by the unfavorable impact of anticipated higher interest.
Details of our earnings per share performance versus the prior year or in the appendix year to date available cash flow was $191 million up nearly 125% versus last year. Please go to slide number seven.
I will start by reviewing the revenue results for the enterprise here before turning to our respective regions.
In Q2, we delivered five 6% organic growth driven by price realization across the portfolio.
Strong volume growth in electronics was more than offset by volume declines in our mechanical products.
Our access technologies acquisition serves as the primary driver of our 12, 5% growth in net acquisitions and divestitures.
Currency pressure were minimal in the quarter, bringing total reported growth to 18%.
First half organic revenue growth was 10, 2% overall driven by strength in electronics.
Americas operating growth was nearly 15% and international was down 3%.
Please go to slide number eight.
During the second quarter, we achieved double digit price realization, our electronics growth for the Americas was nearly 40% as we continued to see both improvements in our supply chain and strong demand.
Electronic component availability was significantly challenged in the first half of 2022, making the quarter an easier comparison versus the prior year as our supply chains are much healthier now.
In the second quarter, we saw soft mechanical volumes as customers adjust to a reduced lead times to our improved supply chain and operational execution.
Organic growth was up high single digits for both nonresidential and residential Americas businesses.
As John mentioned earlier access technology has now been part of the Legion for just over a year and we are pleased with the ongoing integration and results. This business had pro forma revenue growth of approximately nine 5% versus Q2 2022.
<unk> contributed over 16% to the Americas reported growth.
Our adjusted operating income of $205 9 million increased 32, 9% versus the prior year period, while adjusted operating margin and adjusted EBITDA margin for the quarter were up 190, and 180 basis points respectively.
Excluding access technologies, our Americas segment drove a 460 basis point improvement in operating margin versus the prior year. Our team is executing well and we were able to drive price and productivity in excess of inflation and investments to deliver the strong margin expansion.
Please go to slide number nine.
Our international business had a solid second quarter with revenues of $185 3 million flat on a reported basis and down 1% organically.
In the quarter price realization was more than offset by lower volumes, primarily associated with associated with our global portable securities business.
As we've discussed previously this business benefited from a COVID-19 related demand surge in the first half of last year.
We expect this market will normalize and be less of a headwind to our international segment in the second half of this year.
Our electronics and software solutions are performing well and continued to be a growth driver for our international segment.
In addition currency was a slight tailwind this quarter and positively impacted reported revenue by six tenths of a percent.
International adjusted operating income of $29 million increased 2% versus the prior year period, we saw significant improvement in adjusted operating margin and adjusted EBITDA margins.
30, and 40 basis points, respectively, when compared to last year. The margin improvement was primarily driven by favorable price and productivity in excess of inflation and investment reflecting strong execution by the team.
Please go to slide number 10.
Year to date available cash flow came in at $190 1 million up 100.
<unk> $5 6 million versus the prior year.
This increase is driven by higher earnings and lower cash used for networking capital, primarily offset by higher capital expenditures.
Working capital as a percent of revenue increase versus the prior year, partially driven by our access technologies business, which was not owned in the first half of last year.
Working capital management remains a priority of our company as we efficiently turn earnings to cash.
As committed we deleveraged following the acquisition of access technologies and our net debt to adjusted EBITDA is back down to two one times.
We repaid $60 million on our revolving credit facility in the second quarter and the remaining 30 million outstanding was repaid in the month of July .
This means we have completed our repayments of short term borrowings for the acquisition demonstrating our ability to effectively deploy capital and maintain an investment grade credit rating.
Our business continues to generate strong cash flow and our balance sheet continues to be in a healthy position I will now hand, it back over to John for an update on our full year 2023 outlook. Thanks, Mike. Please go to slide 11.
And as we look at the remainder of 2023, we're tightening our full year revenue outlook.
Also increasing our earnings per share outlook, we now expect the Americas segment to be between 15% to 16% for total growth and seven five to eight 5% organically.
Within the Americas, we expect to see nonresidential organic growth up high single to low double digits.
We expect the residential business to be relatively flat as electronics growth is expected to offset mechanical weakness in that segment.
As a reminder, our supply chain challenges in our Americas business began to recover in the second half of last year. So we will have a tougher comparable period in the second half of 2023. Additionally.
Additionally, due to our improved lead times this year and their impact on our nonresidential customers quarter and patterns seasonality is expected to be somewhat flatter than what it leads its history would imply.
