安朗杰 (ALLE) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Allegion Third Quarter 2020 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 of Investor Relations and Treasury.

Please go ahead.

Thank you, Andrew.

Good morning, everyone.

Welcome, and thank you for joining us for Allegion's Third Quarter 2020 Earnings Call.

With me today are Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of 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 third quarter 2020 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'll start by walking through the third quarter financial summary.

Revenue for the third quarter was $728.4 million, a decrease of 2.7% or 3.4% organically, which shows sequential improvement from Q2 to Q3.

The organic revenue decrease was driven by continued economic challenges stemming from the COVID-19 pandemic.

Currency tailwinds provided a boost to total revenue and more than offset the impact of divestitures of our business in Colombia and Turkey.

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

Adjusted operating margin increased by 20 basis points in the third quarter.

I'm extremely proud of the resiliency shown by the Allegion team.

We executed extremely well and the cost management actions taken during the year helped mitigate the deleverage from volume declines.

Positive price and muted inflation also helped deliver the operating margin increase.

Adjusted earnings per share of $1.67 increased $0.20 or approximately 14% versus the prior year.

The increase was driven primarily by favorable other income, tax rate and share count offset the lower operating income.

Year-to-date available cash flow came in at $256.1 million, an increase of just over $26 million versus the prior year.

Improvement in net working capital and reduced capital expenditures more than offset the lower net earnings.

Please go to Slide 5. Access has been part of our company's heritage for more than 100 years, and our vision of seamless access in a safer world are providing a sound foundation for our future.

In the realities of a post-COVID world, customers have new concerns and new needs for healthy environments.

The importance of making home, work and institutions safer has never been so important to our customers, and the needs for touchless access is not going away.

Our business is disciplined and focused, prioritizing investments in our seamless access strategy.

As a result, Allegion continues to deliver leadership and innovation across the portfolio.

Our Schlage brand is a 100-year-old powerhouse that spans the globe.

In the building channel, our mix of Schlage mechanical and electronic solutions continue to help us win projects, including a new development community in Florida with over 3,000 homes.

Allegion is further advancing seamless access for builders with electronic solutions that provide contactless home showings and the Schlage Encode Smart Deadbolt continues to gain momentum in both residential, new construction and retail markets.

On university campuses, among the first schools to adopt Schlage security solutions for Apple Wallet are the University of Tennessee, University of Vermont and the University of San Francisco.

Allegion now supports contactless student IDs across Apple Wallet, Android and Google Pay.

For commercial and institutional markets, we have a full suite of mobile-enabled Schlage locks and readers.

In a post-COVID environment, mobile technology, contactless hardware and readers in combination with wave-to-open actuators now extend our touchless options for interior and perimeter security.

Seamless Access also gained ground outside the Americas in Q3.

SimonsVoss is celebrating its 25th year as an electronic access innovator and was recently recognized in Germany as the #1 electronic locking system manufacturer.

In Australia, we just delivered the Gainsborough Freestyle Electronic Trilock for single family and short-term rentals, giving the owner full control of access from a mobile app.

And in Australia and New Zealand, we introduced the Schlage Omnia fire-rated smart lock for multifamily and office settings.

In the quarter, we booked over 4 million in orders to support and provide seamless access solutions to a global leader in social media to be delivered in '21.

Our investments in seamless access are bolstered by global accelerators.

Allegion's partner of choice and open credentials strategy is an important accelerator.

More than 45 physical access control software providers already integrate with Schlage electronic locks and devices.

Many of them are moving to integrate to our mobile credential ecosystem as well.

Our global accelerators include e-commerce, touchless access and increased focus on visitor management and occupancy monitoring.

Seamless access is providing to be a strong foundation for our future.

Patrick will now talk you -- walk you through the financial results, and I'll be back to later discuss our 2020 outlook and wrap up.

Thanks, Dave, and good morning, everyone.

Thank you for joining today's call.

Please go to Slide #6.

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

For the third quarter of 2019, reported earnings per share was $1.40, adjusting $0.07 for the prior year restructuring expenses, integration costs related to acquisitions and debt refinancing costs.

The 2019 adjusted earnings per share was $1.47.

Favorable other income and interest expense increased earnings per share by $0.15.

