安朗杰 (ALLE) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Allegion First Quarter 2021 Earnings Conference Call.

(Operator Instructions) 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 Allegion's First Quarter 2021 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 Allegion.

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.allegion.com.

This call will be recorded and archived on our website.

Please go to Slides 2 and 3. 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 a 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 2021 results, which will be followed by a Q&A session.

(Operator Instructions)

Please go to Slide 4, and I'll turn the call over to Dave.

Thanks, Tom.

Good morning, and thank you for joining us today.

I'm pleased with the company's first quarter performance.

We delivered revenue growth, margin expansion, double-digit earnings growth and strong available cash flow against a tough prior year comparable.

We continue to make progress on our seamless access strategy while maintaining the focus on keeping our employees safe and serving our customers efficiently.

Let's begin by walking through the first quarter financial summary.

Revenue for the first quarter was $694.3 million, an increase of 2.9% or 0.5% organically.

The organic revenue increase was driven by strength in the Americas residential and Allegion's International businesses, offsetting continued softness in Americas nonresidential.

Currency tailwinds provided a boost to total revenue and more than offset the impact of divestitures.

Patrick will share more detail on the regions in a moment.

Adjusted operating margin increased by 30 basis points in the first quarter.

We executed extremely well.

And the restructuring and cost management actions taken during 2020, along with the volume leverage on the businesses that grew, offset the mix headwinds we are experiencing.

Adjusted earnings per share of $1.20 increased $0.16 or 15.4% versus the prior year.

The increase was driven by expanded operating income, along with favorable other income and share count.

Year-to-date available cash flow came in at $105.5 million, an increase of more than $86 million versus the prior year.

The increased cash flow was driven by improvement in net working capital, growth in net earnings and reduced capital expenditures.

Please go to Slide 5. As we discussed previously, reflecting on 2020, despite the ongoing pandemic, Allegion continues to invest in our future, most notably through our innovation engines.

From industrial design, engineering and IT, to ventures, partnerships and acquisitions, we're building a build-borrow-buy approach to accelerate seamless access.

Investing in our capabilities, partnering and integration are all core to our innovation strategy.

Let's review some of Allegion's innovation and investments.

Allegion's Overtur, our cloud-based ecosystem where project teams collaborate on the specification design and construction of door security and openings, expanded in multiple ways during the past year.

Key and credential management was added, more functionality and integration for our building information modeling customers and automation that helps hardware specification writers.

Overtur allows digital connectivity to our customers over the life of the structure.

It's proving its value as a single source of truth for hardware requirements and decisions and to empower our partners to work more productively.

Our ISONAS brand also launched a significant upgrade of its software platform in Q1, the Pure Access Cloud 4.0.

Reader-controllers are pre-configured to the cloud and only require a network connection on site, making the ISONAS system truly plug and play.

The software upgrade includes new front-end technology with customized dashboards, gives a boost to cybersecurity and anticipates added capabilities and future new devices.

Our product innovation spans the world of Allegion.

SimonsVoss recently released the SmartLocker, a retrofit, no-drilling lock option for lockers and furnitures in schools, hospitals and industrial facilities.

This innovation was customer-inspired based on trends and needs in the market.

Importantly, it integrates the existing SimonsVoss digital ecosystem.

And there's additional functionality to pry or open each lock remotely to display breaking attempts in the software and to send notifications.

And just as our internal innovations continue to delight our customers, innovation is built through key partnerships, and our early leadership in the IoT market has established us as a go-to partner.

In Q1, Homebase announced that they're working with Allegion and Walmart InHome to enable direct-to-fridge grocery delivery for apartment residents starting in the Kansas City metro.

Homebase enables communities -- Homebase-enabled communities come with pre-installed Schlage Smart Locks, meaning that the Walmart associate making the delivery gets secure onetime access for entry during a designated time frame for delivery.

This is a clear demonstration of seamless access, adding value to people's everyday lives.

Partnering with CBORD, Apple and Android has rapidly expanded seamless access use cases on higher education campuses.

By enabling mobile credential technologies, we are part of the ecosystem that supports contactless student IDs for iPhones, Apple Watches and Google Pay.

CBORD also brings our Von Duprin exit devices into play, giving colleges new remote lockdown and monitoring capabilities.

These integrations are good for campus securities and help universities and colleges operate more efficiently and safely.

Rounding out our build-borrow-buy approach to innovation, Allegion Ventures continues to invest in companies like Kasa, Mint House, VergeSense and Openpath.

We also acquired Yonomi, a technology company and leader in IoT cloud platforms.

