安朗杰 (ALLE) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Allegion Second Quarter 2020 Financial Results 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 second quarter 2020 earnings call.

With me today are Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of 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 second quarter 2020 results, which will be followed by a Q&A session.

We have a very tight meeting today.

(Operator Instructions) We would like to give everyone an opportunity, given the time allotted.

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.

2020 will go down as a year of dramatic change.

The health and economic impact of COVID-19 will take the headline, alongside the social concerns related to inclusion and diversity.

With these challenges comes needed reflection.

Before I turn the business results, I would like to address these events and Allegion's response to them.

The tragedy of George Floyd's death has been on my mind as well as the deaths of many who have preceded him.

Black lives matter.

Black lives matter, and we must level the playing field, understand bias and work for equality.

Prejudice and racism are intolerable, and we can and must do better.

My executive leadership team has joined me in a journey of listening, learning and reflection, and we'll continue building the right road map for Allegion.

With our employees, we must also help build a better world with our voices, our minds, our hands and our hearts.

I expect the people of Allegion in our businesses to be involved to create positive change in our community and our company, and you can expect the same of me.

This is the spirit and culture of Allegion.

And determining how we respond to social concerns, our value and code of conduct has been our lighthouse since the creation of Allegion.

And they will help us to improve inclusion and diversity at the company.

In a similar way, our values and corporate business strategy has provided the foundation to respond to the COVID-19 pandemic, which will be with us for some time to come.

Please go to Slide 5. Equipped with a culture of safety, a resilient supply chain and operational discipline, Allegion was in a position of strength facing the pandemic.

Keeping our employees safe and healthy continues to be top of mind, and we're effectively leveraging safety and health as our true north throughout these uncertain times.

My leadership team led the COVID-19 effort to ensure our company was responding in real time to considerable global complexity and to meet the needs of our employees, customers, communities and other stakeholders as well as requests from public health officials.

Cross-functional teams guided our health and safety efforts, production and operational decisions, work-from-home infrastructure and best practices.

We also created an Allegion safety net program, giving production workers an extra day of pay per month to cover unexpected illnesses or family needs.

I'm proud of the collaboration and communication between functions, which has been key to working productively and safely wherever we are.

At the same time, Allegion has turned its attention to giving back to communities across the world.

While ensuring our employees had masks, we've also been able to donate thousands of masks to health care workers across the U.S., Mexico and Italy.

Knowing that people have a safe place to live is perhaps more important than ever, we've also continued our substantial commitment to habitat for humanity in 2020.

There is no doubt our team members across the world are dedicated to serving others and doing the right thing.

And taking care of our team members means they can, in turn, take care of their communities.

Please go to Slide 6. Our enterprise excellence and disciplined capital allocation strategies have served us well to weather the COVID-19 storm.

We are delivering new value in access and safety as people deal with the realities of daily life in a pandemic.

Our vision of seamless access and a safer world has never been more important.

As an expert in security, Allegion customers look for us for specific guidance when faced with new challenges.

In the age of COVID-19, for example, new attention was brought to their need for a healthy environment in a variety of ways.

First, proper cleaning and disinfecting procedures for door hardware.

Second, surface technologies like silver ion antimicrobial, coatings and new technologies with antibacterial and antiviral properties.

Third, our touchless solutions are at the forefront of helping prevent the spread of viruses and reducing common physical touch points.

From automatic door-opening solutions and contactless readers to innovative door poles, our products can help avoid hand-to-surface content.

Further, by integrating our way to open and other innovations with identity management partners, we are able to enable seamless access through our partners of choice strategy.

Fourth, our keyless solutions around the world are offering mobile and remote capabilities for access control and workforce management.

In brief, customers around the world are looking for new, practical and convenient solutions that help promote healthy environments and provide peace of mind.

Our leading brands like Schlage, LCN, Von Duprin, Interflex and SimonsVoss, paired with the strength of our supply chain and integrated partners -- integration partners, are meeting those needs.

As we continue to navigate COVID-19 and other challenges, we will focus on our customers, our strategy and the health and safety of our people.

Our business has strong fundamentals and has proven the ability to execute.

We will continue to monitor, evaluate and adapt to market dynamics.

