Allegion plc

Good day and welcome to the Allegiant first quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Thomas Martineau, Vice President, Treasurer, and Investor Relations. Please go ahead.

Thank you, Jason. Good morning, everyone. Welcome and thank you for joining us for Allegiant's first 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 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 first quarter 2020 results, which will be followed by a Q&A session. Given the high uncertainty around the duration and severity of the COVID-19 pandemic, we had previously polled our outlook for 2020 and will not be providing an update during this call. For the Q&A, we would like to ask each caller to limit themselves to one question and one follow-up. and then re-enter the queue. We will do our best to get to everyone given the time allotted. Please go to slide four and I'll turn the call over to Dave. Thanks, Tom.

Good morning and thank you for joining us today. Like all responsible global companies, Allegiant is closely monitoring and assessing the COVID-19 outbreak, which continues to evolve. We are focused on doing what's right for our employees, customers, and communities. We're also maintaining our business health and supporting essential critical infrastructure around the world. Allegiant operates within several different critical infrastructure sectors, making our work essential to our customers, and in many cases, their customers. Our people create the security and life safety devices so many others depend on, whether for private homes, government buildings, or medical facilities. We are regularly called on to provide our products and solutions for hospitals and healthcare facilities. Most recently, new construction for laboratories that will support the fight against COVID-19. This work gives us clear purpose, especially in these unprecedented times. With the exception of Italy and Mexico, where government health decrees have temporarily paused production, our manufacturing sites may operate. We monitor for demand and material shortages related to COVID-19, taking necessary short-term actions, such as adjustments to production, to protect the long-term future of Allegiant. Such measures are being implemented in a way that minimizes disruption to customers and the overall business. In the case of Italy, we are shipping orders for finished goods with government approval. and continue to engage in dialogue with Mexican authorities to open prior to the lifting of its general decree. In the meantime, we are working with our supply chain, existing inventory, and channel partners to fulfill customer requirements for goods normally coming out of Mexico. It remains our intention to continue to serve our customers to the best of our abilities. You've heard me say before, but it bears repeating, we have one of the safest workforces in the world. I could not be prouder of our company of experts who have leveraged our strength and safety to adapt to the current reality. We have faced COVID-19 since mid-January in China and developed operational practices to keep our people safe. We're modeling best practice safe hygiene guidelines based on standards from the World Health Organization and the Centers for Disease Control and Prevention. We're conducting deep cleaning of our facilities on a regular basis. We're social distancing and we're limiting crowds. We've increased our personal protective equipment and supplies. There's additional cleaning solution wipes, hand sanitizers throughout our facilities. Employees can ask for PPE supplies like gloves and we're requiring face masks in manufacturing and distribution facilities. We paused all non-essential meetings and visitors as well as air travel early in the crisis. Essential meetings are encouraged in virtual ways. We're adhering to government decrees and orders and monitoring health conditions. and wherever possible and where necessary, employees are working from home. The strength of Allegiant's global supply chain is a major asset and allows us to continue servicing our customers. We have many levers to pull, from utilizing safety stocks and inventories, to leveraging dual and alternate supply, to sharing components across our own facilities and regions. Without doubt, these options that our team have in place our increasing allegiance credibility and customer loyalty in the marketplace. Of course, our business must be healthy to continue to support our employees, customers, and communities. We have proactively taken actions to mitigate financial implications associated with COVID-19. These actions include reductions in discretionary spending, elimination of non-essential investments, a hiring freeze, and reprioritization of all capital expenditures, including a temporary suspension of share repurchases. Importantly, we believe Allegiant has an extremely strong balance sheet and liquidity that provides flexibility and positions us well throughout this time. Our net debt to adjusted EBITDA ratio was 1.6 times at December 31, 2019. We have an undrawn credit facility of up to $500 million, if needed, and no principal payments due on an outstanding debt until September 22. Our business generates significant cash flow due to industry-leading EBITDA margins and low capital intensity. Alleged available cash flow conversion to earnings ratio has averaged over 100% as a standalone company. Yes, there will be challenges ahead. The start of 2020 has made that clear. Allegiant can take on great challenges with an engaged, safe, and healthy workforce. Financial strength, legacy brands that have stood the test of time, and a steady focus. Allegiant will remain true to our values and strong business fundamentals. Please go to slide five. Let's turn to the results for the first quarter. We have a strong discipline supply chain and our team did an outstanding job navigating the early challenges posed by COVID-19 pandemic, as evidenced by the revenue growth we experienced in the quarter. In particular, the Americas had a stellar quarter offset by weakness in Europe and Asia Pacific. The Americas region had reported growth of 7.7% and organic growth of 8.2% in the quarter, driven by both non-residential and residential businesses. EMEA markets continued to be soft through the quarter, and our business was further impacted by the COVID-19 pandemic impact beginning in March. For Asia Pacific, Asian markets remained weak, and the region as a whole experienced the COVID-19 impacts as well. Electronics growth in the Americas came in at 12% in the quarter. We continue to see electronics as a long-term positive trend as more and more products become connected for ease of access. The underlying fundamentals of the business are strong and will serve as well as the global pandemic subsides. Adjusted operating margins were up 190 basis points in the quarter. Margin expansion led by the Americas regions, which saw adjusted margins of 270 basis points. EMEA and Asia Pacific margins were down due to volume declines in both regions. EMEA margins were further pressured by continued operational inefficiencies from the move of our operations from Turkey to Poland. We highlighted last quarter our expectation that the impact would carry over in the first half of this year. In the first quarter adjusted EPS growth came in at a robust 18% and available cash flow was up nearly 44 million versus the prior quarter or prior year. Overall, I'm very pleased with our Q1 2020 results. That said, the near-term future will be more difficult as we continue to navigate the uncertainty brought on by the COVID-19 pandemic. and I expect financial headwinds. Beyond the expense and cash management actions previously discussed, we are implementing cost reduction actions to optimize and simplify the European and Asia-Pacific regions. These actions are intended to address weaker end market fundamentals, enable enhanced customer focus, and will help position these regions for future success. And there's one accounting item to mention. We recognize a $96.3 million non-cash charge related to goodwill and indefinite lived trade name impairments for our non-U.S. operations predominantly related to the COVID-19 and the expected future impacts. Please go to slide six and I'll take you through the first quarter financial summary. Revenue for the first quarter was $674.7 million, an increase of 3%, inclusive of 4.3% organic growth. Currency headwinds and the impact of the divestitures of our business in Colombia and Turkey offset some of the organic growth. Americans led the way on revenue growth, offsetting the weakness we experienced in EMEA and Asia Pacific. Patrick will share more detail on the regions in a moment. Adjusted operating margin increased by 190 basis points in the first quarter. As I stated earlier, we saw significant margin expansion in the Americas with decline in Europe and Asia. Adjusted earnings per share of $1.04 increased 16 cents or just over 18% versus the prior year. The increase was driven primarily by higher operating income. Favorable share count and tax rate offset the increase in other expense. Available cash flow came in at $19 million, an increase of nearly $44 million versus the prior year. Increased adjusted earnings and improvement network and capital were the driving factors for the increase. Patrick will now walk you through the financial results, and I'll be back for a wrap-up.