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spk04: Good morning and welcome to the Allegiant Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your touchtone phone. After today's 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 2. 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 Treasury. Please go ahead.
spk12: Thank you, Andrew. Good morning, everyone. Welcome and thank you for joining us for Allegiant's third quarter 2020 earnings call. With me today are Dave Petratis, Chairman, President, and Chief Executive Officer, and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegiant. 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.allegiant.com. This call will be recorded and archived on our website. Please go to slides number two and three. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will now discuss our third quarter 2020 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 in one short follow-up, and then re-enter the queue. We would like to give everyone an opportunity, given the time allotted. Please go to slide four, and I'll turn the call over to Dave.
spk10: Thanks, Tom. Good morning and thank you for joining us today. I'll start by walking through the third quarter financial summary. Revenue for the third quarter was $728.4 million, a decrease of 2.7% or 3.4% organically, which shows sequential improvement from Q2 to Q3. The organic revenue decrease was driven by continued economic challenges stemming from the COVID-19 pandemic. Currency tailwinds provided a boost to total revenue and more than offset the impact of divestitures of our business in Colombia and Turkey. Patrick will share more detail on the regions in a moment. Adjusted operating margin increased by 20 basis points in the third quarter. I'm extremely proud of the resiliency shown by the Allegiant team. We executed extremely well and the cost management actions taken during the year helped mitigate the deleverage from volume declines. Positive price and muted inflation also helped deliver the operating margin increase. Adjusted earnings per share of $1.67 increased 20 cents or approximately 14% versus the prior year. The increase was driven primarily by favorable other income Tax rate and share count offset the lower operating income. Year-to-date available cash flow came in at $256.1 million, an increase of just over $26 million versus the prior year. Improvement in net working capital and reduced capital expenditures more than offset the lower net earnings. Please go to slide five. Access has been part of our company's heritage for more than 100 years, and our vision of seamless access and a safer world are providing a sound foundation for our future. In the realities of a post-COVID world, customers have new concerns and new needs for healthy environments. The importance of making home, work, and institutions safer has never been so important to our customers, and the need for touchless access is not going away. Our business is disciplined and focused, prioritizing investments in our seamless access strategy. As a result, Allegiant continues to deliver leadership and innovation across the portfolio. Our Schlage brand is a 100-year-old powerhouse that spans the globe. In the building channel, our mix of Schlage mechanical and electronic solutions continue to help us win projects, including a new development community in Florida with over 3,000 homes. Allegiant is further advancing seamless access for builders with electronic solutions that provide contactless home showings, and the Schlage Encode smart deadbolt continues to gain momentum in both residential, new construction, and retail markets. On university campuses, Among the first schools to adopt Schlage security solutions for Apple Wallet are the University of Tennessee, University of Vermont, and the University of San Francisco. Allegiant now supports contactless student IDs across Apple Wallet, Android, and Google Pay. For commercial and institutional markets, we have a full suite of mobile-enabled Schlage locks and readers. In a post-COVID environment, mobile technology, contactless hardware, and readers in combination with wave-to-open actuators now extend our touchless options for interior and perimeter security. Seamless access also gained ground outside the Americas in Q3. Simons Voss is celebrating its 25th year as an electronic access innovator. and was recently recognized in Germany as the number one electronic locking system manufacturer. In Australia, we just delivered the Gainsborough Freestyle Electronic Tri-Lock for single-family and short-term rentals, giving the owner full control of access from a mobile app. And in Australia and New Zealand, we introduced the Schlage OmniFire-rated Smart Lock for multifamily and office settings. In the quarter, we booked over 4 million in orders to support and provide seamless access to solutions to a global leader in social media to be delivered in 21. Our investments in seamless access are bolstered by global accelerators. Allegiance partner of choice and open credential strategy is an important accelerator. More than 45 physical access control software providers already integrate with Schlage electronic locks and devices. Many of them are moving to integrate to our mobile credential ecosystem as well. Our global accelerators include e-commerce, touchless access, and increased focus on visitor management and occupancy monitoring. Teamless access is providing to be a strong foundation for our future. Patrick will now walk you through the financial results, and I'll be back to later discuss our 2020 outlook and wrap up.