The increase was driven by an approximately $14 million noncash currency translation gain related to the liquidation of a legal entity in our EMEA region.

This benefit would not be expected to recur in 2021.

Favorable year-over-year tax rate and share count combined to provide another positive $0.08 per share impact.

Operational results decreased earnings per share by $0.03, driven by volume deleverage that was nearly offset by favorable price and productivity exceeding inflationary impacts as well as favorable currency.

This results in adjusted third quarter 2020 earnings per share of $1.67, an increase of $0.20 or approximately 14% compared to the prior year.

Lastly, we have a $0.09 per share reduction for charges related to restructuring and impairment costs.

After giving effect to these items, you arrive at the third quarter 2020 reported earnings per share of $1.58.

Please go to Slide #7.

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

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

As indicated, we experienced a 3.4% organic revenue decline in the third quarter.

The COVID-19 pandemic continued to have an impact on the top line number, although we did realize the benefit of delayed projects from the prior quarter.

As shown in the trending chart, revenues rebounded nicely, but were short of the very strong quarterly results in the prior year.

Despite the difficult and uncertain times we are operating in, the overall business performed very well, particularly in the supply chain and meeting customer requirements.

It is also important to note that price remained solid in the quarter, which slightly offset the volume pressure.

Currency also provided a tailwind to total growth and more than offset the impact of the divestiture of our businesses in Colombia and Turkey.

Please go to Slide #8.

Third quarter revenues for the Americas region were $539.1 million, down 5.1% on a reported basis and down 4.6% organically.

The decline was driven by volume challenges on the nonresidential business due to the COVID-19 pandemic and was partially offset by good price realization and strength in the residential business.

The nonresidential business was down low double digits.

Conversely, residential bounced back nicely and grew at a low double-digit rate.

The Americas electronics revenue declined in the mid-single-digit range as discretionary commercial projects are delayed.

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

Americas adjusted operating income of $166.6 million decreased 5.1% versus the prior year period, and adjusted operating margin for the quarter was flat.

Discretionary cost actions, restructuring benefits and material deflation mitigated the impacts of volume deleverage and unfavorable mix.

Please go to Slide #9.

Third quarter revenues for the EMEA region were $148.4 million, up 7.7% and up 2.9% on an organic basis.

The organic growth was driven by strength in the Global Portable Security and SimonsVoss businesses as well as solid price realization.

Favorable currency impacts contributed to the total revenue growth and was slightly offset by the impact of the divestiture in the business in Turkey.

EMEA adjusted operating income of $17.1 million increased 42.5% versus the prior year period.

Adjusted operating margin for the quarter increased by 280 basis points.

The margin increase was driven primarily by price and productivity exceeding inflation.

Productivity was bolstered by benefits from lower operating costs from the restructuring actions taken earlier in the year and discretionary and variable cost reductions.

Please go to Slide #10.

Third quarter revenues for Asia Pacific region were $40.9 million, down 4.2% versus the prior year with an organic revenue decline of 6.8%.

The decline was driven by continued COVID-19-related impacts and weakness in Korea.

Our Australia business performed quite well despite the ongoing pressure in Australian end markets.

Currency tailwinds offset some of the organic revenue decline.

Asia Pacific adjusted operating income for the quarter was $3.2 million, a decrease of $1.2 million, with adjusted operating margins down 250 basis points versus the prior year period.

Of note, the prior year operating income includes a $1.1 million favorable onetime item related to the recovery of previously remitted non-income taxes.

This had a 260 basis point favorable impact on Asia Pacific margins in Q3 of 2019.

Excluding that, margins were essentially flat year-over-year, with the volume deleverage and unfavorable mix being offset by favorable price and productivity exceeding inflation.

Please go to Slide #11.

Year-to-date available cash flow for the third quarter 2020 came in at $256.1 million, which is an increase of just over $26 million compared to the prior year period.

The increase was driven by improvements in net working capital and reduced capital expenditures, which more than offset lower net earnings.

Our strong cash flow generation has been an asset to the company.

This was evident in the third quarter and will continue to serve us well during the current market environment.

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

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

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

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

Please go to Slide #12.

Our financial liquidity position remains extremely solid.

Our net debt-to-EBITDA ratio is 1.6 based on the last 12 months' performance.

Our debt covenants are well within the required limits, and we have no near-term debt maturities.