For international we expect revenue to be down 1% to flat in total and down 1% to 2% organically.
The comparison for the international business is somewhat easier in the second half of 2023 as weaker market conditions really started to set in during the second half of last year.
All in for the company our growth outlook reflects total revenue growth to be between 11, five to 12, 5% with organic revenue growth of five five to six 5%.
As a result of our team's strong operational execution and favorable first half margin performance, we're raising our adjusted EPS outlook for the year and believe it will be between $6 $76 80.
Which is approximately 12 to 13, 5% over the prior year period and as you heard from Mike. This is primarily driven by operations execution.
Lastly, we are increasing our outlook on available cash flow for 2023 to be in the $500 million to $520 million range.
Please go to slide 12.
So in summary, ladies and delivered a solid first half of 2023 like we said at Investor Day, We have returned to a high operating level. Our teams are executing very well.
Also at Investor Day, we laid out the Elysian operating model that I'd like to go back and revisit a little bit about driving organic growth compounding that organic growth with both margin expansion and capital deployment, resulting in double digit EPS growth and I feel we're well on track to deliver all of that for 2002.
'twenty three.
Our end markets are stable demand is steady.
Electronics will continue to fuel our overall revenue growth as we stay focused on our vision of enabling seamless access and a safer world I am confident in our outlook and very proud of what our team and our distribution partners delivered this quarter and then my first year with Allegiant.
So with that we can open up the Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys if 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.
This time, we will pause momentarily to assemble our roster.
The first question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Yes.
Maybe just a first question to try and understand the organic sales guidance development first off so you raised the guidance.
In late April on organic sales and you've taken it down a little bit today.
So was it that you saw channel partners and customers.
Suddenly start to destock sort of late in the second quarter, maybe help us understand sort of what the process was behind that.
Guidance.
Revision and then also on the nonresidential market specifically.
It seems that the macro drivers in the Americas. It was still very good so perhaps a little bit puzzled that you don't see new orders coming in to sort of offset the destocking that seems to be happening in some some areas.
Yes, Julian if you think about the guide.
Last few years, we really struggled with lead times and we got considerably better.
The end of last year.
Our channel partners were maybe a little late to adjust to our reduced lead times. So what we saw in the second quarter is theyre starting to adjust that ordering pattern to our reduced lead times, especially on the mechanical side, they're back down to normal and we're let's say at March 31.
It took a little longer for them to adjust their ordering so they're burning through some of the work that they previously ordered as you know we're mostly a made to order business with channel partners will order based on what they think.
That you saw when you think of our business in general I talked about this in investor.
Expect for us to be total company, roughly 50, 51st half to back half.
And as you look at our guide right now you would say, it's roughly 50 50 as a company. So I do think in the second quarter. We did see that channel partners are adjusting to our improvement operationally, which is great because we put a water effort to get back to operating at a high level.
And then second part of your question related to markets I'll kind of let John answer that yes, Julian Thanks for the question.
We see some of those those same things and I think when I look.
If you just aggregate Americas, non res a little bit the institutional segment in particular shows.
<unk> to flash signals of resilience.
Health care education.
Even airports that probably are still then.
Benefiting phase from the infrastructure Bill because airport terminal renewal was one of the.
The funding principles there of that bill.
But the institutional segment continues to show.
Good signals positive signals and as you know, that's where our business is a bit heavily weighted now that being said are there pockets of weakness major metro commercial office I mean, that's been soft for sure that that's no secret.
But we're also late cycle, we're heavily weighted towards institutional segment seems pretty resilient. So in general yes, we feel.
Again.
Our exposure in non res is quite stable end markets are stable there.
That's helpful. Thank you and then just my follow up just to make sure we sort of calibrated properly within the second half.
Clearly seasonality as abnormal this year Youll revenues were down sequentially in Q2, which is unusual and you talked in the prepared remarks about flatter seasonality this year.
So should we assume that you have a much narrower sort of variability between the third and fourth quarter.
Earnings as we look at that and maybe sort of sales and margins also not that different across the two.
Yeah. Thanks for the question Julien.
Historically, you know us we are we don't guide quarters, but if you think about our business usually have a step down in Q4 versus Q3 in the Americas and its reverse in international if you think of the Americas. This year, we would expect that to be more flatter than normal.