spk13: Thanks, Dave, and good morning, everyone. Thank you for joining today's call. Please go to slide number six. This slide reflects our earnings per share reconciliation for the third quarter. For the third quarter of 2019, reported earnings per share was $1.40, adjusting 7 cents for the prior year restructuring expenses Integration cost-related acquisitions and debt refinancing costs, the 2019 adjusted earnings per share was $1.47. Favorable other income and interest expense increased earnings per share by 15 cents. The increase was driven by an approximately 14 million non-cash currency translation gain related to the liquidation of a legal entity in our EMEA region. This benefit would not be expected to recur in 2021. Favorable year-over-year tax rate and share count combined to provide another positive $0.08 per share impact. Operational results decreased earnings per share by $0.03, driven by Volume D leverage that was nearly offset by favorable price and productivity exceeding inflationary impacts, as well as favorable currency. This results in adjusted third quarter 2020 earnings per share of $1.67, an increase of 20 cents or approximately 14% compared to the prior year. Lastly, we have a 9 cent per share reduction for charges related to restructuring and impairment costs. After giving effect to these items, you arrive at the third quarter 2020 reported earnings per share of $1.58. Please go to slide number seven. This slide depicts the components of our revenue performance for the third quarter. I'll focus on the total legion results and cover the regions on their respective slides. As indicated, we experienced a 3.4% organic revenue decline in the third quarter. The COVID-19 pandemic continued to have an impact on the top line number, although we did realize the benefit of delayed projects from the prior quarter. As shown in the trending chart, revenues rebounded nicely, but were short of the very strong quarterly results in the prior year. Despite the difficult and uncertain times we are operating in, the overall business performed very well, particularly in the supply chain and meeting customer requirements. It is also important to note that price remained solid in the quarter, which slightly offset the volume pressure. Currency also provided a tailwind to total growth and more than offset the impact of the divestiture of our businesses in Colombia and Turkey. Please go to slide number eight. Third quarter revenues for the Americas region were $539.1 million, down 5.1% on a reported basis and down 4.6% organically. The decline was driven by volume challenges on the non-residential business due to the COVID-19 pandemic and was partially offset by good price realization and strength in the residential business. The non-residential business was down low double digits. Conversely, residential bounced back nicely and grew at a low double-digit rate. The Americas electronics revenue declined in the mid-single-digit range as discretionary commercial projects are delayed. We see electronics and touchless solutions continuing to be long-term growth drivers and expect electronics accelerated growth to resume when market conditions normalize. America's adjusted operating income of $166.6 million decreased 5.1% versus the prior year period, and adjusted operating margin for the quarter was flat. Discretionary cost actions, restructuring benefits, and material deflation mitigated the impacts of Volume D leverage and unfavorable mix. Please go to slide number nine. Third quarter revenues for the EMEA region were 148.4 million, up 7.7 percent, and up 2.9 percent on an organic basis. The organic growth was driven by strength in the global portable security and Simon's Voss businesses, as well as solid price realization. Favorable currency impacts contributed to the total revenue growth and was slightly offset by the impact of the divestiture in the business in Turkey. EMEA adjusted operating income of $17.1 million increased 42.5 percent versus the prior year period. Adjusted operating margin for the quarter increased by 280 basis points. The margin increase was driven primarily by price and productivity exceeding inflation. Productivity was bolstered by benefits from lower operating costs from the restructuring actions taken earlier in the year, and discretionary and variable cost reductions. Please go to slide number 10. Third quarter revenues for the Asia Pacific region were $40.9 million, down 4.2% versus the prior year, with an organic revenue decline of 6.8%. The decline was driven by continued COVID-19 related impacts and weakness in Korea. Our Australia business performed quite well despite the ongoing pressure in Australian end markets. Currency tailwinds offset some of the organic revenue decline. Asia Pacific adjusted operating income for the quarter was $3.2 million, a decrease of $1.2 million, with adjusted operating margins down 250 basis points versus the prior year period. Of note, the prior year operating income includes a $1.1 million favorable one-time item related to the recovery of previously remitted non-income taxes. This had a 260 basis point favorable impact on Asia-Pacific margins in Q3 of 2019. Excluding that, margins were essentially flat year-over-year with the volume D leverage and unfavorable mix being offset by favorable price and productivity exceeding inflation. Please go to slide number 11. Year-to-date available cash flow for the third quarter 2020 came in at 256.1 million, which is an increase of just over 26 million compared to the prior year period. The increase was driven by improvements in net working capital and reduced capital expenditures, which more than offset lower net earnings. Our strong cash flow generation has been an asset to the company. This was evident in the third quarter and will continue to serve us well during the current market environment. Looking at the chart to the right, it shows working capital as a percentage of revenues decreased based on a four-point quarter average. This was driven by reduced working capital needs from the lower volume, as well as strong collections performance. The business continues to generate strong cash flow, and we remain committed to an effective and efficient use of working capital. We will continue to evaluate opportunities to optimize working capital and drive effective cash flow conversion. Please go to slide number 12. Our financial liquidity position remains extremely solid. Our net debt to EBITDA ratio is 1.6 based on the last 12 months' performance. Our debt covenants are well within the required limits, and we have no near-term debt maturities. Our 500 million credit facility remains untapped. Our quarterly dividend in 2020 increased 18.5% through the third quarter. This is the sixth consecutive year of annual increases. In addition, with a strong operational execution and cash generation, the increased cash position since the beginning of the year, and better visibility into business conditions, we have resumed share repurchases under our previously authorized $800 million program. As you have heard us say numerous times, we've put our excess cash to use as part of our commitment to a flexible and balanced capital allocation strategy. I will now hand it back over to Dave for an update on our full year 2020 outlook.