Founded in 2013 by building automation and enterprise computing experts, Yonomi was the first to create a smart home ecosystem, one that automatically discovers and coordinates devices.

Allegion was an early customer and investor.

Today, Yonomi solutions are used in more than 150 countries, connected to millions of IoT devices.

IoT -- excuse me, Yonomi also holds unique intellectual property that matches well to Allegion's strategic priorities for accelerating growth through seamless access, innovation and meaningful partnership.

Our goal is to be the provider of choice among IoT developers and integrators.

You'll continue to see more examples of investments in innovation through our build, borrow and buy approach in '21, and we look forward to sharing more with you in the future.

Patrick will now walk you through the financials, and I'll be back later to discuss our '21 outlook and wrap up.

Thanks, Dave, and good morning, everyone.

Thank you for joining today's call.

If you would, please go to Slide #6.

This slide reflects our earnings per share reconciliation for the first quarter.

For the first quarter of 2020, reported earnings per share was 0. Adjusting $1.04 for charges related to intangible asset impairments, restructuring expenses and integration costs related to acquisitions, the 2020 adjusted earnings per share was $1.04.

Operational results increased earnings per share by $0.06, driven by volume leverage, along with continued benefits from cost-control measures and restructuring actions taken in 2020.

Favorable price and currency also contributed to the increase.

The combination of these items offset the unfavorable mix.

Favorable other income and interest expense increased earnings per share by $0.08 and was driven primarily by favorable unrealized investment gains in 2021 compared to unrealized investment losses experienced in 2020.

Favorable share count drove another $0.03 per share impact, more than offsetting the $0.01 reduction from investments.

This results in adjusted first quarter 2021 earnings per share of $1.20, an increase of $0.16 or 15.4% compared to the prior year.

Lastly, we have a $0.02 per share reduction for charges related to restructuring costs.

After giving effect to these items, you arrive at the first quarter 2021 reported earnings per share of $1.18.

Please go to Slide #7.

This slide depicts the components of our revenue performance for the first quarter.

I'll focus on the total Allegion results and cover the regions on their respective slides.

As indicated, we experienced a 0.5% organic revenue growth in the first quarter as solid price performance was able to offset lower volume.

Although the total company volume was slightly down, we did see strength in the Americas residential and International businesses.

Currency also provided a tailwind to total growth and more than offset the impact of divestitures.

Please go to Slide #8.

First quarter revenues for the Allegion Americas segment were $498.9 million, down 2.6% on a reported basis and down 2.9% organically.

The region continued to deliver good price realization.

On volume, Americas residential was outstanding again, experiencing low-20s percent growth, boosted by continued strength in retail point-of-sale, new home construction and electronics growth, which nearly offset the anticipated decline in the nonresidential business caused by lower new construction and discretionary project delays.

Electronics revenue was down mid-single digits with growth in residential products that was offset by reduced commercial electronics, driven by delays in discretionary projects.

We continue to see electronics and touchless solutions as long-term growth drivers and expect electronics accelerated growth to resume when market conditions normalize.

Americas adjusted operating income of $135.5 million decreased 7.6% versus the prior year period, and adjusted operating margin for the quarter was down 140 basis points.

The decrease was driven primarily by volume deleverage, negative mix and incremental investments, partially offset by benefits from cost-reduction actions and restructuring.

Please go to Slide #9.

First quarter revenues for the Allegion International segment were $195.4 million, up 20.2% and up 11% on an organic basis.

The organic growth was driven by strength across all major geographies and businesses as markets continue to rebound.

Part of the year-over-year growth was due to the comparative impact of COVID-related shutdowns in the prior year.

Favorable currency impacts also contributed to total revenue growth and were slightly offset by divestiture impacts.

International adjusted operating income of $18 million increased nearly 1,000% versus the prior year period.

Adjusted operating margin for the quarter increased by 820 basis points.

The margin increase was driven primarily by solid volume leverage, benefits from lower operating costs from the restructuring cost-control actions taken during 2020 as well as favorable currency impacts.

This is also our first quarter reporting under the new Allegion International segment.

The transition was seamless and made possible by having strong leadership in place to drive effective change.

Please go to Slide #10.

Year-to-date available cash flow for the first quarter 2021 came in at $105.5 million, which is an increase of more than $86 million compared to the prior year period.

The increase was driven by improvements in net working capital, higher earnings and reduced capital expenditures.

Our strong cash flow generation continues to be an asset of the company.

Looking at the chart to the right, it shows working capital as a percent of revenues decreased based on a 4-point quarter average.

This was driven by reduced working capital need from the lower volume throughout 2020 as well as strong collections performance.

