Allegion plc

Good morning and welcome to the Allegiant second quarter 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tom Martineau, Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome and thank you for joining us for Allegiance Second 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 second quarter 2020 results, which will be followed by a Q&A session. We have a very tight meeting today. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and 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.

Thanks, Tom. Good morning, and thank you for joining us today. 2020 will go down as a year of dramatic change. The health and economic impact of COVID-19 will take the headline, alongside the social concerns related to inclusion and diversity. With these challenges comes needed reflection. Before I turn to business results, I would like to address these events and Allegiant's response to them. The tragedy of George Floyd's death has been on my mind, as well as the death of many who have preceded him. Black lives matter. Black lives matter, and we must level the playing field, understand bias, and work for equality. Prejudice and racism are intolerable, and we can and must do better. My executive leadership team has joined me in a journey of listening, learning, and reflection, and will continue building the right roadmap for allegiance. With our employees, we must also help build a better world with our voices, our minds, our hands, and our hearts. I expect the people of Allegiant and our businesses to be involved, to create positive change in our community and our company. And you can expect the same of me. This is the spirit and culture of Allegiant. In determining how we respond to social concerns, our value and code of conduct has been our lighthouse since the creation of Allegiant. and they will help us to improve inclusion and diversity at the company. In a similar way, our values and corporate business strategy has provided the foundation to respond to the COVID-19 pandemic, which will be with us for some time to come. Please go to slide five. Equipped with a culture of safety, a resilient supply chain, and operational discipline, Allegiant was in a position of strength facing the pandemic. Keeping our employees safe and healthy continues to be top of mind, and we're effectively leveraging safety and health as our true north throughout these uncertain times. My leadership team led the COVID-19 effort to ensure our company was responding in real time to considerable global complexity, and to meet the needs of our employees, customers, communities, and other stakeholders, as well as requests from public health officials. Cross-functional teams guided our health and safety efforts, production and operational decisions, work from home infrastructure, and best practices. We also created an Allegiant Safety Net program, giving production workers an extra day of pay per month to cover unexpected illnesses or family needs. I'm proud of the collaboration and communication between functions, which has been key to working productively and safely wherever we are. At the same time, Allegiant has turned its attention to giving back to communities across the world. While ensuring our employees had masks, we've also been able to donate thousands of masks to healthcare workers across the US, Mexico, and Italy. Knowing that people have a safe place to live is perhaps more important than ever. We've also continued our substantial commitment to Habitat for Humanity in 2020. There is no doubt our team members across the world are dedicated to serving others and doing the right thing. And taking care of our team members means they can in turn take care of their communities. Please go to slide six. Our enterprise excellence and discipline capital allocation strategies have served us well to weather the COVID-19 storm. We are delivering new value in access and safety as people deal with the realities of daily life in a pandemic. Our vision of seamless access and a safer world has never been more important. As an expert in security, Allegiant customers look for us for specific guidance when faced with new challenges. In the age of COVID-19, for example, new attention was brought to their need for a healthy environment in a variety of ways. First, proper cleaning and disinfecting procedures for door hardware. Second, surface technologies like silver ion antimicrobial coatings and new technologies with antibacterial and antiviral properties. Third, our touchless solutions are at the forefront of helping prevent the spread of viruses and reducing common physical touch points. From automatic door opening solutions and contactless readers to innovative door pulls, our products can help avoid hand-to-surface contact. Further, by integrating our Wave to Open and other innovations with identity management partners, we're able to enable seamless access through our partners of choice strategies. Fourth, our keyless solutions around the world are offering mobile and remote capabilities for access control and workforce management. In brief, customers around the world are looking for new, practical, and convenient solutions that help promote healthy environments and provide peace of mind. Our leading brands like Schlage, LCN, Von Dupren, Interflex, and Simon Voss, paired with the strength of our supply chain and integration partners, are meeting those needs. As we continue to navigate COVID-19 and other challenges, we will focus on our customers, our strategy, and the health and safety of our people. Our business has strong fundamentals and has proven the ability to execute. We will continue to monitor, evaluate, and adapt to market dynamics. Please go to slide seven, and I'll walk you through the second quarter financial summary. Revenues for the second quarter were $589.5 million, a decrease of 19.4% or 18.5% organically. The organic revenue decrease was driven by the economic challenges that arose as a result of the COVID-19 pandemic. Currency headwinds and the impact of divestitures of our businesses in Colombia and Turkey also contributed to the total revenue weakening. All regions experienced substantial revenue declines. Patrick will share more detail on the regions in a moment. Adjusted operating margins decreased by 260 basis points in the second quarter. The significant volume declines drove the margin reduction. We did see positive price, productivity, inflation dynamic, which was helped by reductions in variable and share-based compensation, non-U.S. government incentives, plus the impact of cost actions including reductions of discretionary spending, a freeze on non-essential investments and hiring, restructuring, and reprioritization of capital expenditures. Due to these actions, we saw sequential improvement during the quarter. Adjusted earnings per share of 92 cents decreased 34 cents or 27% versus the prior year. The decrease was driven primarily by lowering operating income as a result of reduced revenue. Favorable share count and other income offset some of the operational decline. Year-to-date available cash flow came in at $103.6 million. an increase of approximately $26 million versus the prior year. Improvement in net working capital and reduced capital expenditures more than offset the lower net earnings. Patrick will now walk you through the financial results, and I'll be back later to discuss our 2020 outlook and a wrap-up. Thanks, Dave.