spk10: Thank you, Patrick. Please go to slide number 13. As you know, we were one of the handful of companies who provided an outlook following Q2. With another quarter behind us, In a bit more clarity, we are updating our outlook for 2020. In the Americas, we expect to see continued pressure on the non-residential business as discretionary spending in commercial markets remain tough due to the people continuing to work from home. In institutional markets, the projects already started will continue to finish. The rate of completion may be slowed as restrictions for the number of people on job sites remain in place and supply chain issues to the construction sites. Residential markets are expected to remain strong in all channels we serve, big box retail, e-commerce, and new construction. With these expectations, we are improving the organic revenue outlook in the Americas to be down 5.5 to 6% for the full year. We are projecting America's total revenue decline to be 6% to 6.5%, with a slight impact from the divestiture of the business in Colombia. In Europe, we saw sequential improvement in Q3, and we expect Q4 to be better than the year-to-date performance we have experienced. For the region, we now project organic revenue to be down 6.5% to 7.5%. Total revenue includes currency tailwinds in the latter part of the year, as well as the impacts from the divestiture of the businesses in Turkey, and is projected to be down 4.5 to 5.5 percent for the full year. In Asia Pacific, markets were weak before COVID-19, especially in Australia. We expect that, along with the weakness we are experiencing in Korea, to continue. With this backdrop, we expect 2020 organic revenue decline of 12 to 13% and 2020 total revenue to be down 12.5 to 13.5% with a slight impact from currency. We are projecting total and organic revenue for the company to be down 6 to 6.5%. We are raising our outlook for adjusted earnings per share to a range of $4.75 to $4.80. Although net investments are assumed to be relatively small in the revised outlook, we remain committed to investing in innovation that supports our seamless access strategy. This outlook reflects the reprioritization of investment to support the expected future electronics growth. Our revised outlook assumes a full-year adjusted effective tax rate of approximately 13%, as well as outstanding weighted average diluted shares of approximately $93 million. The outlook additionally includes approximately $1.30 to $1.35 per share impact from impairment and restructuring charge during the year, most of which have already occurred. As a result, reported EPS is estimated at $340 to $3.50. Finally, our revised available cash flow outlook for 2020 has increased and is now projected to be in the $400 to $420 million range. Please go to slide 14. Allegiant has strong business fundamentals and a proven ability to execute and adapt to a changing and uncertain market conditions. We have managed the business extremely well to mitigate the impacts of the ongoing pandemic. We remain ready to serve our customers and meet their needs for touchless access and healthy environments with our market-leading brands. We will provide an official outlook for 2021 during our Q4 full-year call early next year. But as we think about the remainder of the year and begin to look at 2021, some key observations that we see are, as previously expected, commercial and institutional markets will continue to be soft in Q4 and in the first half of 2021. with a snapback in repair, retrofit, and small projects beginning in the second half of next year. U.S. state and local bond issues continue to be moved ahead and supported by local communities. Residential end markets are expected to remain strong for the long term as an undersupply of single-family homes is corrected. We will continue to manage our cost base to help aggressively mitigate any volume reductions. Seamless access, software, and electronics will drive growth and continue to be among our top investment priorities. They are our future. Strong cash flow generation will remain a focus with capital deployment to enhance shareholder returns. Going forward, Allegiant will be leaner and more focused as we navigate the coming months and emerge from the pandemic. We have implemented restructuring actions during the year that have addressed the cost base in order to right-size the business. We will continue to evaluate business going forward and make necessary changes. Our execution and commitment to driving solid results will remain high. In closing, Allegiant's future is bright. We thank you and will now take your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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. Please note, you may ask one question and one follow-up, and then you may re-enter the queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Chris Snyder of UBS. Please go ahead.
spk08: Thank you for the question. Could you, you know, just maybe unpack the Q4 guidance a little bit, you know, just I guess specifically as it relates to the resi and the non-resi piece in the Americas?