The business continues to generate strong cash flow, and we remain committed to effective and efficient use of working capital.

We will continue to evaluate opportunities to optimize working capital and drive effective cash flow conversion.

I will now hand it back over to Dave for an update on our full year 2021 outlook.

Thank you, Patrick.

Please go to Slide 11.

We have more visibility into our markets, and I am increasingly optimistic on the economic recovery.

The Americas residential business continues to be hot and is expected to grow in 2021.

We anticipate strength in residential to persist for the foreseeable future.

DIY demand remains strong, and the construction market is strengthened by a shortage of available new homes, continued low mortgage rates and improved trends in permits and starts.

However, completion rates have been lagging starts due to labor and supply shortages, which should improve as we move further past the pandemic.

Looking at the Americas nonresidential business, we saw demand begin to increase on the repair/retrofit projects sooner than we previously anticipated.

We expect this trend to continue for the remainder of the year.

In new constructions, we are starting to see positive movement in macroeconomic indicators, but it's important to remember the late cycle nature of this market.

For 2021, I expect nonresidential new construction to remain soft, but the monthly change in the architectural building index, Dodge construction starts and potential stimulus spending are trending favorable.

And assuming this continues, it will lead to growth in 2022 and beyond.

The seamless access, software and electronics continue to be long-term growth drivers, and they will remain our top investment priorities.

They are the future of Allegion.

With these parameters in place, we are now projecting total and organic revenue in the Americas to be flat to up 1% in 2021.

In the Allegion International segment, markets continue to recover, and we expect full year growth in most of our International segments, led by our Germanic and Global Portable Securities business.

We continue to monitor the pace of vaccine rollouts internationally as this will lead to sustainable improvements in the economic environment.

Currency tailwinds more than offset the divestiture of our QMI door business and contribute to total growth.

For the region, we are raising our outlook for total revenue growth to 12% to 13% with organic growth of 7.5% to 8.5%.

All in for total Allegion, we are now projecting total revenue to be up 3% to 4% and organic revenue to increase 2% to 3%.

We are also raising our earnings per share outlook with reported EPS at a range of $4.85 to $5.05 per share and adjusted EPS to be between $5 and $5.15.

This guide incorporates pricing actions to offset direct material inflation as well as reflecting our supply chain capability to mitigate industry challenges on supply and electronic component shortages.

We anticipate that these challenges will persist for the balance of the year, and we will continue to monitor and adapt to changing market conditions.

Our outlook for available cash flow is also being raised and now projected to be $430 million to $450 million.

The outlook assumes investment spend of approximately $0.10 to $0.15 per share.

The full year adjusted effective tax rate is expected to be approximately 12.5%.

The outlook for outstanding diluted shares continues to be approximately 91 million.

Please go to Slide 12.

Allegion is off to a great start.

We experienced reported and organic revenue growth, expanded operating margins and delivered strong cash flow.

We have solid business fundamentals and a proven ability to execute and adapt to changing and uncertain market conditions.

We have managed the business extremely well to set us up for success as markets return to normal.

Macroeconomic indicators and specific indices related to our business are trending positive, and I'm increasingly confident in the recovery.

The Allegion commitment to shareholders, employees and customers is to be stronger exiting the pandemic than when we entered, our work continues.

I want to take this opportunity to thank our employees for their diligence and dedication during the pandemic.

It is their commitment that has driven the company to perform well and accelerated our vision of seamless access and a safer world.

Allegion's future is bright.

Thank you.

Now Patrick and I will be happy to take your questions.

(Operator Instructions) The first question comes from Julian Mitchell with Barclays.

Maybe just wanted to dial in on the revised Americas organic sales growth outlook.

Maybe just help us understand how that guidance increase was split between your residential and your nonresidential assumptions changing.

And then within nonresidential specifically, how should we think about that slope of decline shrinking over the balance of this year?

As you've been running at a sort of down low double-digit rate for 4 quarters in a row now.

Yes.

Julian, so I would characterize it this way.

First of all, during the course of the quarter, things progressively got better, particularly as we looked at our nonresidential business.

And by that, meaning just kind of the level of activity, orders, customer enthusiasm, specifically related to discretionary projects.

And so that piece of information, plus with the improvement in certain indices, leading indicators relative to our business, i.e., ABI, new construction starts, those type of things, which I'll remind you, relative to new construction, it doesn't necessarily mean it's going to be incremental business this year, but continued improvement, particularly as we look out beyond 2021.

But the improvement in non-resi really relates to discretionary projects continuing to be favorable more than what we had originally anticipated last time we were on the conference call.