Good morning, everyone. Thank you for joining today's call. If you would, please go to slide number eight. This slide reflects our earnings per share reconciliation for the second quarter. For the second quarter 2019, reported earnings per share was $1.16. Adjusting $0.10 for prior year restructuring expenses and integration costs related acquisitions, the 2019 adjusted earnings per share was $1.26. Operational results decreased earnings per share by $0.42, driven by Volume D leverage That was offset slightly by favorable price and productivity exceeding inflationary impacts and unfavorable currency. The impact of decreased investments in the quarter was a one cent increase, and an increase in other income drove another positive five cents per share impact. Favorable year over year share count increased adjusted earnings per share by two cents. This results in adjusted second quarter 2020 earnings per share of 92 cents, a decrease of 34 cents or approximately 27% compared to the prior year. Lastly, we have 12 cent per share reduction for charges related to restructuring costs. After giving effect to these items, you arrive at second quarter 2020 reported earnings per share of 80 cents. Please go to slide number nine. This slide depicts the components of our revenue performance for the second quarter. I'll focus on the total Legion results and cover the regions on their respective slides. As indicated, we experienced an 18.5% organic revenue decline in the second quarter. All three regions saw substantial revenue declines. The COVID-19 pandemic drove the decreases across the globe as there were many government mandated shutdowns across all industries where our products are sold. We did see modest price realization, which slightly offset some of the precipitous volume declines. The impact of the divestiture of our businesses in Colombia and Turkey, along with continued currency pressure, were headwinds of total growth. Please go to slide number 10. Second quarter revenues for the Americas region were $444.3 million, down 18.5% on a reported basis and down 18.1% organically. The decline was driven by volume challenges posed by the COVID-19 pandemic. Both the non-residential and residential businesses were down significantly. Early in the quarter, our factories in the Baja region of Mexico were shut down by a broad government decree related to COVID-19, which had a significant impact on shipments. The Americas electronics revenue declined more than 20% in the quarter as that segment was adversely affected due to its discretionary nature. We see electronics continuing to be a long-term growth driver and expect growth to resume when market conditions normalize. On the positive side, the region generated modest price realization and experienced sequential month-over-month improvements in revenue as COVID restrictions began to ease. Due to the Mexico plant closures early in the quarter and improving residential markets, we entered the third quarter with a healthy backlog for our residential business. Although the non-residential business orders are below the prior year, activity has begun to stabilize. America's adjusted operating income of $124.1 million decreased 23.6% versus the prior year period, and adjusted operating margin for the quarter decreased 190 basis points. Volume D leverage drove the decline and was offset slightly by price and productivity exceeding inflation. The region has implemented necessary cost control measures in the quarter, including headcount reductions, investment delays and cancellations, and reductions in discretionary spending. In addition, manufacturing expenses have been adjusted to reduce impacts of lower volumes. Please go to slide number 11. Second quarter revenues for the EMEA region were $111 million, down 21.9% and down 20.4% on an organic basis. The lower volume was driven by COVID-19 and the widespread government-mandated closures throughout the continent. The impact of the divestiture of the business in Turkey and currency headwinds also contributed to the reported revenue decline and were partially offset by modest price realization. EMEA adjusted operating income of $1.5 million decreased 87% versus the prior year period. Adjusted operating margin for the quarter decreased by 660 basis points. The margin degradation was driven by the significant volume declines associated with government-mandated closures in several countries where the company operates. Price and productivity exceeding inflation helped mitigate some of the margin decline. Similar to the Americas, reductions in variable compensation and other discretionary spending helped the productivity performance, as did assistance received through government incentives. As previously announced in Q1, restructuring programs are underway in the region, and we expect benefits to accelerate in the second half of the year. Please go to slide number 12. Second quarter revenues for the Asia Pacific region were $34.2 million, down 22.1% versus the prior year. Organic revenue was down 18%. The decline was driven by COVID-19 related impacts and continued weakness in China residential, in Australian end markets. Total revenue continued to be affected by currency headwinds. Asia Pacific adjusted operating loss for the quarter was 1.2 million, a decrease of 3 million, with adjusted operating margins down 760 basis points versus the prior year period. The operating loss includes a $1.8 million charge related to a specific product quality dispute in China. Significant volume declines and unfavorable mix also had a large impact on the reduced income and margin. As with the other regions, the price productivity inflation dynamic was positive and was aided by reductions in variable compensation and other discretionary spending. As with EMEA, Asia Pacific also benefited from government incentives related to COVID-19. And as previously announced in Q1, restructuring programs are underway in the region, and we expect benefits to accelerate in the second half of the year. Please go to slide number 13. Year-to-date available cash flow for the second quarter 2020 came in at 103.6 million, which is an increase of approximately 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 adjusted net earnings. Our ability for cash flow generation has been a strength of the company that was evident in the second 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 percent of revenues decreased based on a four-point quarter average. This was driven by reduced working capital needs from lower volume as well as better turnover on accounts receivable. 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 to continue driving substantial cash flow conversion. Our financial and liquidity position remains extremely solid. Our net debt to EBITDA ratio is 1.8 based on the last 12 months' performance, and we have close to $500 million available under our revolving credit facility. We also remain committed to a flexible and balanced capital allocation strategy. Although we've communicated a pause in share buybacks in order to focus on liquidity during this time of market volatility, we intend to put excess cash to use as we continue to see market improvement and stabilization. I will now hand it back over to Dave for a view on our full year 2020 outlook.