spk13: So we don't provide specific guidance by quarter. You can obviously back into that relative to our four-year guide. You know, I would say, you know, basis of our Q3 performance is strong, both in terms of top line and operating income margin performance relative to the backdrop of what's going on around the globe. I would say you can kind of see similar type of patterns in terms of both the non-residential and residential businesses in terms of what you saw in Q3. But we'll continue to manage the costs to help mitigate any relative to the non-residential business and the margin impact. We do have a mixed impact that's going on here relative to growth in residential and softness in non-residential business.
spk08: Appreciate that. And then maybe just following up on the resi piece, and I certainly understand – your comments on you know the the resi new construction cycle um you know picking up and we've had low household formations for a long time now so certainly um you know see that view but i guess specifically as it relates to you know maybe the the restocking cycle i know there was the q2 supply chain disruption like you know has that has that restocking cycle fully been realized at this point maybe what's kind of like the runway there that you see growth just on that end
spk10: I would say as we look at the res segment and the pause that was taken by all suppliers in Q2, we're at record backlogs, and normalizing that will take certainly into early Q2.
spk08: Thank you for that, Collar. I very much appreciate it.
spk04: The next question comes from Ryan Merkle of William Blair. Please go ahead.
spk01: Hey, thanks. Good morning and nice quarter.
spk10: Thank you.
spk01: So first off, America's electronics revenue down mid-single digits is much improved. You gave some remarks that the trend of touchless access is real and happening. Do you expect this business to turn positive in the fourth quarter? And could electronics provide some offset to weaker underlying commercial trends in 2021, or is that a bit of a reach at this point?
spk10: Electronics will be positive in Q4. As you look at the year, electronics mirrors our res and commercial performance. extremely strong, electronics res extremely strong, somewhat muted in commercial institutional. Two reasons for that. The strength in residential electronics is driven by supply chain strength and an extremely strong position in the portfolio of our products. The Schlage Encode, the Schlage Connect, our KPL locks are some of the best products on the market. So where was the growth in the quarter? In Q3, we had a supplier affected by COVID, and we lost a couple weeks with that. The demand did not stop. It affected our ability. And if you normalize that through the balance of the year, our growth in electronics, you know, led by REZ, continues. So, you know, feel good about that.
spk01: That's super helpful. Thanks for that. And then I want to follow up on the 4Q guide and maybe ask it a little differently. It seems to imply America's revenue down mid-single digits year over year with flattish margins, just like this quarter. So if I have that right, why is there not more improvement in America's business than 4Q?
spk13: So, you know, I would characterize it this way. Entering into Q3, we had stronger backlogs. particularly in the non-residential business. Some of the projects were delayed in the catch-up and that type of thing. And so we were able to maybe operate more efficiently from a manufacturing perspective that helped the margin profile in the business. Two would be in Q4, maybe a stronger negative mix component relative to the residential, non-residential sales in the quarter. as well as within the channel and product segments within the non-residential business. So there's a lot of things going on there. But, you know, quite frankly, we will, as I said earlier, continue to manage the margin well. I was very happy with the progress we made relative to some of the mitigation on the cost side. And you saw that with, you know, strong overall margin improvement relative to the prior year.
spk01: Yep. Thanks. Pass it on.
spk04: The next question comes from Josh of Morgan Stanley. Please go ahead.
spk05: Hi. Good morning, guys.
spk10: Good morning, Josh.
spk05: Dave, just coming back first to some of your comments on the channel replenishment that's necessary in res and appreciate that kind of side point on maybe some of the interruptions on the electronic side that kept fulfillment maybe capped there. Would you mind quantifying how big of a replenishment still needs to happen? You know, if I remember your comments last time, it was kind of through one queue. Now it sounds like early two queue, so maybe a bit of a push out there. But, you know, how many weeks of inventory or, you know, points of demand, however you want to put it, does the channel need to kind of get back to normal levels on the res side? So...
spk10: Josh, you know, I would, you know, sort it out in my mind is we leave Q3 with record residential backlog, number one. As I think about, you know, bringing that backlog down to normal, it pushes us into Q2. It's not inhibited by our ability for throughput, you know, just with the small disruption that we have expanded capacity of our residential capability significantly. Demand is good. We've done a good job picking up builders, expanding space at big box. E-commerce remains extremely red hot. And I believe it's our ability to keep our customers in product that has built that backlog I would say gaining share and a strong suite of electronics that has enhanced our position. I'd add one other comment. I'd add one other comment. Allegiant's ability to flex that supply chain is as impressive of anything that I've seen in my 40 years of manufacturing.