Please go to Slide 7, and I'll walk you through the second quarter financial summary.

Revenues for the second quarter were $589.5 million, a decrease of 19.4% or 18.5% organically.

The organic revenue decrease was driven by the economic challenges that arose as a result of the COVID-19 pandemic, currency headwinds and the impact of divestitures of our businesses in Colombia and Turkey also contributed to the total revenue weakening.

All regions experienced substantial revenue declines.

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

Adjusted operating margins decreased by 260 basis points in the second quarter.

The significant volume declines drove the margin reduction.

We did see positive price, productivity, inflation dynamic, which helped -- which was helped by reductions in variable and share-based compensation, non-U.

S. government incentives, plus the impact of cost actions, including reductions in discretionary spending, a freeze on nonessential investments and hiring, restructuring and reprioritization of capital expenditures.

Due to these actions, we saw sequential improvement during the quarter.

Adjusted earnings per share of $0.92 decreased $0.34 or 27% versus the prior year.

The decrease was driven primarily by lowering operating income as a result of reduced revenue.

Favorable share count and other income offset some of the operational decline.

Year-to-date available cash flow came in at $103.6 million, an increase of approximately $26 million versus the prior year.

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

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

Thanks, Dave.

Good morning, everyone.

Thank you for joining today's call.

If you would, please go to Slide #8.

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

For the second quarter 2019, reported earnings per share was $1.16.

Adjusting $0.10 for prior year restructuring expenses and integration costs related to acquisitions, the 2019 adjusted earnings per share was $1.26.

Operational results decreased earnings per share by $0.42 driven by volume deleverage that was offset slightly by favorable price and productivity, exceeding inflationary impacts and unfavorable currency.

The impact of decreased investments in the quarter was a $0.01 increase, and an increase in other income drove another positive $0.05 per share impact.

Favorable year-over-year share count increased adjusted earnings per share by $0.02.

This results in adjusted second quarter 2020 earnings per share of $0.92, a decrease of $0.34 or approximately 27% compared to the prior year.

Lastly, we have $0.12 per share reduction for charges related to restructuring costs.

After giving effect to these items, you arrive at second quarter 2020 reported earnings per share of $0.80.

Please go to Slide #9.

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

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

As indicated, we experienced an 18.5% organic revenue decline in the second quarter.

All 3 regions saw substantial revenue declines.

The COVID-19 pandemic drove the decreases across the globe as there were many government-mandated shutdowns across all industries where our products are sold.

We did see modest price realization, which slightly offset some of the precipitous volume declines.

The impact of the divestiture of our businesses in Colombia and Turkey, along with continued currency pressure, were headwinds of total growth.

Please go to Slide #10.

Second quarter revenues for the Americas region were $444.3 million, down 18.5% on a reported basis and down 18.1% organically.

The decline was driven by volume challenges posed by the COVID-19 pandemic.

Both the nonresidential and residential businesses were down significantly.

Early in the quarter, our factories in the Baja region of Mexico were shut down by a broad government decree related to COVID-19, which had a significant impact on shipments.

The Americas electronics revenue declined more than 20% in the quarter as that segment was adversely affected due to its discretionary nature.

We see electronics continuing to be a long-term growth driver and expect growth to resume when market conditions normalize.

On the positive side, the region generated modest price realization and experienced sequential month-over-month improvements in revenue as COVID restrictions began to ease.

Due to the Mexico plant closures early in the quarter and improving residential markets, we entered the third quarter with a healthy backlog for our residential business.

Although the nonresidential business orders are below the prior year, activity has begun to stabilize.

Americas adjusted operating income of $124.1 million decreased 23.6% versus the prior year period, and adjusted operating margin for the quarter decreased 190 basis points.

Volume deleverage drove the decline and was offset slightly by price and productivity exceeding inflation.

The region has implemented necessary cost control measures in the quarter, including headcount reductions, investment delays and cancellations and reductions in discretionary spending.

In addition, manufacturing expenses have been adjusted to reduce impacts of lower volumes.

Please go to Slide #11.

Second quarter revenues for the EMEA region were $111 million, down 21.9% and down 20.4% on an organic basis.

The lower volume was driven by COVID-19 and the widespread government-mandated closures throughout the continent.