Our $500 million credit facility remains untapped.

Our quarterly dividend in 2020 increased 18.5% through the third quarter.

This is the sixth consecutive year of annual increases.

In addition, with the strong operational execution and cash generation, the increased cash position since the beginning of the year and better visibility into business conditions, we have resumed share repurchases under our previously authorized $800 million program.

As you have heard us say numerous times, we put our excess cash to use as part of our commitment to a flexible and balanced capital allocation strategy.

I will now hand it back over to Dave for an update on our full year 2020 outlook.

Thank you, Patrick.

Please go to Slide #13.

As you know, we were one of the handful of companies who provided an outlook following Q2.

With another quarter behind us and a bit more clarity, we are updating our outlook for 2020.

In the Americas, we expect to see continued pressure on the nonresidential business as discretionary spending in commercial markets remain tough due to the people continuing to work from home.

In institutional markets, the projects already started will continue to finish.

The rate of completion may be slowed as restrictions for the number of people on job sites remain in place and supply chain issues to the construction sites.

Residential markets are expected to remain strong in all channels we serve: big box retail, e-commerce and new construction.

With these expectations, we are improving the organic revenue outlook in the Americas to be down 5.5% to 6% for the full year.

We are projecting Americas total revenue decline to be 6% to 6.5%, with a slight impact from the divestiture of the business in Colombia.

In Europe, we saw sequential improvement in Q3, and we expect Q4 to be better than the year-to-date performance we have experienced.

For the region, we now project organic revenue to be down 6.5% to 7.5%.

Total revenue includes currency tailwinds in the latter part of the year as well as the impacts from the divestiture of the businesses in Turkey and is projected to be down 4.5% to 5.5% for the full year.

In Asia Pacific, markets were weak before COVID-19, especially in Australia.

We expect that along with -- the weakness we're experiencing in Korea to continue.

With this backdrop, we expect 2020 organic revenue decline of 12% to 13% and 2020 total revenue to be down 12.5% to 13.5%, with a slight impact from currency.

We are projecting total [and organic] revenue for the company to be down 6% to 6.5%.

We are raising our outlook for adjusted earnings per share to a range of $4.75 to $4.80.

Although net investments are assumed to be relatively small in the revised outlook, we remain committed to investing in innovation that supports our seamless access strategy.

This outlook reflects the reprioritization of investment to support the expected future electronics growth.

Our revised outlook assumes a full year adjusted effective tax rate of approximately 13% as well as outstanding weighted average diluted shares of approximately 93 million.

The outlook additionally includes approximately $1.30 to $1.35 per share impact from impairment and restructuring charge during the year, most of which have already occurred.

As a result, reported EPS is estimated at $3.40 to $3.50.

Finally, our revised available cash flow outlook for 2020 has increased and is now projected to be in the $400 million to $420 million range.

Please go to Slide 14.

Allegion has strong business fundamentals and a proven ability to execute and adapt to a changing and uncertain market conditions.

We have managed the business extremely well to mitigate the impacts of the ongoing pandemic.

We remain ready to serve our customers and meet their needs for touchless access and healthy environments with our market-leading brands.

We will provide an official outlook for 2021 during our Q4 full year call early next year.

But as we think about the remainder of the year and begin to look at 2021, some key observations that we see are: as previously expected, commercial and institutional markets will continue to be soft in Q4 and in the first half of 2021 with a snapback in repair, retrofit and small projects beginning in the second half of next year.

U.S. state and local bond issues continue to be moved ahead and supported by local communities.

Residential end markets are expected to remain strong for the long-term as an undersupply of single-family homes is corrected.

We will continue to manage our cost base to help aggressively mitigate any volume reductions.

Seamless access, software and electronics will drive growth and continue to be among our top investment priorities.

They are our future.

Strong cash flow generation will remain a focus with capital deployment to enhance shareholder returns.

Going forward, Allegion will be leaner and more focused as we navigate the coming months and emerge from the pandemic.

We have implemented restructuring actions during the year that have addressed the cost base in order to right size the business.

We will continue to evaluate business going forward and make necessary changes.

Our execution and commitment to driving solid results will remain high.

In closing, Allegion's future is bright.

We thank you, and we'll now take your questions.