spk05: Got it. Appreciate that call. And then just a follow-up. Dave, I appreciate that even going back to April that you've been cognizant that the current environment probably doesn't support an awesome 2021 for non-res. I think that's now much more apparent to a broader range of folks. If I kind of take some of your comments as a time series, starting from the first quarter earnings, It doesn't really sound like much has changed in the outlook as you guys have seen more data come through and have gotten closer to next year. If anything, you know, some of the bond issuance commentary sounds a bit more supportive than what we would have known back then. Is that reading it right? I mean, I guess, you know, how do you feel versus, you know, some of those early observations when we were in the first half of the year and this was all still fresh?
spk10: So barring a ruptured, I believe, you know, we're lifting off the bottom. I was extremely encouraged by the ABI lift from 40 to 47. Our spec levels are just slightly lighter than last year. So, you know, I think that's a net positive. But I've also got to be cognizant in our key markets, commercial, institutional markets, especially institutional, the priorities around keeping people safe, keeping people socially distanced, keeping people, uh, uh, capacities properly managed. So in my mind, there are small projects, break, fix prevented maintenance that gets delayed. And I believe as COVID winds down in Q2, we're going to see a snap back in those types of projects. And, uh, you know, things will move back towards normal as we get to 22. Got it. Great call. Thanks, Dave.
spk04: The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
spk14: Thanks. Good morning, everybody.
spk04: Good morning.
spk14: Hey, Dave, just to, you know, hate to harp on the 4Q commentary, but I just want to make sure I understand it, particularly in America. So it sounds like On the residential side of things, things are very strong, right? Your backlog's at record levels. Electronics is supposed to be up in the fourth quarter. So the implied step down then in 4Q, is that just non-res is going to get worse in 4Q versus 3Q? And maybe just any color inter-quarter on how trends played out in non-res would be helpful.
spk10: I would say, you know, getting back to Patrick's comments, you know, the The slowdown, in some cases, shutdown in Q2 set us up for a nice backlog to saw through in Q3. We did a good job in that. Primary commercial institutional demand has softened, and we see that in Q4. That's how I'd describe it from a demand standpoint. As you look at the margin profile in that, the res demand is extremely strong, but we, you know, it creates a mix issue. You know, our commercial institutional is, is significantly more profitable and those factors work through the fourth quarter.
spk14: Okay, great. I appreciate the clarification. And then I guess, you know, just the, the follow-on question, thinking about this, you know, a little bit longer term, I, You know, ahead of the pandemic, you know, you guys were pretty front-footed in discussing, you know, some of the, you know, not just like supply constraints, but really labor constraints in some of these projects moving to completion. I guess as you think about the institutional or non-res markets and what you have in your backlog, like how much more visibility do you have, I guess, into 2021? And how much more backlog do you have to complete? I'm just trying to understand, like, how much we've worked through versus what's left to complete before, you know, we kind of head into 2021.
spk10: So as I think of 2021, you know, I talked about spec writing. You know, we're looking, you know, at incoming order demand, especially, you know, project-related and the backlog, right? Incoming project quotes, again, muted. Our backlog, if you look at it over 36 months, is in the low end of the range. It's not unhealthy, but we would typically go into a softer backlog this time of year. But again, it's on the low range. Then you've got to get your crystal ball out and my crystal ball out. The economics that we continue to look at suggest softness, and that's what we suggest.
spk14: Okay, great.
spk04: Thank you all. Next question comes from Julian Mitchell of Barclays. Please go ahead.
spk02: Hi, good morning. Good morning. Maybe just moving away from the top line for a second, very good productivity performance in the quarter with the margins up year on year. You've booked some more restructuring charges. So maybe as we look at 2021, is there any way that you could describe the sort of carryover fixed cost savings into next year that should support margins and any sense around perhaps temporary costs that might flow back into the P&L. Really just trying to get a sense of any major moving parts, the margins next year, aside from volumes.
spk13: Yeah, Julian, you know, I would characterize it this way. You may recall in the last quarter conference call, we kind of outlined what we were doing this year, you know, this $80 million kind of cost reduction takeout for 2020, and we characterized that as kind of three components, which was the discretionary, variable, structural, permanent type of cost savings. And if you look at those specifically on the permanent structural cost savings, to answer your question, we've been at it, you know, pretty solidly, I'd say, over the last couple of quarters. We're now hitting, I'd say, a full strike. in terms of the cost takeout associated with that. We've identified some additional measures as well that will help us into 2021. So there's carryover benefit, particularly in the first half of 2021, that will help mitigate some of these variable components that boomerang back next year. So I look at those. Maybe we're a little upside down, if you kind of look at those two independently and sum them up. We will continue to evaluate our cost structure going forward and adjust as necessary basis of future demands. We're always looking at that. However, we will continue to invest in the business. That's a core part of our strategy, particularly on the seamless access and growth opportunities associated with that to really position us well on the growth prospects associated with that going forward as we exit COVID-19. So there's going to be some pressure there, you know, relative to those components. And then you're going to have, unfortunately, unfavorable mix associated with strengthened residential, better than anticipated, and some continued softness associated with the non-residential markets.