The impact of the divestiture of the business in Turkey and currency headwinds also contributed to the reported revenue decline and were partially offset by modest price realization.

EMEA adjusted operating income of $1.5 million decreased 87% versus the prior year period.

Adjusted operating margin for the quarter decreased by 660 basis points.

The margin degradation was driven by the significant volume declines associated with government-mandated closures in several countries where the company operates.

Price and productivity exceeding inflation helped mitigate some of the margin decline.

Similar to the Americas, reductions in variable compensation and other discretionary spending helped the productivity performance as did assistance received through government incentives.

As previously announced in Q1, restructuring programs are underway in the region, and we expect benefits to accelerate in the second half of the year.

Please go to Slide #12.

Second quarter revenues for the Asia Pacific region were $34.2 million, down 22.1% versus the prior year.

Organic revenue was down 18%.

The decline was driven by COVID-19 related impacts and continued weakness in China residential and Australian end markets.

Total revenue continued to be affected by currency headwinds.

Asia Pacific adjusted operating loss for the quarter was $1.2 million, a decrease of $3 million, with adjusted operating margins down 760 basis points versus the prior year period.

The operating loss includes a $1.8 million charge related to a specific product quality dispute in China.

Significant volume declines and unfavorable mix also had a large impact on the reduced income and margin.

As with the other regions, the price, productivity, inflation dynamic was positive and was aided by reductions in variable compensation and other discretionary spending.

As with EMEA, Asia Pacific also benefited from government incentives related to COVID-19.

And as previously announced in Q1, restructuring programs are underway in the region, and we expect benefits to accelerate in the second half of the year.

Please go to Slide #13.

Year-to-date available cash flow for the second quarter 2020 came in at $103.6 million, which is an increase of approximately $26 million compared to the prior year period.

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

Our ability for cash flow generation has been a strength of the company that was evident in the second quarter and will continue to serve us well during the current market environment.

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

This was driven by reduced working capital needs from lower volume as well as better turnover on accounts receivable.

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

We will continue to evaluate opportunities and optimize working capital to continue driving substantial cash flow conversion.

Our financial and liquidity position remains extremely solid.

Our net debt-to-EBITDA ratio was 1.8 based on the last 12 months' performance, and we have close to $500 million available under our revolving credit facility.

We also remain committed to a flexible and balanced capital allocation strategy.

Although we've communicated a pause in share buybacks in order to focus on liquidity during this time of market volatility, we intend to put excess cash to use as we continue to see market improvement and stabilization.

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

Thank you, Patrick.

Please go to Slide 14.

As you know, we previously withdrew our outlook for 2020.

This morning, we reissued an outlook.

The numbers we provided assume there is no additional COVID-19 impacts, including government decrees, supply chain disruptions and safety and health issues.

The pandemic has already driven much change in the market dynamic across the world for 2020.

With that said, Allegion's sound fundamental business strength provides some resiliency in times of economic downturn, and our long-term investment thesis remains unchanged.

In the Americas, we expect to see continued year-over-year organic revenue declines in the second half.

Residential markets are expected to rebound more quickly than the nonresidential.

We have seen sequential increases in homebuilder demand, and point-of-sale metrics have improved in the big box and e-commerce channels.

We expect commercial markets to be tough as the pandemic had forced many to work from home.

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

With these expectations, we project organic revenue in the Americas to be down 7.5% to 8.5% for the full year.

We are projecting Americas total revenue decline to be 8% to 9% with a slight impact from the divestiture of the business in Colombia.

In Europe, markets have softened prior to the COVID-19 outbreak and revenue declines are expected to continue in the second half.

However, we are projecting sequential improvement as we go through the back half.

For the region, we project organic growth to be down 9% to 10%.

Total revenue includes the impact of currency pressure in the first half as well as the divestiture of the business in Turkey and is projected to be down 10% to 11% for the full year.

In Asia Pacific, markets were weak before COVID-19 and we expect that to continue, especially in the China residential and Australian markets.

With that backdrop, we expect an organic revenue decline in 2020 of 10.5% to 12.5%, and total revenue will be down 14% to 16% as currency pressures continue.

We are projecting total organic revenues for the company to be down 8% to 9% and total revenues to decline 9% to 10%.