(Operator Instructions) The first question comes from Chris Snyder of UBS.

Could you just maybe unpack the Q4 guidance a little bit?

Just I guess, specifically as it relates to the resi and the nonresi piece in the Americas?

So we don't provide specific guidance by quarter.

You can obviously back into that relative to our full year guide.

I would say, basis of our Q3 performance strong, both in terms of top line and operating income margin performance relative to the backdrop of what's going on around the globe.

I would say you can kind of see similar type of patterns in terms of both the nonresidential and residential businesses in terms of what you saw in Q3.

But we'll continue to manage the cost to help mitigate any shortfall relative to the nonresidential business and the margin impact.

We do have a mix impact that's going on here relative to growth in residential and softness in nonresidential business.

Appreciate that.

And then maybe just following up on the resi piece.

And I certainly understand your comments on the resi new construction cycle picking up, and we've had low household formations for a long time now.

So certainly, see that view.

But I guess, specifically, as it relates to maybe the restocking cycle, I know there was the Q2 supply chain disruption.

Like has that restocking cycle fully been realized at this point?

Maybe what's kind of like the runway there that you see growth just on that end?

I would say, as we look at the res segment and the pause that was taken by all suppliers in Q2, we're at record backlogs and normalizing that will take certainly into early Q2.

The next question comes from Ryan Merkel of William Blair.

Nice quarter.

Thank you.

So first off, Americas electronics revenue down mid-single digits is much improved.

You gave some remarks that the trend of touchless access is real and happening.

Do you expect this business to turn positive in the fourth quarter?

And could electronics provide some offset to weaker underlying commercial trends in 2021?

Or is that a bit of a reach at this point?

Electronics will be positive in Q4.

As you look at the year, our electronics, especially electronics mirrors, our res and commercial performance, extremely strong -- electronics res extremely strong; somewhat muted in commercial and institutional.

Two reasons for that.

The strength in residential electronics is driven by supply chain strength and an extremely strong position in the portfolio of our products.

The Schlage Encode, the Schlage Connect, our KPL locks are some of the best products on the market.

So where was the growth in the quarter?

In Q3, we had a supplier affected by COVID, and we lost a couple weeks with that.

The demand did not stop, but it affected our ability.

And if you normalize that through the balance of the year, our growth in electronics led by res continues.

So feel good about that.

That's super helpful.

And then I want to follow up on the 4Q guide, and maybe ask it a little differently.

It seems to imply Americas revenue down mid-single digits year-over-year with flattish margins just like this quarter.

So if I have that right, why is there not more improvement in the Americas business in 4Q?

So I would characterize it this way.

Entering into Q3, we had stronger backlogs, particularly in the nonresidential business, some of the projects were delayed and the catch-up and that type of thing.

And so we were able to maybe operate more efficiently from a manufacturing perspective that helped the margin profile in the business.

Two would be in Q4 maybe a stronger negative mix component relative to the residential-nonresidential sales in the quarter as well as within the channel and product segments within the nonresidential business.

So there's a lot of things going on there.

But quite frankly, we will, as I said earlier, continue to manage the margin well.

I was very happy with the progress we made relative to some of the mitigation on the cost side, and you saw that with strong overall margin improvement relative to the prior year.

The next question comes from Josh Pokrzywinski of Morgan Stanley.

Dave, just coming back first to some of your comments on the channel replenishment that's necessary in res.

And I appreciate that kind of side point on the -- on maybe some of the interruptions on the electronics side that kept fulfillment maybe capped there.

Would you mind quantifying how big of a replenishment still needs to happen?

If I remember your comments last time, it was kind of through 1Q, now it sounds like early 2Q, so maybe a bit of a push out there.

But how many weeks of inventory or points of demand, however, you want to put it, does the channel need to kind of get back to normal levels on the res side?

So Josh, I would -- sorted out in my mind is, we leave Q3 with record residential backlog, number one.

As I think about bringing that backlog down to normal, it pushes us into Q2.

It's not inhibited by our ability for throughput, just with a small disruption.

We have had -- we have expanded capacity of our residential capability significantly.

Demand is good.

We've done a good job picking up builders, expanding space at big box.

E-commerce remains extremely red hot, and I believe it's our ability to keep our customers in product that has built that backlog, I would say, gaining share and a strong suite of electronics that has enhanced our position.