spk02: Very helpful. Thank you, Patrick. And maybe my follow-up would be also away from the top line, just on the balance sheet. I think in the prepared remarks around cash usage, you'd mentioned that the buyback may be resuming. So maybe just help us understand the appetite for share buybacks, how quickly you want to get underway on that, and how attractive M&A opportunities are today.
spk13: So first on the M&A, you know, I would say, you know, core part of our strategy to continue to evaluate opportunities that are core in our business, you know, expanding product or market presence, important, continue to evaluate where we can look at assets that help us from a technology perspective, you know, particularly around this whole connectivity aspect. and seamless access and participating in that growth. So we're active looking at various opportunities. I would say there's fewer assets on the market, you know, specific and core to our business. And so kind of if you assume that there's limited M&A activity, we would pivot more toward shareholder distribution, which we, I just want to clarify, we are in the market and will be in Q4. to help, you know, continue to put cash to use for the benefit of our shareholders and enhance shareholder returns. We think it's a good investment relative to where we trade today, and so we'll continue to be active, you know, in the market.
spk10: I would add, Julian, from an M&A position, we can go where we need to go. We've got, you know, the dry powder and firepower. I think it's, you know, an enviable position, leaning harder towards electronics, software that accelerate and add capabilities to our value proposition.
spk02: Great. Thanks, Dave and Patrick.
spk04: The next question comes from Andrew Obin of Bank of America. Please go ahead.
spk11: Hi, guys. Good morning.
spk10: Good morning, Andrew.
spk11: I just want to dive in a little bit in institutional markets, specifically education and healthcare. If I look at the bond issuance year to date, I think as of end of September, education bond issuance was up almost 40%, and healthcare, I think, was down 2%, effectively flat. So within this dynamic, so in education, the pushback we're getting is that Okay, so we are going to have new bond issues in November. I guess people will vote for it. But what are you hearing from your customers on the education side about the fact is that I guess some people, they are getting tuition, but maybe they're not getting rents for the dorm rooms. So how much pressure is education sector under? And then for health care, right, the issue there is elective surgeries, which are coming back. But how are the conversations going with the health care providers in terms of whether they get back to normal? So that's sort of part one, education and health care. What are you seeing in those two verticals into next year?
spk10: So I've had more dialogue on the educational side, and I'd say generally optimistic and in line with the Bank of America research. As I've had, you know, dialogues, you know, with a few university presidents, their capital projects continue to move forward and, uh, have funding at the state levels or the private level, depending on the institution. I think, you know, there's something to recognize within that though, Andrew is the small projects, the break fix, the preventive maintenance, those, um, Facility teams are inundated by just the problems of the day in dealing with students at all levels. So I tend to be net positive, and in that college campus K through 12, Allegiant will get more than its fair share of the business. On the hospital side, I see the opportunity. The hospital system has been severely tested. And investment will go back into that, but it will be second half of 21 and into 22.
spk11: And just a follow-up question. Can you just give us any color on what's happening with your market share in discretionary retrofit market? I know it's been sort of a couple years ago been a big initiative. You guys have done very well. I believe you continue to do well. But any color on what's happening there?
spk10: You know, we continue to execute our ground game in terms of the discretionary, working with our wholesale partners. A large partner just shifted, you know, completely to a Legion opening price point mid-price point project, so it continues to be a net positive.
spk11: So it continues to gain market share slowly and steadily.
spk10: Yes, and... I would say the command of our supply chain helps us there. When things are locked up because of challenges in other parts of the world, again, you've heard me say, Andrew, our supply chain is simpler, and it gives us opportunities to have dialogues. We can keep the flow of product going.
spk11: Fantastic, and congratulations on a well-executed quarter.
spk10: Thank you, Andrew.
spk04: The next question comes from Tim Weiss of Baird. Please go ahead.
spk06: Good morning, Tim. Hey, guys. Hey, good morning. Nice job on the margins. Maybe just really the only question I have is just on pricing. You know, as you kind of look at 21, you know, maybe some choppiness in non-res continuing into next year. You know, any change in kind of how you guys think about pricing, you know, in kind of the out here? And I'm really just asking because we are starting to see a little bit of incremental kind of raw material inflation that's kind of popping up here. So any just kind of commentary on how we should think about price?