So the way Youre thinking about without giving numbers is correct you shouldnt see as big a drop off from Q Q3 to Q4, when you model this versus let's say historical norms.
That's great. Thank you.
Thanks Julien.
The next question comes from Joe O'dea with Wells Fargo. Please go ahead.
Hi, good morning, Thanks very much.
Hey, I.
I guess.
In terms of that that last point and as we think about what's going on with channel partners and in volume trends and the swing from <unk> to <unk>.
As we think about the back half of the year and how youre thinking about channel inventory levels and given maybe not as much seasonality from <unk> to <unk>. It is that based on sort of an expectation that.
At the end of the third quarter. These channel inventories are sort of roughly normalized or just any views on timing of when those channel inventories get to a more or less normal state.
Yeah, Joe I think you would find and we find on our channel checks and customer visits a very wide range of answers there.
I think our two step distribution partners, our wholesalers would have a different answer than some of the more traditional.
Contract hardware distributors.
In our integrated hardware distributors might have a bit different answer I think.
In aggregate, we still hear comments like aftermarket activity is very strong, particularly in the non res space.
Again.
Leading macros would say the <unk>.
Institutional segment is still pretty resilient. So we still see I'd say, a good levels of sell through.
And.
The inventory.
State.
The business is going to be different.
Within the channel overall, I think the best way to think about it is you just listen to what Mike said and think first half second half 50, 50 is kind of the way, we see 2023 working out.
And then on the Americas margin.
Ex access tack that 31%.
Clearly a really strong margin level I guess, the just sort of framing that relative to some of the comments at the investor day and targets to grow margins 50 to 100 bps kind of annually.
Is there anything about the mix that you're seeing.
Or price cost dynamics that make kind of growing off of this base a little bit more challenging just kind of want to understand some of the strength behind that that margin in the quarter.
Yes, So Joe Great question as you know obviously the back half of the year won't have as much margin expansion year over year as first half.
Just because the back half of last year was pretty strong.
And so as a result, we still expect to see margin expansion in the back half in total.
But it won't be as strong as what you saw at the last two quarters, just due to the prior year comp.
If you think of last year, we started to really pick up operationally back half.
Long term on Investor day, I talked about that 50 to 100 basis point improvement that's part of our operating model and we still believe on a long term basis, we can deliver margin expansion in those levels.
Quarter to quarter, it could change or by a prior year comp, but think of the so operating.
<unk> model, where we're going to drive price and productivity to offset in fund that inflation and investment drive some expansion with that and the volume leverage. So in total the operating model I talked about in length at Investor Day still holds and we feel good about the progress we've made.
For item dynamic I've talked about over the last year. That's still holds but you will see a step down in the realization percentage due to the prior year comparable.
Got it that's helpful, Mike and Mike My follow on since I think you referenced that equation.
Is that that price and productivity net of in placement investment is the strongest I think we've seen in really many years.
So can you maybe just break down a little bit what youre seeing on the productivity versus the investment side and again, how that that's expected.
The cadence for that going forward through the remainder of the year, Yeah, Joe really don't want to give individual numbers, but I will say you are seeing an improvement in our productivity and our efficiency right. So as we our supply chain has normalized and we operate at a higher level, we are driving a higher level of productivity.
<unk> than what you saw in <unk>.
'twenty to 'twenty, one and so we're really really excited about the momentum we have in productivity, we expect that to continue as an organization.
And we do expect.
To continue to invest in our business to drive that topline growth thinking about the great opportunity that electronics and software provides us. So we'll continue to invest in the business, but what you saw this quarter you do have better operational efficiency and productivity.
Has that has been a focus for us.
But that just to be just to be clear that that equation is expected to remain like pretty strongly positive in the back half of the year correct, Yes, I don't want to forecast or guide that dynamic just make sure you get the margin rate right. As you look at our EPS guide in revenue.
Kind of gave you the pricing as well so you can back into the all the dynamics you need for your model, but expect to see margin expansion in the back half.
And then as you look at quarters, just be cognizant of our Q3 Q4 comparable of last year as well.
Understood. Thank you.
Yes.
The next question comes from Josh Poker, what scheme with Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Yes.
Just wanted to tease out if we can you know somebody's supply versus demand signals on the mechanical side I think we've heard elsewhere in terms of the kind of normalization. Some destocking I guess those could be two separate things the same concept, but any indicators that you are getting from <unk>.