Residential continues its strength really across the board, just really seeing good improvement in DIY, new build construction, et cetera.

We expect that strength to continue.

I would just remind you, keep in mind that last year, as we're coming -- exiting out of Q2, after the plant shutdowns, demand started to surge.

We were kind of catching our feet relative to production and kind of keeping up with demand.

We didn't start kind of filling channel inventory until late Q3, Q4.

That will be nonrecurring, right, this year.

And so you get into a tougher comp, if you will, in the back half of this year as it relates to the residential business, but still growth on a normalized basis.

And then my follow-up would be switching to the Americas margin outlook.

So if I look in the 10-Q, you have that pricing and productivity in excess of inflation line.

That was only about a 20 bps tailwind to margins in the first quarter.

How should we think about that playing out over the balance of the year, both in terms of sort of what's happening with inflation and also your pricing measures?

It's going to be more difficult, and the reason being is the inflationary item will step up, i.e., it's going to be worse as we progress kind of throughout the course of the year.

Why?

Because of the input cost specific to commodities and material components.

The other thing I would remind you of is, remember, we talked last year about some of the boomerang effect of the cost kind of coming back in into 2021 that was not there in 2020.

So that's another item.

Plus, we're going to have incremental investments.

All of those are going to weigh a little bit more on margin and will put more pressure, if you will, on margins in the back half of the year that, for '21, that we didn't experience in 2020.

But let me just add something else.

I think the -- on the non-resi side of things, relative to the reduced volume, even though things are getting better as we progress throughout the year, we do have volume deleverage.

We have taken the necessary actions to extract variable costs, okay?

So it's really a volume deleverage issue.

It's not a permanent item.

When volumes come back, margins will accelerate and because we've taken the necessary cost-control actions.

I'd add one other dimension, and that would just be a slight mix shift as this -- as the discretionary small project comes back, and we're seeing that and applauding it, it tends to have more mid-price-point products versus our new build supply that's heavy in our premium product.

The next question comes from Colton West of Longbow Research.

Looks like some great progress just made this quarter.

I guess, firstly, as we speak to contacts and we hear of a pickup in non-res quoting activity, and in the prepared remarks, you called out an acceleration on the R&R side.

With where conditions stand today, are you able to give us a more concrete sense of when we start to see orders and then the corresponding top line growth?

And is this something -- do we start to see quotes turn into orders as early as 2Q?

Or is this -- does this not materialize until maybe the back half or next year?

We see some favorable indicators.

One, the broader indicators that you all see, ABI, Dodge starts -- not Dodge starts, but Momentum, so we like what we see there.

Two, our own specification is up.

The challenge of that is specification doesn't mean orders tomorrow or next week or even next quarter.

We would see that gaining momentum as we exit '21 and then into '22.

I also like the -- where the investment is going in terms of our mix and strengths of the company.

As we see end markets' dynamics in major projects and in construction, hospitals, K-12 college campuses and institutions, that's where the market is rebounding, and it tends to complement the strengths of the company.

Okay.

And then my next one is from sort of a 30,000-foot view.

Would you consider the current level of earnings to be trough earnings?

And if so, can you walk us through the moving parts that will push earnings to the next peak?

Yes.

So I would characterize the earnings, really good performance, obviously, in Q1.

If we look at the full year guide, kind of in line with last year in terms of where we ended up.

I would expect, with the improvement in terms of our outlook, particularly on the nonresidential business gaining momentum, that will hopefully continue to accelerate in 2022.

And as I mentioned before, you would see continuous improvement in margins relative to that business.

With the continuation of residential and the strength of the end markets, would expect growth there.

So yes, I would characterize, as long as the end markets continue to be favorable, we'll see earnings growth accelerate from '22 and beyond.

The next question comes from Andrew Obin of Bank of America.

So a question in the last stimulus bill, and I think HVAC companies have been talking about it and also electrical companies have been talking about it.

There's a lot of money allocated for schools.

And I think if you look in the last stimulus, I think 70% of the money was spent on capital improvement project, right?

And the money seems to be like sort of $6 billion to $7 billion a year for the next 3 years.

So I think HVAC companies and electrical companies are talking about the fact that they'll see an impact from this in next quarter, right, because you do school remodeling in the summer.

So institutional vertical is quite a big deal for you guys.

Are you going to see any impact from it?

And what's your assessment of the impact of this portion of the stimulus on your business this year and next year?

So thanks for your question.

We absolutely see the billions of dollars that are being allocated into K-12 campuses.

We will see benefit from that.

Hard to quantify.

Each project will have different attributes.

But it's clear, school security remains on the minds of Americans.