Please go to Slide 15.

Our new 2020 outlook for adjusted earnings per share is $4.15 to $4.30.

As indicated, the earnings decline is driven by lower volumes related to COVID-19.

We have made significant cost reduction in the business, and our work will continue to streamline our structure as needed while prioritizing critical investments as we remain focused on driving our strategy of seamless access.

The combination of interest and other expense is expected to be a positive to earnings per share.

Our outlook assumes a full adjusted effective tax rate of approximately 13.5% to 14.5% as well as outstanding weighted average diluted shares of approximately 93 million.

The outlook additionally includes approximately $1.35 to $1.45 per share impact from impairment and restructuring charges during the year, most of which has already occurred.

As a result, reported EPS is estimated to be at $2.70 to $2.95.

Our revised available cash flow outlook for 2020 is now projected to be in the $350 million to $370 million range.

Please go to Slide 16.

Allegion has strong fundamentals and has proven the ability to execute and adjust to market dynamics as demonstrated during the first half of 2020.

We have strong -- we had strong momentum in the first quarter, particularly in the Americas.

While the pandemic was unforeseen and its effects were immediate, we managed the business extremely well to restructure and manage costs.

We also moved quickly to address new customer needs for touchless solutions and remote management.

As we go into the second half of the year, we start from our core strengths in health and safety, supply chain and financial discipline.

We will take the necessary and often difficult actions needed to adjust quickly to evolving market dynamics.

The strategy of adding value through seamless access and a safer world drives the right focus for the long term, and it puts us on solid footing for the post-pandemic world.

Thank you.

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

(Operator Instructions) The first question comes from Ryan Merkel of William Blair.

So 2 questions.

First off, in Americas, the year-over-year decline in electronics was a little more than I thought.

Just looking forward, do you expect electronics mix to continue to mix down?

And then second question, are you seeing more interest in touchless access and mobile keys in this environment?

I would say we do not expect a mix down.

I think our key growth has been stronger in the residential.

And I think last-mile delivery, the growth of e-commerce, people's connectivity, that trend will continue.

We've got one of the best locks on the market with our Encode lock.

The favorability ratings, I looked this morning, 37,000 comments on Amazon, at about a 4.8.

So I feel extremely good about that.

I think the weakness in the quarter, really driven by the overall lockdowns, but in terms of integrator's ability to enter college campuses, none of us wanted people coming on-site and that work to see.

So we like the long-term trends, and I believe it's a key factor going forward.

I think too when you think about some of the capabilities that we're putting together, the ability to seamlessly travel without touch whether it's the wave of hand, your edge device, these things will continue to be drivers.

Add things like our investment in VergeSense, the need to be able to understand how many people are in a room, in an area, in a building, these are things that will continue to expand as we go forward.

The next question comes from John Walsh of Crédit Suisse.

Wondered if we could just touch a little bit on investments and tax.

I guess maybe first on the investments.

Obviously, you put a hard number around it.

Not surprising, it's lower than the initial expectations given the way demands played out.

Tax, this is kind of the second year in a row we'll have this lower rate.

How should we think about the investment spending going forward and the sustainability of the tax rate from here?

So as we indicated in our full year guide, we're looking at some incremental investments, although it's lower than what we'd originally anticipated but, nonetheless, higher than last year.

And that's predominantly around this whole movement in electronics and trying to drive that market for faster adoption, some specific initiatives around the IoT platform and those type of things that help us and particularly as we begin to kind of come out of this pandemic.

So we feel good about those investments and the ability to be able to drive incremental revenue.

And as we've indicated historically, those investments have enabled us to drive revenue faster than the overall market.

And I think we get good return on those in terms of invested capital.

So going forward, we'll kind of continue to monitor the markets and the needs in our business, and we'll continue to invest for the long-term future in our business.

As it relates to the tax rates, we are anticipating a lower rate, again, than what was originally provided at the beginning of the year.

Some of that is due to some favorable items that kind of came through, FIN 48 reserves, those type of things.

Some of it is, quite frankly, we've been able to implement some new tax planning strategies that will take effect, and we feel good about the work that the team has implemented there.

As we go forward beyond 2020, we had historically given some guidance that the tax rate would migrate upwards to kind of like the high-teens area.