spk13: So I would characterize it as, you know, solid performance in Q3 and year-to-date 2020. We will continue to push and remain competitive. in the market, you're correct. There's going to be some inflationary pressure associated with input costs on commodities, you know, things like steel and aluminum. You know, we'll continue to push the price dynamic to the extent we can and, again, remain competitive. But I would think about it as, you know, we're 1 percent, maybe a little bit lower realized kind of on a go-forward basis.
spk06: Okay. Sounds good. Thanks, guys. Good luck on the rest of the year.
spk10: Thank you.
spk04: The next question comes from John Walsh of Credit Suisse. Please go ahead.
spk07: Hi. Good morning. Good morning. Just wanted to go back to the kind of the language you used around a snapback in the repair retrofit and small projects activity you're looking at or anticipating next year. You talked about that large mobile project, which will hit next year. But I'm curious today if you're seeing your customers make those touchless upgrades in the back half of this year, or if it's still more of a conversation with them anticipating doing more of the projects next year.
spk10: We can identify projects and early adopters, but the momentum of those projects will, you know, pick up once we get on the other side of COVID. Unless there's a burning need, when you go in and increase or improve your infrastructure to touchless, waveless projects, connected, it's a bigger project than somebody wants to take on in the middle of a firefight.
spk07: Gotcha. No, that makes sense. And then, you know, just thinking about earlier when you were talking about the seamless opportunity, you did use the term, you know, thinking about the readers. You know, as I kind of have historically thought about Allegiant's position in that product, It was smaller relative to one of your competitors. But how important is having the reader as part of the solution, you know, as these customers shift into that seamless world? Is that someplace where you need to get bigger or just trying to understand how that works?
spk10: So when you think about readers, kind of think about light switches. You know, they're ubiquitous. They're in every room. Is, you know, one light switch differentiate another? And the answer is no. It's important in the sequence, but what we're really after is to eliminate the cards. and move that to your edge device, your cell phone. That is going to happen. That's the opportunity that we're going to exploit, which complements the touchless environment. It complements higher security levels because you can not only have one level, but even triple levels of authentication. And you don't ever, you get immediate, you know, what we call the arbitrator of access. You know, with a click of a button, access is granted or denied, eliminating the needs of cards. That's our opportunity.
spk07: Great. Appreciate that color. Thank you.
spk04: The next question comes from Deepak Raghavan. of Lowell's Fargo. Please go ahead.
spk00: Hi, good morning, all. Good morning, Deepa. Good quarter, by the way. Two questions for me. First one is, Dave, can you talk about the momentum or the revenue growth that you're seeing in products that are driving this post-COVID world with, you know, you're touchless, seamless. You talked about contactless Apple iPhones, etc., Now, these look like strong renovation opportunity, so why would you not see continued tailwinds into first half of next year versus your commentary for a snapback only in second half? And also, can you touch upon how creative these tech-heavy products and software is to your margins?
spk10: And I have a follow-up. I think you have to put yourself in the middle of a college campus, a hospital, a And, you know, the prioritization of their day and their project work in a COVID reality. As I talk to school administrators, it's not the dose-prevented small preventive maintenance items, small projects, unless it's severely broken. It's just not part of the priority list. It's about people flow. It's about, you know, cleaning surfaces. You know, when you're in a firefight and you would be at the University of Florida today, you know, that project, those small projects don't hit even the radar screen. So, you know, that's what I see in terms of this moving into the second half. Your follow-up or your second question? Did you hear it, Patrick? Yeah, sure.
spk13: So deep on the margin profile, the electronics would be similar. type of margin as your traditional mechanical, but a higher selling price and therefore more EBIT dollars. So to the extent we can continue to push electronics, which we are and we will, that benefits us from an earnings growth perspective.
spk00: Great. My follow-up, Patrick, was more on the residential electronics locks performance. As I mentioned yesterday, their smart lock business in residential grew high double digit percent in Q3. Did you see similar kind of strength?
spk10: Deep, I would say this. If we didn't have the supply disruption from a supplier, we would have had one of the strongest residential quarters in the company's history.
spk00: Oh, got it. Great. Thanks for the call.
spk04: The next question comes from David McGregor of Longbow Research. Please go ahead.
spk03: Hi, good morning. It's Colton on for David. Congrats on a good quarter. Thank you. I guess can you start by walking us through how the residential point-of-sale growth played out in the quarter and any new trends you're seeing there?