And I think, too, the rise in violence, which is disturbing across the country, coupled with the stimulus, school security will get a portion of that investment and benefit Allegion.

Great.

But is it in your guidance yet?

Or is it just too hard to quantify at this point?

I would say, Andrew, a little bit too hard to quantify at this point.

However, as we talked about earlier, a step-up in terms of order activity relative to discretionary projects we did see, and that will turn into, we'll call it, new business, Q2, Q3 type of time frame.

But I think trying to kind of quantify a larger impact specific to the stimulus bill, right now, is probably premature.

I would just add, we will capture a large percentage of that security spend, and we should be able to have visibility of that in our spectrum quotation activity in which we also see a very large part of the market.

Got you.

And just a follow-up question, on International sort of starting to build impressive momentum there in terms of operating turnaround, can you just give us more granularity?

What's driving it?

Is it Italy?

Is it Poland?

Is it Korea?

Is it Australia?

As I said, it's been all of a sudden, there's real momentum.

Just would love to get a better sense of what's happening there.

So one, remember the pandemic started internationally before it started here.

So Asia Pacific, particularly Italy hit hard early.

So we're seeing that recovery even though the pandemic continues to move.

Number two, our continued investment in electronics and software, our Interflex and SimonsVoss businesses are performing extremely well.

I'm quite proud of the work, the leverage of investment to drive top line, which we will continue.

Third, success in our GPS business.

For those of you that have gone to try and buy a bike, there's no inventory in.

We made supply chain changes that gives us some advantages versus importers.

We like that.

And then we're beginning to see early recovery as well, Australia and New Zealand.

Remember, our Gainsborough acquisition, as residential recovery drives in Australia, will do extremely well there.

I'd add something else.

Over the last 4 to 5 quarters, we've been working hard to reposition that.

We collapsed 3 divisions into 2. That gave us some cost efficiencies, driving more accountability then and the ability to invest back in those businesses for future growth.

I like our position, and the future is bright as we move through recovery.

The next question comes from Tim Wojs with Baird.

Nice work.

Thank you, Tim.

Maybe just a bigger-picture question for you guys.

Just as you're seeing buildings reopened, where in the budget stack is security from a priority perspective?

And I guess I'm just kind of wondering if you're seeing other areas within buildings, like HVAC taking focus away from security, or are you seeing kind of the interest in the budget priorities relatively unchanged relative to where they were pre-COVID?

I would describe it as this, and I think it's consistent as I have painted it.

I think over the last 12 months, there's been the absence of any type of preventive maintenance and small project work because the focus was on the health and safety of the occupants of buildings.

I believe what we saw strongly, beginning mid-March and continues on, is the return of that.

People are going after those projects.

Those small projects, preventive maintenance activity, particularly if it's security-related, carry a pretty high priority versus other preventive maintenance aspects.

Let's say the door doesn't shut properly, it's not locking, I have a security breach, maintenance people are always making trade-offs.

As we move into the air conditioning season or I don't have heat, those tend to be a red priority.

We could fall into yellow, but, Tim, I believe there's an absent -- there has been an absence of preventive maintenance, these small projects, and those are moving in.

I believe the budgets are there.

I've also been refreshed that in larger projects that have -- that were delayed, those are coming back in the mid-project level.

An example would be the University of Tennessee.

They had a project that was slated to go in '20.

That's come back on.

So it's fully budgeted.

I think, again, what -- that will naturally occur, and we'll get our share of that wallet.

And as the new construction comes back, it will add more momentum to Allegion.

Okay.

Okay.

Great.

That's good to hear.

And then maybe just my second question, just on the M&A side of things.

How would you kind of characterize the development of the pipeline over the last 3 to 6 months?

And any sort of increased kind of activity or actionability there just given maybe more of a meeting of the minds in terms of people's perspective on the end market?

I would say the attention of the leadership team has never been stronger, focused on moves that can help improve the scale of Allegion.

We believe, as we move harder in seamless access, scale matters.

We're pushing hard on moves that we think would help us participate in the connection of access, seamless access at a faster pace.

I'd say less time spent on smaller projects and deals.

But we've been working on this now for 7, 8 years, and we're pushing on those relationships.

We believe there's further consolidation opportunities within the market.

And the faster that we accelerate this convergence, it's going to force some action.

The next question comes from John Walsh with Crédit Suisse.

Really impressive execution in the International business.

I wanted to actually ask you about where you see the margins going for that segment now.

I mean really strong out of the gate here with that kind of high end of upper single-digits performance.

What should we kind of be thinking about for the full year there in terms of margins?

Yes, John.