Distributors or maybe specifying architects on demand signals or sell through in June maybe just to kind of match up that supply versus demand dynamic a bit better yes, Josh.
Segment this down a little bit so I think when you look at mechanical.
Products broadly.
As we indicated in the comments.
Residential mechanical for us is indeed soft.
Offset by very strong electronics performance.
And the non res side I think that dynamic again, you can imagine if for the last.
Eight 910 months, you are placing their orders and youre not getting delivery for <unk> 2008 weeks and then suddenly you are getting delivery in two to four weeks.
It takes a little bit to work through that I think channel checks have anecdotally indicated things to us like.
When you look across the Americas places like the Midwest, South southeast really really strong.
If you go to some major metro areas that are probably a bit heavy commercial office they are pretty light.
So it's pockets of strength pockets of weakness.
On balance we still see good sell through we still see that the non res market is stable primarily supported by the institutional segment.
Super helpful.
And then just to pick up some comments that you made and I guess.
Congrats on the quick Delevering.
Post the access technologies.
I think at the Analyst day, you know a lot more focus on growth and inorganic growth was a piece of that.
How would you characterize the pipeline right now and you know and what you guys are seeing out there, especially with now higher interest rates and maybe some less competition.
Yes.
I'd say short of talking about any specific targets or anything I would feel very good about.
The top of our funnel in terms of looking for acquisition targets I think again think of us as a pure play provider of security and access solutions.
We've talked a lot about the <unk>.
Importance of <unk>.
Elektron ex the importance of controlling software really driven by the increasing use of smartphone wallets and mobile credentials.
That as a as a macro tailwind really propelling and giving new uses for smart hardware electronic access control solutions.
We feel again as.
As an industry that still all the signals we can find that's still high single digit growth that we can tend to outperform by a point or two and get a leasing performance in the low double digit range.
And certainly acquisitions plays a part in that and I think as we've said now.
You can look for us to be acquisitive.
You can look and expect us to also be a disciplined buyer.
But we do see acquisitions, playing a key role in our overall growth strategy.
Good color. Thanks, I'll leave it there thank you.
The next question comes from Andrew <unk> with Bank of America. Please go ahead.
Hey, guys. Good morning, Hey, good morning, guys.
Just a question on international market volumes.
Delighted portable security.
Weakness, but it seems like underlying volumes got sequentially, a little bit better.
Can you just I know that it's fairly diverse.
Group of countries, but can you just highlight dynamic maybe by region, you know, Italy, Spain.
France Central Europe , Korea, Australia, just any granularity on what's happening there.
Yeah, I will take a little bit different angle and hope it still answers your question Andrew but it's of course. Thank you so I would say.
The portable security business without a doubt volume drag no doubt about it as Mike mentioned in the prepared comments the post COVID-19 demand Spike that you saw in that space was quite dramatic we do expect that market is going to normalize as you get into 2024 and 'twenty five.
But I would say and we're not alone in CNS or commenting on it but residential in general in Europe is rather weak.
And that's by and large on mechanical business. So those volumes are under pressure there's no doubt.
Our electronics and software solutions would still be in probably the low double to mid mid teens.
Organic growth. So we feel really good there which is again more on.
The commercial side of our business the non res side of our business.
APAC for US you know, we do have some China exposure, it's not a lot but there is there is no doubt China is under a lot of pressure and so are relatively small but profitable business. There is certainly lower.
Relatively speaking.
Australia, New Zealand pretty steady pretty steady pretty stable kind of falling in line with what you'd see in the Americas.
Stable end markets, our teams are performing well there.
Okay, and just maybe a follow up question related to institutional.
Hey, if you could sort of differentiate between whats happening hospitals and schools because it seems the dynamic is somewhat different M. B a more interesting question.
And you guys turned me onto this years ago, but.
If you look at our Muni bond issuance and tax receipts.
What's your latest read on the environment go into the second half in 'twenty four because I know you guys have an educated view there. Thanks so much.
Youre very kind in your your comments Andrew.
I would say.
Looking at the institutional segment, you don't see quite the amplitude of volatility that you might see in other parts of the commercial business, it's a little bit steadier, it's a little bit more stable that is the segment that we performed very well isn't that the segment.
Where codes compliance safety standards for your building really matter and Thats, where our allegiant differentiates and I think really excels.
Health care has been pretty resilient education has been pretty resilient.
And that's both higher Ed and K 12.