More guidance to come when we come out with the '21 information, but I feel fairly confident it will be better than that, maybe mid-teens type of thing, at least in the near term, and that's all because of where we find ourselves today and some of the great tax planning strategy work that's been going on.

Great.

And then maybe just a follow-up here.

You talked about, in the Americas, exiting with some strength in resi and stabilization in nonresi.

Can you put any numbers around that, either what the exit rate was in June or what you're seeing here in July?

So first, I'd look at the backlog.

We've got effectively record backlogs between commercial, institutional and res.

The res demand, extremely strong as we look at point-of-sale.

If you look May, June and July, a 12% increase in dollars, 7% in units, really like that trend.

This morning's Wall Street Journal is about strength in housing.

I think the other thing, as you think about our res performance, especially in the first half, there was a mandate in the country of Mexico to shut down.

That's about 25% of our workforce and a big supplier of our res supply chain.

We deleted inventories in a situation where demand was accelerating, that point-of-sale that I referred to, record backlogs in residential.

I think we've got a great set of product capabilities.

And I think our supply chain is stronger than the people that we're competing against.

So I like our opportunities as we go through the next -- or the second half and early into next year.

The next question comes from Jeff Sprague of Vertical Research.

Two from me also.

David, I'd be interested in just your kind of forward opinion here now on the nonres cycle overall.

You introduced on the Q1 call the very logical possibility that 2021 could be down given the later-cycle nature of some of these end markets.

Based on what you're seeing in the channels now and just pipeline work and other folks on the ground, what's your thought around that large question on everyone's mind?

So I think when you think about the institution of commercial verticals, everybody, caution lens.

I think, clearly, there are shifts going on there.

I think we saw the ABI come out.

It doesn't drive optimism.

I think as I look at Allegion, healthy backlogs, our commercial institutional backlogs as we exited June, high.

But I think the other thing that we look at, specs written, we saw some disruption in spec writing and demand from architectural firms.

That's to be expected.

I think we'll have a better call on specs written, which is in early demand level as we exit Q3.

It's -- if I looked at spec written today, it's improved every week as we've gone through the crisis, but this is more of a long-term trend.

But if I would look at educational, health care, total commercial, we anticipate softer markets.

We will put our foot on to drive seamless access, and we believe we can outperform in a weaker position because of our installed base, the strength of our spec writing and the capability of Allegion.

And then second question, perhaps for Patrick just around kind of the cost reduction actions.

Patrick, could you just provide a little bit more granularity on kind of what's kind of been done structurally from a cost savings standpoint and what perhaps is temporary?

And I'm sure you, like a lot of companies, also some of these temporary actions are feeling like maybe they're at least semi-permanent as folks think about travel budgets and the like.

But if you could kind of frame that up for us, it would be helpful.

Yes, sure.

So good question.

Let me try to provide a framework around that.

First of all, we've identified and we are executing on a plan of about $80 million of cost reduction, year-over-year reduction.

And I would bucket that into 3 categories, the first of which would be the structural, more fixed costs, predominantly headcount reduction.

That for this year is about 30% of the $80 million.

Then you've got another bucket, what I call the discretionary type of expenditures, i.e., T&E, contractor spend, consulting, those type of things, the things that you control in a down market, that's another probably 30% of the $80 million for this year.

And then the variable type of items, the things that are compensation related that a large portion of which will probably boomerang back next year is the balance of the $80 million or 40% of the total.

I think the key point here is that offsetting the variable stuff, i.e., the things that are expected to come back next year, we do have and will have carryforward benefit associated with some of the permanent cost reductions that will carry into next year.

We won't be in a full year run rate level on some of those identified costs until Q4.

So we have that.

As Dave mentioned in his script, we will continue to work on further cost reductions to help mitigate that as well.

So TBD on further actions that will be identified for the second half of the year.

I'd just add a little color to that as well.

I think we got after this early even before COVID-19, you could see that in our in-flight restructuring plans.

And I think it's important that we continue to accelerate investments around electronics and seamless access while transforming the company into a leaner structure.

The next question comes from David MacGregor of Longbow Research.

It's Colton West on for David MacGregor.

I guess you pointed out sequential improvement on a month-to-month basis in the Americas in the quarter.