So again, as you indicated, really strong performance, both top line and margin rate, particularly relative compared to prior year.

Just as a reminder, you may recall, last year, we were pretty quick out of the gate in terms of implementing cost-control measures, going in with the restructuring programs across the board in Asia as well as Europe.

And so you're seeing kind of the full benefit of that, if you will, reflected in the '21 results.

So the restructuring actions taken last year begin to lap in the back half of the year.

So you're not going to see kind of a step-up in the margin performance that you saw in Q1.

However, I would suggest that margins will continue to improve year-over-year as we continue throughout the year.

And we should finish, on an aggregate basis, i.e., the consolidation of Asia and Europe together, at kind of a record performance in terms of margin percent.

And that's really reflective, as Dave kind of highlighted earlier, the continued strength in electronics, which has a higher-margin profile.

The -- all the cost-reduction actions that we've taken will continue to manifest itself.

And the collapse and consolidation of the 2 segments together, we're seeing the benefits of that as well.

I feel like we're in a really good position kind of going forward, not only to drive top line, but to ensure that we do it in a profitable basis.

And we continue from here on out getting margin accretion as the business continues to grow.

Great.

And then just as a follow-up, I think it was in response to Julian's question about residential.

You called out kind of some stock orders in Q3, Q4.

Just curious here, in Q1, if you were still seeing those stock orders or if kind of sell-in is equal to sell-out at this point yet?

Yes.

So we did experience some of that, not to the magnitude that we did in the latter half of last year.

And I would say, too, quite frankly, if you kind of look at inventory levels in the channel, particularly at big box, look on it like a trailing kind of 12-month basis, basis of future demand, still probably lower than where it needs to be.

So it's a matter of kind of trying to produce at a higher level, which is difficult right now kind of given some of the supply constraints in our business.

So there is maybe a little bit more that we could put into the channel.

But right now, we're kind of assuming we're more on a normalized basis, producing basis of demand type of thing.

The next question comes from Jeff Sprague with Vertical Research.

I just wanted to put my finger a little bit more on kind of the cyclical trajectory also, and I thought maybe it'd be helpful to kind of discuss things a little bit sequentially given how wild some of the year-over-year comps are with COVID and the like.

Just thinking about Americas in aggregate, right, with commercial coming off the bottom and resi is still strong, I mean, is there any reason to think you don't have your normal sequential lift in revenues there from Q1 to Q2?

I think, first, let's look at the lay of the land backwards.

You had the rupture of the pandemic.

Then let's go even back, we had a record Q1.

We had the rupture of the pandemic.

But as we compare to competition, I believe we were stronger quarter in, quarter out over several of the last quarters.

So whether it was up or down, the sequential nature of it, remember, we talked about plowing through our backlog.

So with that as a backdrop, as we move through, we should expect some lift in the second and third quarters that we would normally see.

I think that's why we highlight the return of the discretionary and small projects, which I think will certainly be better than it was a year ago.

The but is that new construction demand is not as robust as it was going into the pandemic.

So I think it takes '21 to normalize itself, and we'll see probably a truer picture of what the market is going to be and we believe better as we go into '22.

Yes.

The nature of my question is really -- and I hate to just kind of play math exercise with you, right?

But Q2 sales typically rise 15% to 20% sequentially, right?

For that to happen, you need almost 30% organic growth in Q2.

And if you do 30% organic growth in Q2, you're implying kind of negative 10% in the back half to get to your guide.

So...

So Patrick will add the math.

I would suggest, and we are suggesting or forecast that's not going to happen.

And I think one of the key drivers is new -- or nonresidential construction starts.

They have been down 28% for the last 4 quarters, and that is clearly a driver of our business.

That's got to be in place to get that type of ramp.

So Jeff, keep in mind, going into Q2 last year, we're coming off a record quarter Q1 2020.

Backlogs were really, really healthy, both on discretionary new construction, projects that were started were kind of still being completed.

Some of them may have been delayed and pushed out during the back half of the year.

So you still have a real tough comp on non-res, okay?

New construction, it begins to improve year-over-year and sequentially.

But by Q2, it's still going to be, on non-resi now, okay, not residential, on non-resi still kind of be tough.

Okay?

We didn't have plant shutdowns like we did in residential business in Q2.

The next question comes from Josh Pokrzywinski with Morgan Stanley.

Dave, just on a bit of a snap-the-line update versus where you were kind of 3 or 6 months ago.

I think the expectation was that when we get into the second half, folks will be back in some of these institutions or offices and will drive some retrofit activity.

It sounds like some of that is starting to percolate a bit quicker, but I guess, one, am I reading that right?