Thank you, Patrick. Please go to slide 14. As you know, we previously withdrew our outlook for 2020. This morning, we reissued an outlook. The numbers we provided assume there is no additional COVID-19 impacts, including government decrees, supply chain disruptions, and safety and health issues. The pandemic has already driven much change in the market dynamic across the world for 2020. With that said, allegiance sounds Sound fundamental business strength provides some resiliency in times of economic downturn, and our long-term investment thesis remains unchanged. In the Americas, we expect to see continued year-over-year organic revenue declines in the second half. Residential markets are expected to rebound more quickly than the non-residential. We have seen sequential increases in homebuilder demand, and point of sale metrics have improved in the big box and e-commerce channels. We expect commercial markets to be tough as the pandemic had forced many to work from home. In institutional markets, projects already started will continue and finish. With these expectations, we project organic revenue in the Americas to be down 7.5% to 8.5% for the full year. We're projecting America's total revenue decline to be 8 to 9%, with a slight impact from the divestiture of the business in Colombia. In Europe, markets have softened prior to the COVID-19 outbreak, and revenue declines are expected to continue in the second half. However, we are projecting sequential improvement as we go through the back half. For the region, we project organic growth to be down 9 to 10%. Total revenue includes the impact of currency pressure in the first half, as well as the divestiture of the business in Turkey, and is projected to be down 10 to 11% for the full year. In Asia Pacific, markets were weak before COVID-19, and we expect that to continue, especially in the China residential and Australian markets. With that backdrop, we expect an organic revenue decline in 2020, of 10.5 to 12.5% and total revenue will be down 14 to 16% as currency pressures continue. We are projecting total organic revenues for the company to be down 8 to 9% and total revenues to decline 9 to 10%. Please go to slide 15. Our new 2020 outlook for adjusted earnings per share is $4.15 to $4.30. As indicated, the earnings decline is driven by lower volumes related to COVID-19. We have made significant cost reduction in the business, and our work will continue to streamline our structure as needed, while prioritizing critical investments as we remain focused on driving our strategy of seamless access. The combination of interest and other expense is expected to be a positive to earnings per share. Our outlook assumes a full adjusted effective tax rates of approximately 13.5 to 14.5%, as well as outstanding weighted average diluted shares of approximately 93 million. The outlook additionally includes approximately $1.35 to $1.45 per share impact from impairment and restructuring charges during the year, most of which has already occurred. As a result, Reported EPS is estimated to be at $2.70 to $2.95. Our revised available cash flow outlook for 2020 is now projected to be in the $350 to $370 million range. Please go to slide 16. Allegiant has strong fundamentals and has proven the ability to execute and adjust to market dynamics as demonstrated during the first half of 2020. We had strong momentum in the first quarter, particularly in the Americas. While the pandemic was unforeseen and its effects were immediate, we managed the business extremely well to restructure and manage costs. We also moved quickly to address new customer needs for touchless solutions and remote management. As we go into the second half of the year, we start from our core strengths in health and safety, supply chain, and financial discipline. We will take the necessary and often difficult actions needed to adjust quickly to evolving market dynamics. The strategy of adding value through seamless access and a safer world drives the right focus for the long term, and it puts us on solid footing for the post-pandemic world. Thank you. Now Patrick and I will be happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 2. Please limit yourself to one question and a brief follow-up. At this time, we will pause momentarily to assemble our roster. First question comes from Ryan Merkel of William Blair. Please go ahead.