I'd add one other comment.

Allegion's ability to flex that supply chain is as impressive of anything that I've seen in my 40 years of manufacturing.

Got it.

Appreciate that color.

And then just a follow-up.

Dave, I appreciate that even going back to April that you've been cognizant that the current environment probably doesn't support an awesome 2021 for nonres, I think that's now much more apparent to a broader range of folks.

If I kind of take some of your comments as a time series starting from the first quarter earnings, it doesn't really sound like much has changed in the outlook as you guys have seen more data come through and have gotten closer to next year, if anything, some of the bond issuance commentary sounds a bit more supportive than what we would have known back then.

Is that reading it right?

I mean I guess how do you feel versus some of those early observations when we were in the first half of the year, and this was all still fresh?

So barring a rupture, I believe we're lifting off the bottom.

I was extremely encouraged by the ABI lift from 40 to 47.

Our spec levels are just slightly lighter than last year.

So I think that's a net positive.

But I have also got to be cognizant in our key markets, commercial and institutional, especially institutional, the priority is around keeping people safe, keeping people socially distanced, keeping people capacities properly managed.

So in my mind, they are small projects, break-fix, preventative maintenance that gets delayed.

And I believe as COVID winds down in Q2, we're going to see a snapback in those types of projects and things will move back towards normal as we get to '22.

The next question comes from Joe Ritchie of Goldman Sachs.

Dave, just to -- hate to harp on the 4Q commentary, but I just want to make sure I understand it, particularly in Americas.

So it sounds like on the residential side of things, things are very strong, right?

Your backlog is at record levels.

electronics is supposed to be up in the fourth quarter.

So the implied step down then in 4Q, is that just nonres is going to get worse in 4Q versus 3Q?

And maybe just any color intra-quarter on how trends played out in nonres would be helpful?

I would say, again, back to Patrick's comments, the slowdown, in some cases shutdown in Q2, set us up for a nice backlog to saw through in Q3.

We did a good job in that.

Primarily commercial institutional demand has softened, and we see that in Q4.

That's how I'd describe it from a demand standpoint.

As you look at the margin profile in that, the res demand is extremely strong, but it creates a mix issue.

Our commercial institutional is significantly more profitable, and those factors work through the fourth quarter.

Okay.

Great.

I appreciate the clarification.

And then I guess just the follow-on question, thinking about this a little bit longer term.

Ahead of the pandemic, you guys were pretty front-footed in discussing some of the -- not just like supply constraints, but really labor constraints in some of these projects moving to completion.

I guess, as you think about the institutional or nonres markets and what you have in your backlog, like how much more visibility do you have, I guess, into 2021?

And how much more backlog do you have to complete?

I'm just trying to understand like how much we've worked through versus what's left to complete before we kind of head into 2021?

So as I think of 2021, I talked about spec writing.

We're looking at incoming order demand, especially project related and the backlog.

Incoming project quotes, again, muted.

Our backlog, if you look at it over 36 months is in the low end of the range.

It's not unhealthy, but we would typically go into a softer backlog this time of year.

But again, it's on the low range.

Then you've got to get your crystal ball out and my crystal ball, the economics that we continue to look at suggest softness, and that's what we suggest.

The next question comes from Julian Mitchell of Barclays.

Maybe just moving away from the top line for a second.

Very good productivity performance in the quarter, with the margins up year-on-year, you booked some more restructuring charges.

So maybe as we look at 2021, is there any way that you could describe the sort of carryover fixed cost savings into next year that should support margins?

And any sense around perhaps temporary costs that might flow back into the P&L?

Really just trying to get a sense of any major moving parts to margins next year aside from volumes?

Yes, Julian, I would characterize it this way.

You may recall in the last quarter conference call, we kind of outlined what we were doing this year.

This $80 million kind of cost reduction takeout for 2020 and we characterized that as kind of 3 components, which was the discretionary, variable, structural, permanent type of cost savings.

And if you look at those specifically on the permanent structural cost savings, to answer your question, we've been at it pretty solidly, I'd say, over the last couple of quarters.

We're now hitting, I'd say, a full stride in terms of the cost takeout associated with that.

We've identified some additional measures as well that will help us into 2021.