And two, is that something that could show up as soon as 2Q?

I know there's still plenty of chop in the new side of the market, but just versus that prior expectation of a second half improvement in non-resi retrofit.

I want to be very clear, beginning mid-March and through today, we saw an uplift in wholesale and CHD demand that we believe is part of an air pocket that we saw 12 months earlier.

Preventive maintenance, small projects were delayed, and that's come back, and we're very pleased to see that.

It was a little earlier.

I think the results of the vaccination success we're having here in the U.S. has driven that and overall confidence.

So feel good about that.

We added to Allegion's commercial and institutional backlog in the Americas during the period.

And we continue to believe that will -- that demand will continue.

I think the challenge is that new construction backlog, which the projects are complete, I think it's evident in the starts data that comes out of Dodge, and we just got to work through that.

I think we've got a reasonable view on it.

Again, market demand was better than we anticipated in Q1, reasonably better.

It's still softer than it was a year ago.

Got it.

That's helpful.

And maybe just to follow up on that.

And I think this sort of gets to what Jeff was asking as well.

I guess there's still plenty of uncertainty on new construction, and you sort of prefaced with your answer just now that the non-res new backlog is still lower.

But is it lower than what you would have thought a few months ago?

I guess that would sort of imply some higher level of conversion.

So I guess, that's always possible.

But it sounds like the market itself is doing better from an orders perspective.

So just trying to balance that maybe heightened caution on the backlog comment even though I don't know if anything has really changed for you.

I would say the new construction activity is performing as we would anticipate, and we see the benefits of that really rolling in into '22.

And it's the nature of the beast.

I would also emphasize this.

However the market performs on the retrofit, small project and new construction, I believe that we've made the investments here that will continue to beat the market.

Great.

That's helpful color, and congrats on a good quarter.

Thank you.

The next question comes from Chris Snyder with UBS.

Just following up a little bit more on the non-res comments.

If starts inflect positive here shortly, when could we expect the new construction business to bottom?

And then just any color you could provide on the R&R trajectory embedded in the 2021 guidance.

I would say if starts inflect, and we believe they'll gain momentum as we go through the year, you really see the benefits of that in '22 because dirt in the ground today does not mean revenues for Allegion tomorrow.

This is a long-cycle nature.

Most building projects have a 12- to 18-month duration, especially in our sweet spots.

And that's how I paint it.

I'm extremely encouraged by the uplift of our specification activity and the broader indices.

And I think, couple that with the stimulus, we feel good about where this business is going.

Appreciate that, all that color.

And then just kind of following up.

So non-res has been running at a low double digit or down low double digits for the last 3 quarters.

Can you provide any color on the under-the-surface movements between new construction, which kind of based on your lag comment, seemed like it would be continually getting worse through at least Q1?

And just any mix there between new construction and R&R, just the under-the-surface movement.

As you know, we don't really give specific guidance associated with the breakdown in those kind of end markets.

But I would characterize it this way, that continued pressure as we kind of continue to go through '21 relative to new construction year-over-year, but getting sequentially better in the back half of the year, i.e., as we progress, the rate of decline becomes less.

The repair/retrofit was the first area that kind of saw the decline last year.

And that will start to hopefully improve in the back half of the year, year-over-year.

But keep in mind, the new construction part of our nonresidential business is roughly 65% relative to -- or compared to the discretionary in total.

I appreciate that...

I would also suggest, just a little bit more color on that, the range of capabilities that Allegion has today, opening price point, mid price point and full price point in terms of our commercial and institutional offerings is significantly better than it was in the last downturn.

We're seeing that growth.

We're flexing our strength in the channel to make sure if $1 is available for revenue, that we get more than our fair share of that.

The next question comes from Ryan Merkel with William Blair.

First off, can you just talk about the supply chain pressures you're seeing?

And is this risk manageable?

Or are you expecting to see a revenue impact in '21?

So our record speaks for ourselves here.

I think the Allegion supply chain has performed exceptionally through the last 5 quarters.

It's because of a strategic choice that we make to produce in region, and it's benefiting us in a lot of ways.

There are clear and obvious pressures, particularly on electronics.

And we're certainly adapting to those.

There could be some shutdowns in terms of we're not able to produce specific products.

With that in mind, we were very aggressive early to put in long-term orders to secure our supply chains.

We've got tight vendor relations.

And again, my confidence is, yes, we can be affected, but we will navigate it better than the competition.

And I would add that the current guide assumes that we're going to help mitigate the impact of the inefficiencies.

I feel good about that, where we stand today.