Are you seeing those trends continuing to July now?

Absolutely.

I -- as you can feel the pulse of the economy coming back, and I put cautions around that because, in some cases, they've gone too fast, but we feel it.

I think if you're in the wholesale-retail channel, on-shelf inventories are down, and we're seeing that in terms of specs, quotes, point-of-sale and our own shipments.

Okay.

And then I guess as a follow-up, nonres came in better than res, it sounds like, for the quarter.

How much of that was volumes versus price/mix?

If I recall correctly, you guys implemented 3% pricing on commercial hardware back in April.

Yes, majority volume related.

But as we kind of saw in Q1, pricing relative to nonres better than the residential performance, we will continue to push that dynamic to the extent we can and so far, year-to-date, have been fairly successful in getting solid price realization in the nonresidential segment.

Next question comes from Joe Ritchie of Goldman Sachs.

So Dave, my first question, maybe just trying to unpack the impact that you had from the Mexico decree.

I know last quarter you guys had talked about having inventory on hand, but it sounds like you kind of depleted that inventory fairly quickly as the quarter went on.

I'm just trying to understand, one, kind of like the impact that you had in the first quarter from maybe running out of inventory; and then secondly, like, how should we be potentially thinking about a restock as you get back online in Mexico?

So we deep dive this.

In terms of the performance second quarter, there was a decree from Mexico that mandated a 30-day shutdown.

We're open well ahead of that, and it was our ability to point out that we were essential but, more importantly, our ability to keep our people safe.

If you dig into it, the governor of the Baja highlighted Allegion in a press conference, in our safe practices and the confidence that we could do that.

So that was important.

I think if you look at the whole region, we got restarted quicker.

Second, the government mandated that anybody over the age of 55, immune compromised, pregnant could not work.

For us, that was about 300 to 400 employees.

We had this -- in some of our most experienced, we have reloaded on that and are producing at a higher -- we're producing out of the Baja today at the highest level since I've been at Allegion or we created the company.

So if you think about that, we've got 42 discrete manufacturing line in Ensenada, if you have ever visited there.

The ability to bring on that number of employees, pull that lever and replenish the supply chain is, I think, a few companies in the world could do it.

So extremely proud of the team, our ability to rebound.

I think a second thing that's important here, you don't see the point-of-sale data, but our teams did an extremely good job to drive our -- use our inventory to keep customers and products as well as other partners in the supply chain.

When you think about -- and it's a situation where you're trying to maximize inventory, we reached out in our partners' supply chains to be able to optimize that.

Again, I thought they did a better job of it.

And I believe, the last point in your question, we will be well into the first quarter of next year getting the supply chain in terms of finished inventories normalized with the increasing demand.

Got it.

Okay.

That's helpful color, Dave.

I guess my one follow-up question here, in just thinking about what's happening from a commodity perspective and how your business mix is perhaps expected to change over the next 12 months, copper prices right now are surging and noticed that while pricing was still positive this quarter, I think it's 70 bps in the Americas, it was still -- you saw a tick down versus Q1.

So I'm just trying to understand, I guess, as we kind of move forward in this environment where volumes really aren't at normal levels, like, how are you guys feeling about your ability to offset inflation and your ability to get price in this environment also in the context of kind of the mix shifts that you're seeing in your business?

I'm always confident on price.

I would say the market is disciplined.

Our first cautionary is always steel.

We purchase a lot of steel more and then I think brass.

But we'll continue to be aggressive on price realization, try to offset the effects of inflation, but I'm net positive, and I'm that way every day.

Patrick will bring some real addition to it.

Well, Joe, you're right.

I mean the commodity prices have continued to rise here over the last 90 days or so.

So I'd say for the balance of the year, as we kind of look at the margin profile, think about sequential improvement as we progress throughout the course of the year just through more efficiency and some of the cost measures we're taking will help us navigate for the balance of the year.

Next year, the other question, we'll kind of monitor and see how it progresses during the course of this year.

But as Dave mentioned, we'll continue to push price to the extent we can.

And if we're unable to offset the inflationary impacts, we'll drive productivity, we'll make the appropriate investments to do whatever we can to mitigate the inflationary impacts.