So there's carryover benefit, particularly in the first half of 2021 that will help mitigate some of these variable components that boomerang back next year.

So I'd look at those, maybe we're a little upside down if you kind of look at those 2 independently and sum them up.

We will continue to evaluate our cost structure going forward and adjust as necessary basis of future demand.

So we're always looking at that.

However, we will continue to invest in the business, that's a core part of our strategy, particularly on the seamless access and growth opportunities associated with that, to really position us well on the growth prospects associated with that going forward as we exit COVID-19.

So there's going to be some pressure there relative to those components.

And then you're going to have, unfortunately, unfavorable mix associated with strength in residential, better-than-anticipated, and some continued softness associated with the nonresidential markets.

Very helpful.

And maybe my follow-up would be also away from the top line, just on the balance sheet.

I think in the prepared remarks, around cash usage, you'd mentioned that the buyback may be resuming.

So maybe just help us understand the appetite for share buybacks?

How quickly you want to get underway on that?

And how attractive M&A opportunities are today?

So first, on the M&A, I would say, core part of our strategy to continue to evaluate opportunities that are core in our business, expanding product or market presence important, continue to evaluate where we can look at assets that help us from a technology perspective, particularly around this whole connectivity and seamless access and participating in that growth.

So we're active looking at various opportunities.

I would say there's fewer assets on the market, specific and core to our business.

And so kind of if you assume that there's limited M&A activity, we would pivot more towards shareholder distribution, which we -- I just want to clarify, we are in the market and will be in Q4 to help continue to put cash to use for the benefit of our shareholders and enhanced shareholder returns.

We think it's a good investment relative to where we trade today, and so we'll continue to be active in the market.

I would add, Julian, from an M&A position, we can go where we need to go.

We've got the dry powder and firepower.

I think it's an enviable position, leaning harder towards electronics, software that accelerate and add capabilities to our value proposition.

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

I just want to dive in a little bit in institutional markets, specifically, education and health care.

If I look at the bond issuance year-to-date, I think as of end of September, education bond issuance was up almost 40%, and health care, I think, was down 2%, effectively flat.

So within those dynamics, so in education, the pushback we're getting is that, okay, so we are going to have new bond issuance in November.

My guess, people will vote for it.

But how -- what are you hearing from your customers on the education side about the fact is that, I guess, some people they are getting tuition, but maybe they are not getting rents for the dorm rooms.

So how much pressure is education sector under?

And then for health care, right, the issue there is elective surgeries, which are coming back.

But how are the conversations going with the health care providers in terms of whether they get back to normal?

So that's sort of part one.

Education and health care, what are you seeing in those 2 verticals into next year?

So I've had more dialogue on the educational side.

And I'd say, generally optimistic and in line with the Bank of America Research.

As I've had dialogues with a few university presidents, their capital projects continue to move forward and have funding at the state levels or the private level, depending on the institution.

I think there's something to recognize within that, though, Andrew, is the small projects, the break-fix, the preventative maintenance, those facility teams are inundated by just the problems of the day in dealing with students at all levels.

So I tend to be net positive.

And in that college campus, K through 12, Allegion will get more than its fair share of the business.

On the hospital side, I see the opportunity.

The hospital system has been severely tested, and investment will go back into that, but it will be second half of '21 and into '22.

And just a follow-up question.

Can you just give us any color on what's happening with your market share in discretionary retrofit market?

I know it's been sort of a couple of years ago, been a big initiative.

You guys have done very well.

I believe you continue to do well.

But any color on what's happening there?

We continue to execute our ground game in terms of the discretionary, working with our wholesale partners.

A large partner just shifted completely to Allegion opening price point, mid-price point project.

So it continues to be a net positive.

So continue to gain market share slowly, steadily?

Yes.

And I would say the command of our supply chain helps us there.

When things are locked up because of challenges in other parts of the world, again, you've heard me say, Andrew, our supply chain is simpler, and it gives us opportunities to have dialogues.

We can keep the flow of product going.

Fantastic.

And congratulations on a well-executed quarter.

Thank you, Andrew.

The next question comes from Tim Wojs of Baird.

Nice job on the margins.

Maybe just -- really the only question I have is just on pricing.

As you kind of look at '21, maybe some choppiness in nonres continuing into next year.