School safety is always important allegiant has for a long time been a very proud and vocal advocate for proper standards proper codes and compliance.
We've increased our human resources human capital in that space and continue to be.
A very positive participant.
And the industry for school safety there.
When we look at things to to the second half your question like Muni bonds and state tax revenues.
The picture is actually pretty stable pretty pretty favorable I'd say state tax revenues look to be relatively high.
Mike what you saw back in the OLED <unk> crash.
Environment is a little different this year, maybe some COVID-19 stimulus maybe just.
Good economic growth very low unemployment et cetera, the tax revenues at the state level seems to be pretty good from the data that we see.
<unk>.
Bond issuance in 'twenty, one 'twenty two was very high.
And obviously, it's taken a bit of a dip here, but seems to be sequentially recovering somewhat.
Then also remember Andrew Allegiant is a late cycle, so from bond issuance to budget development two projects being firmed up to <unk>.
<unk> in the dirt so to speak to finally doors and door hardware going on that can take some time.
And so I think in general looking at bond issuance over the long term drawing a trend line. There you can kind of understand why that segment, we see as particularly stable.
And so I'd say again flashing signals of resilience in the institutional segment would be the way we would see it.
Thank you.
Thank you.
Our next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, Thanks, two questions for me any way to quantify the impact of the order pattern adjustment for mechanical for the full year and then on electronics when do you see the lead times normalizing there and could we see a similar order pattern adjustment at some point there. Thank you.
Yeah, So I'll talk about the first one if.
If you think of our business Ryan I keep on talking about that roughly 50, 51st half to back half.
So if you think about it for the full year guide that will be.
<unk> completed by the end of the year. So it really won't have an impact on full year, but you could see a flatter quarter to quarter variance like we talked about.
Earlier in the call so for a full year, its really not applicable but.
When you think about quarterly timing. It does result in a little more smoothing quarter to quarter over the last three than you would normally expect.
And then remind me again your second question electronics.
But like electronic jump in yeah. The electronics should we expect to see a similar ordering pattern adjustments and lead times et cetera.
Lead times have been coming down.
Say that is the portion of our business where lead times are still a little bit extended.
Certainly down from the peaks that we saw in the middle of last year.
But maybe not yet back to normal but have been on a pretty good glide path to getting back to a more normal state.
Backlog, there is still a little bit elevated there demand is still strong.
You see the our Investor day material in talking about the non res mechanical segment being a low single digit growth industry.
The electronics portion would be high single digit growth.
I think that's the main thing is we see that as a <unk>.
The key growth driver. So we'll have that same dynamic pop up in the channel It certainly could.
Yet to be seen and I think as we all get a little bit smarter here, having gone through these quite volatile and dynamic times of the supply chain.
Maybe with good work, we can we can mitigate it but yet to be seen I guess I don't have a real good.
Detailed forecast for you there, but we'll be watching out for it yes, and just add Brian just remember that electronics, we talked about it extensively at Investor day about what a real strong long term growth driver that is for us. So demand there as John mentioned is still really strong so as you think about.
That business moving forward that electronics business should be a double digit growth long term driver for us. So this is not a couple of quarters of growth. This is a long term growth opportunity for us.
Got it thank you.
Yes.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone Hi, David.
Hey, I just wanted to maybe build on Brian's question on the electronics.
Obviously, a 40% number is a huge number there's a lot of backlog clearance going on there.
You talked about kind of the makeup of the high single digit growth that's underlying that.
Is there any way to sort of sort of trifurcate that down between institutional and commercial and residential or just give us a better feel for what the second half of this year demand in electronics is likely to look like by sort of that framework, yes, what youll see David a couple of dynamics in the second quarter and I talked about it earlier in the prepared remarks.
Admittedly Q2 last year was a little weaker so you do have some growth here due to a weaker <unk>.
Previous year, but still this is now four quarters in a row really strong growth in electronics, we saw strength in both electronics growth in <unk> as well as non res. So both were strong in the quarter.
And as we look forward to the ended the year.
The back half, we expect to see good growth in electronics. The one thing I'll remind you is the comps in the back half of last year get much tougher, particularly in electronics right. So if you remember last year, we through some pretty robust numbers up in the back half. So just make sure you take that into.
<unk> when you model.
Your electronics, but overall still expect to have some good growth this year and beyond this year in electronics in both res and non res.