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

Question, can you just comment on regional trends in the U.S.?

How is California trending versus Texas versus Florida versus Northeast?

I mean, frankly, just trying to figure out how COVID and second wave has just impact -- has been impacting demand and if there is a close correlation between what we've seen with hospitalizations and demand trends by region?

I would say the stoppage in New York, the Northeast, you have some pretty strong government mandates and decrees, especially Boston, no public construction.

We do very well in those big metro markets.

And so we're seeing that recovery as the Northeast gets better.

Again, you look to California construction, and Allegion was able to operate during the first shutdown.

We'll see how it drives if -- as they move, I guess, towards a second shutdown.

I think you really dig into the data of the COVID, Andrew, you're seeing growing pockets in construction workers of infection.

And how government will mandate around it, we've got to keep an eye on it.

But construction has been considered essential in most areas of the country, and I think it will continue.

And just a follow-up.

You sort of talked about seamless access.

But how do you think -- how are you rethinking access business post-COVID?

Do you expect any structural changes in what the customers will demand in terms of being able to sort of get in and out of the building without touching things?

So I absolutely believe it.

The number of inquiries on our antimicrobial products would be a clear example.

But Andrew, I really believe that your edge device is how we'll navigate through society.

The long-term trend is, I think, positive.

We've got -- the ability exists today to be able to, through your edge device, monitor your temperature.

As you approach the door, if you're out of an accepted range, are you going to get a temperature check?

Do we allow access?

Those are things that are going to continue to develop as a result of COVID-19 and trying to keep people healthy.

The next question comes from Tim Wojs of Baird.

Just maybe going back to Americas and just some of the cadence through the quarter, is there any way to just think about how June kind of finished up relative to the quarter in both resi and nonresi?

Yes.

I -- Tim, I would say, again, during the course of the quarter, sequential improvement as the quarter progressed.

June much stronger than May, May stronger than April.

Feel pretty good relative to the visibility and the strengths relative to the backlog and the order intake.

Resi, as Dave indicated, POS really strong, demand improving significantly.

On nonres, I'd say it's more stabilized, kind of going into Q2 and exiting out of Q2, now much better.

And so relative -- commensurate with kind of the guidance we gave, that's kind of how we're seeing things right now.

Maybe a little conservatism there, but okay.

I'd also say we look at a variety of indicators on nonres bookings, frame sales, hardware quotes, specs written, wholesale sell-through.

Every week, as we exited April, got better.

You could see things coming back through.

Okay.

Perfect.

And then, I guess, bigger picture.

If the end markets, maybe over the next 12 to 18 months, are choppy, I just wanted to gauge your appetite on just M&A.

And does, I guess, your appetite changed at all?

I mean is this a time where maybe you'd purposely get more aggressive and just add good assets in maybe a time of more stress?

We'll certainly be watching the stress movements on a set of selected assets that we always keep an eye on.

I don't expect a lot of change in those things that we would aspire to.

The jewels that could help redefine Allegion, I don't expect that to change.

But look for us to increase our activity around tools that will help us expand seamless access, both internally and externally.

The next question comes from Josh Pokrzywinski of Morgan Stanley.

Just before my question, Dave, thanks for your leadership on employee safety, health, societal awareness, all that.

I think it's very clear, those aren't just talking points, so really, really appreciate that.

Just a couple of questions on the nonresi business.

First, on backlog visibility, how far does that stretch out?

Does that get you through year-end?

Does that get into '21?

And then any comments that you would make on some of the retrofit side of the business versus new as you see activity or quotes in the market today?

Because I think, maybe relative to some other products that's out there, security retrofit is either completely nondiscretionary because you're locked out or it's broken or a lot more discretionary around aesthetics or upgrades.

So just maybe some comments on how that retrofit side looks.

I'd say in terms of the backlog of commercial institutional, I'd say you look at that with a 6 months' lens.

But there's a couple of filters: what we have in the actual backlog, then you start looking at quotes, specs, job awards.

Like, let's just take -- if we looked at the city of Washington, D.C., job awards that could go out 18, 24 months, do we have the contractor, the architect, the wholesaler.

There's things that go beyond just our book of business.

And generally, we're going to get more than our fair share there.