Thanks, and good morning, everyone.

Good morning.

So two questions. First off, in America, the year-over-year decline in electronics was a little more than I thought. Just looking forward, do you expect electronics mix to continue to mix down? And then second question, are you seeing more interest in touchless access and mobile keys in this environment?

I would say we do not expect a mix down. I think, you know, our key growth has been, you know, stronger in the residential. And I think, you know, last mile delivery, the growth of e-commerce, you know, people's connectivity, that trend will continue. We've got one of the best locks on the market with our ENCODE lock. The favorability ratings, I looked this morning, 37,000 comments on Amazon at about a 4.8, so feel extremely good about that. I think the weakness in the quarter, really driven by the overall lockdowns, but In terms of integrators' ability to enter college campuses, you know, none of us wanted people coming on site and that work to see. So, we like the long-term trends and believe it's a key factor going forward. I think, too, when you think about some of the capabilities that we're putting together, the ability to seamlessly travel without touch, whether it's the wave at hand, your edge device, These things will continue to be drivers. Add things like our investment in VergeSense, you know, the need to be able to understand how many people are in a room, in an area, in a building. These are things that will continue to expand as we go forward.

Perfect. Thank you.

The next question comes from John Walsh of Credit Suisse. Please go ahead.

Hi. Good morning.

Good morning, John.

Um, wondered if we could just touch a little bit on, uh, investments and tax, I guess maybe first on the investments. Um, obviously, you know, you put a hard number around it, not surprising. It's lower than the initial expectations, given the way demands played out, um, tax, you know, this is kind of the second year in a row we'll have this lower rate. Um, how should we think about the investment spending going forward and the sustainability of the tax rate from here?

So as we indicated in our full year guide, you know, we're looking at some incremental investments, although it's lower than what we'd originally anticipated, but nonetheless higher than last year. And that's predominantly around this whole movement in electronics and trying to drive that market for faster adoption and you know, some specific initiatives around the IoT platform and those type of things that will help us, and particularly as we begin to kind of come out of this pandemic. So feel good about those investments and the ability to be able to drive incremental revenue. And as we've indicated historically, those investments have enabled us to drive revenue faster than the overall market. And I think we get good return on those in terms of invested capital. So, you know, going forward, you know, we'll kind of continue to monitor the markets and the needs in our business, and we'll continue to invest for the long-term future in our business. As it relates to the tax rate, we are anticipating a lower rate, again, than what was originally provided at the beginning of the year. Some of that is due to some, you know, some favorable items that kind of came through, FIN 48 reserves, those type of things. Some of it is, quite frankly, we've been able to implement some new tax planning strategies that will take effect and feel good about the work that the team has implemented there. As we go forward beyond 2020, we had historically given some guidance that the tax rate would migrate upwards to kind of like the high teens area. More guidance to come, you know, when we come out with the 21 information. But I feel fairly confident it will be better than that, you know, maybe mid-teens type of thing, at least in the near term. And that's all, you know, because of, you know, where we find ourselves today and some of the great tax planning strategy work that's been going on.

Great. Thank you for that, Culler. And then maybe just a follow-up here. You talked about in the Americas exiting with some strength in resi and stabilization in non-resi. Can you put any numbers around that, either what the exit rate was in June or what you're seeing here in July?

So, you know, first, you know, I'd look at the backlogs. We've got effectively record backlogs between, you know, commercial, institutional, and res. The res – demand extremely strong as we look at point of sale. If you look May, June, and July, 12% increase in dollars, 7% in units. Really like that trend. This morning's Wall Street Journal about strength in housing. I think the other thing, as you think about our res performance, especially in the first half, there was a mandate in the country of Mexico to shut down. That's about 25% of our workforce and a big supplier of our res supply chain. We deleted inventories in a situation where demand was accelerating, that point of sale that I referred to. Record backlogs in residential, I think we've got great, a great set of product capabilities. And I think our supply chain is stronger than the people that we're competing against. So I like our opportunities as we go through the next, the second half and early in the next year.

Great. Thank you.

The next question comes from Jeff Sprague of Vertical Research. Please go ahead.

Thank you. Good morning. Two from me. Also, David, I'd be interested in just your kind of forward opinion here now on the non-res cycle overall. You introduced on the Q1 call the very logical possibility that 2021 could be down given the later cycle nature of some of these end markets. Based on what you're seeing in the channels now and just pipeline work and other you know, folks on the ground. What's your thought around that large question on everyone's mind?