spk10: I would say... impressive strengths in the e-commerce, um, um, you know, would indicate, uh, share gains. Uh, if we look at point of sale, um, we continue to gain momentum and strength. Um, and it's really across all sectors. I don't think, you know, the, when people are spending more time in their homes, they're, they're thinking about, you know, how do I upgrade and improve my space? Uh, I think across DIY, you see that extremely strong trend. One, I think, too, the rise in demand for single-family home, whether existing or new, we're benefiting from that. Remember, Allegiant tends to be the replacement lock of choice. And then we have a suite of electronic products that may be the best in the industry, but And then our supply chain. We have product available, have been able to provide it to all of those channels. In some cases, our specials, our lead times are extended because of the increase in demand. But I think, you know, several factors there that are really showing off some res performance. I'd add one more, too, and I commented on it. Our ability... To take our demand up is as good as I've seen in 40 years of manufacturing.
spk03: That's great. I appreciate that. And then as a follow-up, you mentioned some supplier headwinds in the third quarter related to electronics. Can you give us an update on where your supply chain stands today for the segment and if there are any risks that could limit growth in the near term?
spk10: With the exception of that one supplier headwind, no disruptions. That doesn't mean the supply chains are not under pressure, but we tend to produce in region, and that, you know, certainly helps us just think time on the boat. But it's one of, you know, the proud points of Allegiant. We've been working on that supply chain even under Ingersoll Rand. The simplicity of it, the leanness of it, some of the vertical integration that we did over the last few years as we invested in Allegiant has really come back to pay dividends.
spk03: Great. Thanks for the call.
spk04: The next question comes from Jeff Kessler of Imperial Capital. Please go ahead.
spk09: Thank you. Thank you. Good morning, guys. Good morning, Jeff. Morning. Can you break out EMEA and Asia Pacific just a little bit in terms of, and granted they're small, but the fact is that at some point EMEA has to grow again. Let's call it vertically and geographically, what was stronger and what was weaker in EMEA? Okay.
spk10: I think a very good quarter in EMEA, number one. Number two is strengthen our Simon's Voss franchise, which would be Simon's Voss Interflex. Our leader there, Bernard Somme, really put his foot on the pedal as we went into the pandemic, had some supply chain strengths that went in and allowed him to capture projects effectively. I also thought our Interfax business, you know, did extremely well, which is access, software, control, time and attendance. That business, you know, under some pressure because they do a very good job of servicing large manufacturers, especially the auto aerospace industry, you know, executed well. And I think the numbers suggest that. The other one that's hidden, Jeff, is our what we call global portable security program. Excellent execution and leadership by John Stanley. Think about it. You can't walk into a bike shop today and find a bike, and that demand has come right into our wheelhouse. We also have been investing in connected technologies that help, you know, the location of your bike platform, you know, won some nice business because of that connected capability in the GPS business. That'd be my comments in, in, you know, for the Europe business.
spk09: Okay. Great. And in the, you know, in the, in the U S now that, now that, and I think you alluded to, you didn't use the word NFC, but I'm assuming that NFC becomes a, a key part of the, of the touchless, wireless three levels of authority for, Are you going to be using multiple technologies in terms of getting those projects going, and will it be mainly around NFC, or will you be adding various types of Bluetooth to it? I mean, I know I'm getting down in the weeds here, but the question really involves, you know, how flexible are you going to be in terms of those technologies, and what is the – what are people asking for or what are people negotiating with you for? They just heard the word that Apple has taken this on as well, and now it's basically going to be a standard. Or are you getting different types of demand for different types of wireless technology per either vertical or per type of end user?
spk10: NFC remains important. We're investing and partnering in technologies like Thread that you're probably the only person on the phone that's aware of it, but Thread Technologies. And I think we continue to be very comfortable on our foundation of being open and, you know, making good segmentation decisions that allow Legion to grow but also servicing our customers.
spk00: All right.
spk09: Just as a last follow-up to this, as far as getting this out there, is this at the beginning going to cost you more to get these technologies? I mean, you've obviously had wireless technologies coming out into the marketplace for several years now. But are these new technologies going to cost you more to get out there, or is this, as you said before, the ultimate margins remain about the same. Where do the innards of those margins differ from mechanical?
spk10: Again, margins consistent at a higher selling price. What fascinates me is our position in seamless access opens up new business opportunities in terms of helping customers simplify their world. So an example of this would be at the University of Texas, Austin, where we are the sole supplier on access, they manage 80,000 credentials today. I can get them out of that business and provide new value propositions, higher level of security that I think customers will be more than willing to offer them. creating new streams and ecosystems for Allegiant.
spk09: Great. Thank you very much.
spk04: Be safe. This concludes our question and answer session. I would like to turn the conference back over to Tom Martineau for any closing remarks.
spk12: Thank you. And we'd like to thank everyone for participating in today's call. Have a safe day. The conference has now concluded. Thank you for attending today's presentation.
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