Any change in kind of how you guys think about pricing in kind of the out year?

And I'm really just asking because we are starting to see a little bit of incremental kind of raw material inflation that's kind of popping up here.

So any just kind of commentary on how we should think about price?

So I would characterize it as solid performance in Q3 and year-to-date 2020.

We will continue to push and remain competitive in the market.

You're correct, there's going to be some inflationary pressure associated with input costs on commodities, things like steel and aluminum.

We'll continue to push the price dynamic to the extent we can and, again, remain competitive.

But I would think about it as we're 1%, maybe a little bit lower realized kind of on a go-forward basis.

The next question comes from John Walsh of Crédit Suisse.

Just wanted to go back to the -- kind of the language you used around a snapback in the repair, retrofit and small projects activity you're looking at or anticipating next year.

You talked about that large mobile project, which will hit next year, but I'm curious today if you're seeing your customers make those touchless upgrades in the back half of this year?

Or if it's still more of a conversation with them anticipating doing more of the projects next year?

We can identify projects and early adopters, but the momentum of those projects will pick up once we get on the other side of COVID.

Unless there's a burning need -- when you go in and increase or improve your infrastructure to touchless, waveless connected, it's a bigger project than somebody wants to take on in the middle of a firefight.

Got you.

No, that makes sense.

And then just thinking about earlier when you were talking about the seamless opportunity, you did use the term, thinking about the readers.

As I kind of have historically thought about Allegion's position in that product, it was smaller relative to one of your competitors.

But how important is having the reader as part of the solution as these customers shift into that seamless world?

Is that some place where you need to get bigger?

Or just trying to understand how that works.

So when you think about readers, kind of think about light switches, they're ubiquitous, they're in every room.

Is one light switch differentiate another?

And the answer is no.

It's important in the sequence, but what we're really after is to eliminate the card and move that to your edge device, your cell phone.

That is going to happen.

That's the opportunity that we're going to exploit, which complements the touchless environment, it complements higher security levels because you cannot only have one level but even triple levels of authentication.

And you don't ever -- you get immediate, what we call, the arbitrator of access.

With a click of a button access is granted or denied, eliminating the needs of cards, that's our opportunity.

The next question comes from Deepa Raghavan of Wells Fargo.

Good quarter, by the way.

Two questions for me.

First one is, Dave, can you talk about the momentum or the revenue growth that you're seeing in products that are driving this post-COVID world with your touchless, seamless, you talked about contactless, Apple iPhones, et cetera.

Now these look like strong renovation opportunity, so why would you not see continued tailwinds into first half of next year versus your commentary for a snapback only in second half?

And also, can you touch upon how accretive these tech-heavy products and software is to your margins?

And I have a follow-up.

I think you have to put yourself in the middle of a college campus, a hospital, and the prioritization of their day and their project work in a COVID reality.

As I talk to school administrators, it's not -- those preventative -- small preventative maintenance items, small project, unless it's severely broken, it's just not part of the priority list.

It's about people flow.

It's about cleaning surfaces.

So when you're in a firefight, and you would be at the University of Florida today, that projects -- those small projects don't hit the -- even the radar screen.

So that's what I see in terms of this moving into the second half.

Your follow-up or your second question?

Did you hear it, Patrick?

So Deepa, on the margin profile, the electronics would be similar type of margin as your traditional mechanical, but a higher selling price and therefore, more EBITDA.

So to the extent we can continue to push electronics, which we are and we will, that benefits us from an earnings growth perspective.

Great.

My follow-up, Patrick, was more on the residential electronics locks performance.

[Asla] mentioned yesterday, their smart lock business in residential grew high double-digit percent in Q3.

Did you see a similar kind of strength?

Deepa, I would say this, if we didn't have the supply disruption from a supplier, we would have had one of the strongest residential quarters in the company's history.

The next question comes from David MacGregor of Longbow Research.

It's Colton on for David.

Congrats on a good quarter.

Thank you.

I guess, can you start by walking us through how the residential point-of-sale growth played out in the quarter, and any new trends you're seeing there?

I would say, impressive strength in the e-commerce would indicate share gains.

If we look at point of sale, we continue to gain momentum and strength, and it's really across all sectors.