Okay. Thanks for that and then secondly, just a question on the access technologies.
If you could just talk about the extent to which you've been successful building out the recurring service revenues in the first year of ownership.
Maybe just also remind us on the scale the international business <unk> you Greg.
With that business over the first year.
Yep Yep.
Really good question David.
Always thrilled to talk about access technology, that's been a great add to the Allegiant portfolio.
I would say.
The the service side of the business has historically been about 40% of the total it has also historically grown around a low double digit rate.
High single low double digit rate and so we feel really good about that we see lots of future opportunities and potential there as our overall, our total allegiance service capabilities continue to expand and grow.
Then I would say in terms of an international presence with access technologies.
And it's quite small so it's not zero, but it's quite small this is mainly in the Americas business and where we really focused the investments in new product development and.
Just really staying close to those customer requirements.
Are you focused on putting more feet on the street.
Certainly it's a human capital intensive business right. These are these are fair.
Very highly qualified very highly trained very professional service technicians that go out and do this work I'd say it's a.
It's a lot of things, we got to put better productivity tools in their hand, better diagnostic tools in their hands, we're working on a variety of technology there.
And then.
As we work together with certain channel partners as well, making sure we got the right coverage and the right people to take care of those customers. So the human element is important absolutely technology is also important there.
Are you able to find those people I mean are you having.
I'm just wondering how much of a struggle with us too.
Sure.
Identify and recruit and retain those people okay. So three follow on alright.
Yeah, I'd say, obviously, you said you'd like to talk about access technologies.
Yeah don't take advantage of them come on.
These again these people are hard to find that won't that won't sugarcoat. It. These are very highly skilled very professional technicians.
But we put a lot of investment into training and support as well and so we have to be very choosy. Because these technicians are the ones keeping our customers up and running.
So it's.
It's not just hire as many as your cabinets hire the best and that's what we focus on doing.
Thanks, very much for the questions.
Thanks, John .
The next question comes from Brett Linzey with Mizuho America. Please go ahead.
Hey, Thanks, Good morning, Hey, just a question on electronics versus mechanical I know historically, you've said that margin profile is similar but curious as you get more scale in that category and considering all the redesigns in the reengineering you did last year is there headroom for the for the HELOC gross margin to move higher over time.
Brett we think about gross margins for the organization moving higher over time as we drive the <unk>.
<unk> productivity.
In excess of the inflation and investments and we leveraged volume growth.
So I don't think it's just an electronics I think as an organization.
We're going to drive margin expansion.
Uh huh.
With respect to electronics, I would say, they're roughly similar percentages, but with a higher selling price electronics will give us a little more dollars per every unit of sale. That's a dynamic we've talked about in the past. So it's great. When we can upsell to an electronic device and its something were focused.
To drive long term.
Great and then just on the international side, clearly volumes continued to be weak, but margins pretty solid in the quarter, our price and productivity.
Assuming the volume environment remains soft do you think.
Tim and team can defend the operating margins in that low double digit range.
Just curious what the sensitivity might be on the upside or downside.
I appreciate the question because we were really proud of what the international team put up in <unk>.
That revenues roughly in still driving margin expansion to your point.
Price productivity net of inflation and investments is a positive dynamic for that group.
Say like previous quarters.
<unk> International business is on a much more firm foundation as a business and we're continuing to find improvement opportunities. So Tim and the team are performing very very well, we're proud of what they are accomplishing and I think we're making.
Good progress against the goals that we've got set up for international I appreciate you calling that out.
Yes, thanks for taking the question.
Okay.
This concludes our question and answer session I would like to turn the conference back over to John Stone, President and CEO for any closing remarks.
Thanks, very much and thanks, everyone for a really great Q&A.
And just to really quickly wrap up the main themes you heard today electronics continues to be a strong growth engine for us and we believe we're in the early innings of adoption there within the industry. The driver here is the flexibility and added layers of securities that are available when you adopt smart hardware in mobile credentials.
Our end markets are stable and while we saw a softening in mechanical volumes this quarter as customers adjusted to our improved lead times.
Indications from our channels show steady demand stable end markets.
Allegiant team continues to deliver outstanding operational performance. Our team is controlling the things they can control and they're executing very well in my opinion.
This is marked by strong margin expansion and increased cash flow with this we're confident in our performance for the remainder of the year and raising our full year EPS outlook. As a result, thanks very much have a nice day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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