However, continued pressure there does create inefficiencies to the extent we're unable to procure the appropriate supplies needed to produce the products.

And so it kind of remains to be seen, but we're managing through it.

Some of our product lines, particularly electronics, are hand to mouth, and it does create inefficiencies, but we're working through those issues.

I would -- 40 years of dealing with this type of thing, we made moves early that will help us, and extremely proud of our supply team and what they've done to mitigate a variety of issues.

And we were well out ahead of this, and I think we'll come out of it stronger.

Got it.

All right.

And then just quickly, great to hear the non-res rentals coming back.

Is that a broad-based comment?

Or is it just happening in certain sectors today?

So I think if you go across the geographies, we see stronger activity, particularly in the Southeast Texas.

You can kind of look at where COVID come -- had harder hits or where shutdowns have been harder.

It reflects the strength.

As you go into the different segments, think about -- were you completing your preventive maintenance list at any hospital in the United States over the last 15 months?

I would suggest the answer is no.

College campus is similar.

And we see confidence in our wholesale distribution orders, incoming orders, and it's going into those segments that have really been battered in their ability just to meet the needs of their customers.

The next question comes from Jeff Kessler with Imperial Capital.

First, just quickly on International.

Again, congratulations on the numbers.

You've explained them.

I'd love to give Tim all the credit, but of course, I won't yet.

But I do want to know what his game plan is or what the game plan is for getting what -- in general, for getting International essentially moving so that the -- so that currency and other factors are not what we're going to be talking about in 2 to 3 years, but the -- but gains in market share, et cetera.

Because obviously, having International move forward is just another quiver in your growth cap.

So Tim does have a lot of instant talent, and we give him great kudos in the first 90 days.

Jeff, there's been a tremendous amount of work that's gone on in that business over the last couple of years.

And one is, I talked about the restructuring.

Significant investment and prioritization around Interflex and SimonsVoss, really nice growth over the last 6 quarters.

Interflex and SimonsVoss performed exceptionally during the pandemic, and I think that momentum will continue.

As you think about strategic priorities for Tim, it's to continue that growth and expand the cloud and technical capabilities.

You know better than others that SimonsVoss really thrives on what we call active technologies.

Driving more investment that goes into some of the passive areas will help fuel those -- their growth, which could include also acquisition.

But we like that SimonsVoss, Interflex.

I think second important for Tim is we acquired the Gainsborough asset.

That's well positioned.

We launched the first electronic Trilock in the region.

And we think we're well positioned to be with new -- in the new build and the DIY to see nice growth as that residential market recovers in Gainsborough.

I think, third, what has been surprising to Tim in his first 90 days is the opportunity to export more capability from the Americas, which he has more knowledge than anybody in the company and -- so looking forward to taking some of the real strengths we have here in the Americas and helping our international partners grow even faster.

Okay.

My follow-up question quickly is, and maybe the answer may not be so quick, is just underneath your level, I would say, or perhaps down a level from where you folks operate, we're seeing a shift, a small shift in growth from away from video and toward, we'll call it -- you want to call it software-based access control, everything from, obviously, NFC to Bluetooth to ultra-high frequency as well as just power over Ethernet, which you folks know a little bit about.

And what we're also seeing is, simply put, a gain in software as a driver as opposed to hardware as a driver in getting into access control.

And with access control, let's say, becoming a faster growth area than even video, and we've seen some crazy valuations in the venture and private equity markets for some of these companies that are getting involved in areas that are either adjacent to you or actually may compete with you, from intercoms all the way to SaaS-based things, what is the company looking at in terms of trying to make sure that it both protects its flank and grows this business?

So I would describe it as one of the most exciting opportunities that I've seen in my 40 years of industrial participation.

The company has been invested heavily and increased our investment as we went through the pandemic.

The Yonomi acquisition would be reflective.

But if you looked under the covers and saw the growth of our investments in Bangalore and our engineering capabilities, since I create -- since we created Allegion, we've tripled the feet on the street there to be able to position ourselves more strongly in the connectivity and the software elements.

Third, Jeff, would be the venture activity.

And you see some of the investments, Kasa, Mint House, Openpath.

I don't believe we -- our strategy has been to be in the fast lanes to -- with new technology to be able to observe, learn, partner, invest, potentially own.

Yonomi went through that entire cycle.

I think we continue to sharpen our position, and I like our opportunities to be able to participate in the world of seamless access that you described.

All right.

Great.

Look forward to interacting with you guys in the future.

Always the leader in this, and we appreciate your thought leadership, Jeff.

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.

And we'd like to thank everybody for participating in today's call.

Have a safe day.

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