Allegion plc

Good morning and welcome to the Allegiant third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's questions, after 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 of Investor Relations and Treasurer. Please go ahead.

Thank you, Andrew. Good morning, everyone. Thank you for joining us for Allegiant's third quarter 2021 earnings call. With me today are Dave Petratis, Chairman, President, and Chief Executive Officer of 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 third quarter 2021 results, which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up. We would like to give everyone an opportunity, given the time allotted. Please go to slide four, and I'll turn the call over to Dave. Thanks, Tom.

Good morning and thank you for joining us today. Before we go into our third quarter results, I'd like to take a minute to acknowledge and congratulate my fellow Allegiant team members for their ongoing dedication to the environment, society, and governance. I'm humbled and honored to share that just last week Allegiant was recognized for ESG leadership through two different awards. the Robert W. Campbell Award, and the Jackson Lewis Diversity, Equity, and Inclusion Champion Award. The Campbell Award is an annual recognition by the National Safety Council, America's leading nonprofit safety advocate. It is the premier award for excellence in integrating environmental, health, and safety management into business operating systems. Winners have strong processes and show measurable achievement over a five-year period in EH&S performance that leads to productivity and profitability and are expected to demonstrate a long-term track record of not just EH&S compliance, but also critical improvements. The prestigious award is also known for its rigorous application process with a systematic review and audit attached to it. Submissions are reviewed by management, labor, academic, and government experts from around the world, followed by a meticulous audit format at three or more of a company's global sites. With this in mind, Campbell Award winners are an elite group of organizations. Past winners include Boeing, Cummings, Dow Chemical, DuPont, Honeywell Aerospace, and Johnson & Johnson. Allegiant is proud to have our name added to this best-in-class list. We are also excited to have been named the Jackson Lewis Diversity, Equity, and Inclusion Champion by the Indiana Chamber of Commerce. This is a statewide honor that recognizes an organization making significant strides in the workplace. The judge noted that Allegiant was chosen as its first ever winner of this award because of our company's proactive and intentional diversity, equity, and inclusion efforts around the globe. We have strong momentum on our diversity efforts, and we know there's more work to be done. We're not asking the people of Allegiant to agree on everything, but we need to be a place where racism and bias are rejected. where inclusion is a way of life and where all employees feel they belong and can contribute to our business success. Importantly, I've shared before that Allegiant's ESG commitments are vital to how our company achieves results and the way we do business. ESG excellence will give us better long-term outcomes across the board. Better employee safety, better employee engagement, better productivity, better creativity, better innovation, and stronger financial performance. We see this firsthand, and external data points to it as well. Please go to slide five. During the quarter, we experienced continued strength in demand, particularly in the America's non-residential market. This trend began in Q2 and accelerated through Q3. Leading indicators like ABI and Dodge New Construction indices remain positive. Increased demand is for both discretionary projects and new construction and is across all verticals and product categories. The recovery has been faster than we originally anticipated and is expected to continue in the foreseeable future. Residential and market demand is also favorable across both retail point of sale and new home construction. The strength in demand continues to constrain the global supply chain's ability to fully meet demand requirements. Similar to last quarter, this was especially prevalent in electronic components in Q3. As I'm sure you're aware, this is a global issue and not isolated to Allegiant or to any single industry. We have redirected resources and are taking actions such as reconfiguring and redesigning products, as well as developing alternative sources of supply to help alleviate the pressures we are experiencing in procuring electronic components. Additionally, material and freight input costs continue to accelerate during Q3. We now anticipate material and freight inflation to be approximately $60 million higher compared to last year. In addition to the supply chain pressures we are seeing for electronics, there are also widespread industry shortages of labor and other components. Once again, these issues are not allegiance specific, and we expect the global constraints driving these shortages to continue beyond 2021. These challenges led to margin deterioration in the quarter. We will leverage the strength of our supply chain management capabilities as well as price to help mitigate these impacts going forward. During the quarter, the continued road must demand coupled with the supply chain pressures resulted in record backlogs. approximately four times normal levels. We estimate that widespread shortages have delayed approximately 80 to 100 million of 2021 revenue. We believe this impact is evenly distributed across the third and fourth quarter. We do not believe this is lost revenue, but expect it will be recovered as supply chain constraints ease. Now let's turn to the third quarter performance for more details. Please go to slide six. Revenue for the third quarter was $717 million, a decrease of 1.6% on both a reported and organic basis. The organic revenue decrease was driven by lower volume in the Americas region related to the aforementioned electronics, components, and labor shortages. Currency tailwind and acquisitions offset the impact of divestitures. Patrick will share more details on the regions in a moment. Adjusted operating margins decreased by 330 basis points in the third quarter. Higher input costs, productivity challenges, and volume deleverage drove the majority of the decrease. Incremental investments, important to our future growth. caused 90 basis points of the decline. Adjusted earnings per share of $1.56 decreased to 11 cents or 6.6% versus the prior year. The decrease was driven by reduced operating income offset by a favorable tax rate and share count. Year-to-date available cash flow came in at $327.7 million, an increase of $71.6 million or 28% versus the prior year. The increased cash flow was driven by higher year-to-date net earnings, along with improvement in net working capital and reduced capital expenditures. Patrick will now take you through the financial results, and I'll be back later to discuss our 2021 outlook and wrap up.