So I think when you think about the institution of commercial verticals, you know, everybody caution lights. I think, you know, clearly there's shifts going on there. I think, you know, we saw the ABI come out, you know, it doesn't, drive optimism. I think, you know, as I look at Allegiant, you know, healthy backlogs, you know, our commercial institutional backlogs as we exited June, you know, high. But I think the other thing that we look at, specs written, you know, we saw some disruption in spec writing and demand from architectural firms. That's to be expected. I think we'll have a better call on specs written, you know, which is an early demand level as we execute three. If I looked at spec written today, it's improved every week as we've gone through the crisis. But, you know, this is more of a long-term trend. But as I would look at educational, healthcare, total commercial, We anticipate softer markets. We will put our foot on to drive seamless access. And we believe we can outperform in a weaker position because of our installed base, the strength of our spec writing, and the capability of Allegiant.

Thanks. And then second question, perhaps for Patrick, just around kind of the cost reduction issue. actions. Patrick, can you just provide a little bit more granularity on kind of what's kind of been done structurally from a cost-saving standpoint and what perhaps is temporary? And I'm sure you, like a lot of companies also, some of these temporary actions are feeling like maybe they're at least semi-permanent as folks think about travel budgets and the like. But if you could kind of frame that up for us, it would be helpful.

Yeah, sure. So, good question. Let me try to provide a framework around that. You know, first of all, we've identified and we are executing on a plan of about 80 million of cost reduction, year-over-year reduction. And I would bucket that into three categories, the first of which would be the structural, more fixed cost, predominantly headcount reduction. That for this year is about 30% of the $80 million. Then you've got another bucket, what I call the discretionary type of expenditures, i.e., you know, T&E, contractor spend, consulting, those type of things, the things that you control in a down market. That's another probably 30% of the $80 for this year. And then the variable type of items, the things that are compensation related that a large portion of which will probably boomerang back next year is the balance of the 80 million or 40% of the total. I think the key point here is that offsetting the variable stuff, i.e., the things that are expected to come back next year, We do have and will have carry forward benefit associated with some of the permanent cost reductions that will carry into next year. We won't be in a full year run rate level on some of those identified costs until Q4. So, we have that. As Dave mentioned in his script, we will continue to work on further cost reductions to help mitigate that as well. So TPD on further actions that will be identified for the second half of the year.

I'd just add a little color to that as well. I think we got after this early, even before COVID-19. You could see that in our in-flight restructuring plans. And I think it's important that we continue to accelerate investments around electronics and seamless access while transforming the company into a leaner structure.

Thank you.

The next question comes from David McGregor of Longbow Research.

Please go ahead. Hi, good morning. It's Colton Weston for David McGregor. I guess you pointed out sequential improvement on a month-to-month basis in the Americas in the quarter. Are you seeing those trends continue into July now?

Absolutely. As you can feel the pulse of the economy, you know, coming back, you know, and I put cautions around that because in some cases they've gone too fast. But, you know, we feel it. I think if you're in the wholesale retail channel, you know, on-shelf inventories are down, and we're seeing that, you know, in terms of specs, quotes, point of sale, and our own shipments.

Okay, and then I guess as a follow-up, non-res came in better than res, it sounds like, for the quarter. How much of that was volumes versus price mix? If I recall correctly, you guys implemented 3% pricing on commercial hardware back in April.

Yeah, majority volume related, but, you know, as we kind of saw in Q1, you know, pricing relative to non-res better. than the residential performance. You know, we will continue to push that dynamic to the extent we can. And so far, year to date, have been fairly successful in getting, you know, solid price realization in the non-residential sector.

Okay.

Great. Thank you.

Next question comes from Joe Ritchie of Goldman Sachs. Please go ahead. Thanks. Good morning, everyone.

Good morning.

So, Dave, my first question, maybe just trying to unpack the impact that you had from the Mexico decree. I know last quarter you guys had talked about having inventory on hand, but it sounds like you kind of depleted that inventory fairly quickly as the quarter went on. I'm just trying to understand, one, kind of like the impact that you had in the first quarter from maybe running out of inventory, and then secondly – Like, how should we be potentially thinking about a restock as, you know, you get back online in Mexico?

So, you know, we deep dive this, you know, in terms of the performance second quarter. There was a decree, you know, from Mexico that mandated a 30-day shutdown. We, you know, were open well ahead of that, and it was our ability to point out that we were essential, but more importantly, our ability to keep our people safe. If you dig into it, the governor of the Baja highlighted Allegiant in a press conference in our safe practices and the confidence that we could do that. So that was important. I think if you look at the whole region, we got restarted quicker. Second, the government mandated that Anybody over the age of 55, immune compromised, pregnant, you know, could not work. For us, that was about 300 to 400 employees. We had this, and some of our most experienced, we have reloaded on that and are producing at a higher, we're producing out of the Baja today at the highest level since I've been at Allegiant, or we created the company. So, If you think about that, we've got 42 discrete manufacturing line in Ensenada, if you have ever visited there. The ability to bring on that number of employees, pull that lever, and replenish the supply chain is, I think, few companies in the world could do it. So, you know, extremely proud of the team, our ability to rebound. I think a second thing that's important here, you don't see the point of sale data. But our teams did an extremely good job to drive our, you know, use our inventory to keep customers in products as well as other partners in the supply chain. You know, when you think about a situation where you're trying to maximize inventory, we reached out into, you know, our partners' supply chains to be able to optimize that. Again, I thought they did a better job of it. And I believe the last point in your question is, we will be well into the first quarter of next year, you know, getting the supply chain in terms of finished inventories normalized with the increasing demand.