I don't think the -- when people are spending more time in their homes, they're thinking about how do I upgrade and improve my space.

I think across DIY, you see that extremely strong trend, one.

I think, two, the rise in demand for single-family home, whether existing or new, we're benefiting from that.

Remember, Allegion tends to be the replacement lock of choice and then we have a suite of electronic products that may be the best in the industry.

And then our supply chain, we have product available, have been able to provide it to all of those channels.

In some cases, our specials, our lead times are extended because of the increase in demand, but I think several factors there that are really showing off some res performance.

I'd add one more, too, and I commented on it.

Our ability to take our demand up is as good as I've seen in 40 years of manufacturing.

That's great.

I appreciate that.

And then as a follow-up, you mentioned some supplier headwinds in the third quarter related to electronics.

Can you give us an update on where your supply chain stands today for the segment?

And if there are any risks that could limit growth in the near term?

With the exception of that 1 supplier, no disruptions.

That doesn't mean the supply chains are not under pressure, but we tend to produce in region, and that certainly helps us just spend time on the boat.

But it's one of the proud points of Allegion.

We've been working on that supply chain even under Ingersoll Rand.

The simplicity of it, the leanness of it, some of the vertical integration that we did over the last few years as we invest in Allegion has really come back to pay dividends.

The next question comes from Jeff Kessler of Imperial Capital.

Can you break out EMEA and Asia Pacific, just a little bit in terms of -- granted, they're small, but the fact is that, at some point, EMEA has to grow again.

Where -- let's call it vertically and geographically, what was stronger and what was weaker in EMEA?

So I think a very good quarter in EMEA, number one.

Number two is strength in our SimonsVoss franchise, which would be SimonsVoss Interflex.

Our leader there, Bernhard Sommer, really put his foot on the pedal as we went into the pandemic, had some supply chain strengths that went in and allowed him to capture projects.

I also thought our Interflex business did extremely well, which is access, software, control, time and attendance.

That business under some pressure because of -- they do a very good job of servicing large manufacturers, especially the auto, aerospace industry, executed well.

And I think the numbers suggest that.

The other one that's hidden, Jeff, is our, what we call, Global Portable Security, excellent execution and leadership by John Stanley.

Think about it, you can't walk into a bike shop today and find a bike, and that demand has come right into our wheelhouse.

We also have been investing in connected technologies that help the location of your bike platform, won some nice business because of that connected capability in the GPS business.

That would be my comments in -- for the Europe business.

Okay.

Great.

And in the U.S. now that, and I think you eluded to, and you used the word NFC, but I'm assuming that NFC becomes a key part of the touchless, wireless, 3 levels of authority technology.

Are there -- are you going to be using multiple technologies in terms of getting those projects going?

And will it be mainly around NFC?

Or will you be adding various types of Bluetooth to it?

I mean I know I'm getting down in the weeds here, but question -- the question really involves, how flexible are you going to be in terms of those technologies?

And what is -- what are people asking for?

Or what are people negotiating with you for?

I just heard the word that Apple has taken this on as well and now it's basically going to be a standard.

Or are you getting different types of demand for different types of wireless technology per either vertical or per type of end user?

NFC remains important.

We're investing and partnering in technologies like thread that you're probably the only person on the phone that's aware of it, but thread technology.

And I think we continue to be very comfortable on our foundation of being open, and making good segmentation decisions that allow Allegion to grow, but also servicing our customers.

Just as a last follow-up to this, as far as getting this out there, was this at the beginning going to cost you more to get these technologies?

I mean you've obviously had wireless technologies coming out into the marketplace for several years now, but is -- are these new technologies going to cost you more to get out there?

Or is this as you said before, the ultimate margins remain about the same?

Where do the innards of those margins differ from mechanical?

Again, margins consistent at a higher selling price.

What fascinates me is our position in seamless access opens up new business opportunities in terms of helping customers simplify their world.

So -- an example of this would be, at the University of Texas, Austin, where we are the sole supplier on access, they manage 80,000 credentials today.

I can get them out of that business and provide new value propositions, a higher level of security that I think customers will be more than willing to off-load, creating new revenue streams and echo systems for Allegion.

This concludes our question-and-answer session.

I would like to turn the conference back over to Tom Martineau for any closing remarks.

Thank you.

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

Have a safe day.

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