Got it. Okay. That's helpful color, Dave. I guess my one follow-up question here is, In just thinking about what's happening from a commodity perspective and how your business mix is perhaps expected to change over the next 12 months, copper prices right now are surging. And notice that while pricing was still positive this quarter, I think it's 70 bps in the Americas, it was still, you saw it tick down versus Q1. So I'm just trying to understand, I guess, as we kind of move forward in this environment where volumes really aren't at normal levels, like How are you guys feeling about your ability to offset inflation and your ability to get price in this environment, also in the context of kind of the mixed shifts that you're seeing in your business?

I'm always confident on price. You know, I would say, you know, the market is disciplined. Our first, you know, cautionary is always steel. You know, we purchase a lot of steel more, and then I think brass – But we'll continue to be aggressive on price realization, try to offset the effects of inflation. But I'm net positive, and I'm that way every day. Patrick will bring some realization to it.

Well, Joe, you're right. I mean, the commodity prices have continued to rise here over the last 90 days or so. So I'd say for the balance of the year, as you kind of look at the margin profile, think about sequential growth. improvement as we progress throughout the course of the year, you know, just through more efficiency and some of the cost measures we're taking will help us navigate for the balance of the year. Next year, another question, you know, we'll kind of monitor and see how it progresses during the course of this year. But as Dave mentioned, we'll continue to push price to the extent we can. And if we're unable to offset the inflationary impacts, we'll drive productivity we'll make the appropriate investments to do whatever we can to mitigate the inflationary impacts.

Okay, thank you both.

The next question comes from Andrew Obin of Bank of America. Please go ahead.

Yes, good morning. Good morning, Andrew. Question, can you just comment on regional trends in the U.S.? How is California trending versus Texas versus Florida? versus Northeast, I mean, frankly, just trying to figure out how COVID and the second wave has been impacting demand and if there is close correlation between what we're seeing with hospitalizations and demand trends by region. Thank you.

I would say, you know, the stoppage in New York, you know, the Northeast, you have some pretty strong government mandates and decrees, especially Boston, you know, no public construction. We do very well in those big metro markets, and so we're seeing that recovery as the Northeast gets better. Again, you look to California, construction and Allegiant was able to operate during the first shutdown. We'll see how it drives as they move, I guess, towards a second shutdown. I think You know, you really dig into the data, the COVID, Andrew. You're seeing growing pockets in construction workers of infection and, you know, how government will mandate, you know, around it. We've got to keep an eye on it. But construction has been considered essential in most areas of the country, and I think it will continue.

And just to follow up, you sort of talked about seamless access, but how do you think, how are you rethinking access business post-COVID? Do you expect any structural changes in what the customers will demand in terms of being able to sort of get in and out of the building without touching things?

So I absolutely believe it. The number of inquiries on our antimicrobial products would be a clear example, but Andrew, I really believe that your edge device is how we'll navigate through society. You know, the long-term trend, I think positive. We've got the ability exists today to be able to, through your edge device, monitor your temperature as you approach the door. If you're out of an accepted range, you know, are you going to get a temperature check? Do we allow access? Those are things that are going to continue to develop. as a result of COVID-19 and trying to keep people healthy.

Thank you.

The next question comes from Tim Weiss of FAIR. Please go ahead.

Hey, guys. Good morning. Good morning to you. Just maybe going back to Americas and just some of the cadence through the quarter, is there any way to just think about how June kind of finished up relative to the quarter in both resi and non-resi?

Yeah, I, you know, Tim, I would say, again, during the course of the quarter, you know, sequential improvement as the quarter progressed. June, much stronger than May, May stronger than April. you know, feel pretty good, you know, relative to the visibility and the strengths relative to the backlog and the order intake. You know, resi, you know, as Dave indicated, POS really strong, demand improving significantly. On non-res, I'd say it's more stabilized, you know, kind of going into Q2 and exiting out of Q2 now much better. And, you know, so, you know, relative commensurate with kind of the guidance we gave That's kind of how we're seeing things right now. Maybe a little conservatism there, but okay.

I'd also say, you know, we look at a variety of indicators on non-res bookings, frame sales, hardware quotes, specs written, wholesale sell-through. Every week, you know, as we exited, April got better. You know, you could see things coming back through.

Okay, perfect. Thank you. And then I guess bigger picture, if the end markets, you know, maybe over the next 12 to 18 months are choppy, I just wanted to gauge your appetite on just M&A. And does your – I guess your appetite change at all? I mean, is this a time where maybe you'd purposely get more aggressive to just add good assets and maybe a time of more stress?

We'll certainly be watching the – the stress movements on, you know, a set of selected assets that we always keep an eye on. I don't expect a lot of change in those things that we would aspire to, you know, the jewels that could help redefine Allegiant. I don't expect that to change. But look for us to increase, you know, our activity around tools that will help us expand seamless access, both internally and externally.

Great. Good luck, guys.

Thank you. The next question comes from Josh Popolinski of Morgan Stanley. Please go ahead.

Hey, good morning, guys. Hey. Hey, just before my question, Dave, thanks for your leadership on employee safety, health, societal awareness, all that. I think it's very clear those aren't just talking points. So, you know, really, really appreciate that. Just a couple questions on the non-res you business. You know, first, on backlog visibility, how far does that stretch out? Does that get you through your end? Does that get you into 21? And then any comments that you would make on some of the retrofit side of the business versus new as you see activity or quotes in the market today? Because I think maybe relative to some other products that's out there, security retrofit is either – completely non-discretionary because, you know, you're locked out or it's broken or, you know, a lot more discretionary around, you know, aesthetics or upgrades. So just, you know, maybe some comments on how that retrofit side looks.

Thanks. I'd say in terms of, you know, the backlog of commercial institutional, I'd say you look at that, you know, with a six-month lens. But there's a couple filters. What we have in the actual backlog, then you start looking at quotes, specs, job awards. Like let's just take a – if we looked at the city of Washington, D.C., you know, job awards that could go out, you know, 18, 24 months. Do we have the contractor, the architect, the wholesaler? There's things that go beyond just our book of business and generally – You know, we're going to get more than our fair share there. So, you know, I think, you know, good indicators, but then you got to go to the broader macro. So, you know, I feel pretty good sitting here. You know, I feel very good, you know, on 2020. It's as you look out, I put those caution lights. Second question on the discretionary. I would, I believe in terms of, you know, break-fix, the discretionary side of the market, especially the day that money gets spent, especially with rising crime rates. Um, I live in the downtown areas of Indianapolis. You're going to get your doors locked. And I think you also got to think about shutdowns are places secure. So the, the discretionary break fix part of this market tends to roll, uh, in up and down economies. And, uh, Generally, if you've got LCN, Von Duprin, and Schleg installed, you're going like for like.

I appreciate that. The next question comes from Jeff Kessler of Imperial Capital. Please go ahead.

Thank you. Hi, Dave. How are you doing?

Good, Jeff. Good to hear your voice.

Yeah. In terms of timing on the regions, It seems that the U.S., particularly in the southern tier, is going to continue to have some problems, although the northeast has obviously done a lot better. Europe seems to have rolled over its COVID problems much more quickly than we have. Are you seeing any impact on your business in Europe? because of perhaps them coming out of pandemic a little bit earlier than the U.S.?

We see – let me say this. You know, we've got our electronics, our Simons Vossen Interflex business, and our mechanical business in Europe. The electronics business has performed well during the COVID-19 and lockdowns, and – You've got to look at that as a key strength, maybe better geographical position, but it's that continued trend of, you know, electronic conversion, you know, software capabilities that is leading the way there. So we like that. We're going to continue to invest in that. And, you know, we were driving some restructuring before COVID-19 was even mentioned, you know, The world has got a challenge, you know, in terms of overall GDP. But, you know, the dock regions, the Nordic regions, you know, are going to be a bit better than the southern. And the electronic trends, we think, will continue to operate nicely anywhere we're at in the world.

All right. Follow-up is you've talked a good amount about seamless and touchless technology. uh, seamless and touchless electronics. Um, are you seeing, uh, any move within the subsectors, you know, when you, when you, you've got some Bluetooth connectivity, but obviously NFC has been on the tip of your tongue now for, you know, since you guys were, before the company was even spun out of Ingersoll land. And now that Apple has bought into NFC, uh, uh, wholly at this point, um, the entire NFC world seems to be growing. The question is, looking at other companies, some smaller companies who are moving very quickly into NFC access, are you seeing more competition there? Are you seeing your own business improving in that area? And if so, what are the areas that you're going to be focusing on with regard to Some of these technologies have been around but have been suppressed for one reason or another.

So I look backward to try and understand what our strength is. I think 18 of the last 22 quarters, we have grown double digits in electronics. So we like that trend. Uh, two is I think, you know, it's all about your edge device and, you know, that is the tool that will allow, you know, the free flow of people. I think the problems to be solved, uh, are outstanding. Remember we were the first, uh, company in the world. Hey, Siri, open the door. Our relationships with Apple are outstanding and I think, uh, These technologies are going to continue to drive and shape the marketplace, and I like the position of Allegiant.

Thank you very much.

You're welcome.

The next question comes from Deepa Raghavan of Wells Fargo. Please go ahead.

Hi. Good morning, all. Good morning, Deepa. Question for me is, For America's fiscal year 2020 revenues, it doesn't look like the revenue outlook assumes Q4 exits with positive growth, but it definitely looks like you're planning for continued sequential improvement throughout the second half. Now, if we continue to extrapolate that trend, it appears spring could be the likely bottom. I mean, and by next construction season, we could be talking positive non-growth in America. Is that a reasonable way to think about trends if economy stabilizes here? Or is the air pocket and quotation activities that you're currently seeing push the timeline out materially?

Great question. Not easy answers. I went back and looked at, you know, contraction in the architectural indexes. And these tend to snap back quickly. Now, is this, you know, the pandemic will follow that? I think it's a function of how long the pandemic drags on. You know, the real damage that's been done to institutional budgets. But as we move into the construction season, there is naturally an improvement. And, you know, spring could be, you know, giving us life here. But I think we'll have a better view of that in 90 days.

Got it. Can you talk about inventory in the system? And if you can split that between resi and non-residential inventory commentary, that will be helpful. Thank you very much.

Inventory in the residential channel has been depleted. I'm looking for some numbers here, but, you know, think about it, you know, 16 days of no replenishment, we tend to try and optimize those inventories. So, the shelves aren't bare. We're in a replenishment cycle, but it will take, you know, well into first quarter at, you know, the significant demand levels to get that back to normal. If there's any weakness in competitive supply chain, and, you know, if you think about some of our competitors, the supply chains get pretty complex. We could have more opportunity and could take longer. You know, we'll take on that challenge. In terms of the non-res, you know, commercial institutional supply chains, those are, you know, responding back, you know, quickly, rapidly. I think some of the leverage that we had was we built backlog in some of our institutional products. We were able to fill that, but that's normalizing much quicker.

Thanks. I'll pass it on.

And we'll take our last question from Julian Mitchell of Barclays. Please go ahead.

Hi. Good morning. Good morning to you. Thanks. Morning. Maybe just the first question around circling back to residential. Just trying to understand when you put everything together around the Mexico impact and inventories and so forth and the point of sale data, how likely is it, do you think, that the residential revenues in the Americas can grow in the second half? It's certainly something that we're seeing at other resi-related products. And any color you could give on the differing outlooks you have within RISD of new construction versus the replacement side?

You know, I would characterize it this way, Julian. You know, as we look at the residential business and you kind of look at all the factors you mentioned, clearly, you know, in the second half, sequential improvement as we progress throughout the year. Growth year over year will be dependent upon our ability to get the labor in place to produce the product and get it through the channel to the end customer. And so a little bit constrained there from a capacity perspective is kind of going to be the driver whether we can show year over year growth. But nonetheless, we'll kind of continue to drive that. Like the overall trend in electronics, that's going to rebound. as well to provide some additional growth as well.

So I'd be maybe a little bit more aggressive in that I believe Allegiant has a better supply chain than our competitors. And I believe that is going to allow us to take some advantages here in the marketplace. And you think about that, you know, these products come from, you know, Southeast Asia, The complexity can get pretty hard where ours tend to be is more North American centric. Even though we had to take a pause to keep our people healthy, I think I've got a better supply chain. I'd say second, you know, the point of sale orders are reflecting, you know, that we're creating opportunities. Our electronics are some of the highest regarded and highest quality in the marketplace. And then, you know, some of the builder activity, you know, that part of the market is growing today in the Wall Street Journal. And if you've got a question, are my suppliers going to be able to support me as that market expands? If you're, you know, any of the big builders, who are you going to look to? And I like our opportunities to have those discussions. When you've got to depend on products coming halfway around the world, to support your home building effort in an environment of uncertainty this pandemic, I like our opportunities.

Thank you. And any color on replacement trends in particular? I think, as you said, new home building very strong. Are you seeing replacements perhaps growing at an equal pace in the second half or similar revenue trajectory as OE?

Amazing, as I work from home, the amount of activity in the do-it-yourself centers. Then think about the more frequent deliveries, a point of sale, and then people just investing back in their home. Schlage is the number one replacement brand. It's a nice spot on the market, so I like our opportunity.

Great. Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Tom Martineau for any closing remarks.

Thanks. We'd like to thank everyone for participating in today's call. Please have a safe day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.