So I think good indicators, then you got to go to the broader macro.

So I feel pretty good sitting here.

I feel very good on 2020.

It's -- as you look out, I put those caution lens.

Second question on the discretionary, I would -- I believe in terms of break fix, the discretionary side of the market, especially the day that money gets spent, especially with rising crime rates -- I live in the downtown areas of Indianapolis, you're going to get your doors locked.

And I think you also got to think about shutdowns.

Are places secure?

So the discretionary break fix part of this market tends to roll in up and down economies.

And generally, if you've got LCN, Von Duprin and Schlage installed, you're going like-for-like.

The next question comes from Jeff Kessler of Imperial Capital.

The -- in terms of timing on the regions, it seems that the U.S., and particularly in the southern tier, is going to have some -- is going to continue to have some problems, although the Northeast has obviously done a lot better.

Europe seems to have rolled over its COVID problems much more quickly than we have.

Are you seeing any impact on your business in Europe because of perhaps them coming out of pandemic a little bit earlier than the U.S.?

We see -- let me say this.

We've got our electronics, our SimonsVoss and Interflex business and our mechanical business in Europe.

The electronics business has performed well during the COVID-19 and lockdowns, and it's -- you've got to look at that as a key strength.

Maybe better geographical position, but it's that continued trend of electronic conversion, software capabilities that is leading the way there.

So we like that.

We're going to continue to invest in that.

And we're driving some restructuring before COVID-19 was even mentioned.

The world has got a challenge in terms of overall GDP, but we -- the dark regions, the Nordic regions, are going to be better than the southern, and the electronic trends, we think, will continue to operate nicely anywhere we're at in the world.

All right.

A follow-up is you've talked a good amount of that seamless and touchless electronics.

Are you seeing any move within the subsectors when you -- you got some Bluetooth connectivity, but obviously, NFC has been on the tip of your tongue now for -- since you guys was -- before the company was even spun out of Ingersoll Rand.

And now that Apple has bought into NFC wholly at this point, the entire NFC world seems to be growing.

The question is, looking at other companies, some smaller companies who are moving very quickly into NFC access, are you seeing the same type of -- are you seeing more competition there?

Are you seeing your own business improving in that area?

And if so, what are the areas that you're going to be focusing on with regard to some of these technologies that have been around but have been suppressed for one reason or another?

So I look backward to try and understand what our strength is.

I think 18 of the last 22 quarters, we have grown double digits in electronics.

So we like that trend.

Two is, I think, it's all about your edge device.

And that is the tool that will allow the free flow of people.

I think the problems to be solved are outstanding.

Remember, we were the first company in the world, "Hey, Siri open the door." Our relationships with Apple are outstanding.

And I think these technologies are going to continue to drive and shape the marketplace, and I like the position of Allegion.

The next question comes from Deepa Raghavan of Wells Fargo.

A question for me.

For Americas fiscal year 2020 revenues, it doesn't look like the revenue outlook assumes Q4 exits with positive growth, but it definitely looks like you're planning for continued sequential improvement throughout the second half.

Now if we continue to extrapolate that trend, it appears spring could be the likely bottom.

I mean -- and by next construction season, we could be talking positive nonres in Americas.

Now is that a reasonable way to think about a trend if economy stabilizes here?

Or is the air pocket in quotation activities that you're currently seeing push the time line out materially?

Great question, not easy answers.

I went back and looked at contraction in the architectural indexes.

And these tend to snap back quickly.

Now is this -- this pandemic will follow that.

I think it's a function of how long the pandemic drags on, the real damage that's been done to institutional budgets.

But as we move into the construction season, there is naturally an improvement, and spring could be given a slight tier, but I think we'll have a better view of that in 90 days.

Got it.

Can you talk about inventory in the system?

And if you can split that between resi and nonresidential inventory commentary, that will be helpful.

Inventory in the residential channel has been depleted.

I'm looking for some numbers here.

But think about it, 16 days of no replenishment, we tend to try and optimize those inventories.

So the shelves aren't bare.

We're in a replenishment cycle, but it will take well into first quarter at the significant demand levels to get that back to normal.

If there's any weakness in competitive supply chain, and if you think about some of our competitors, the supply chains get pretty complex, we could have more opportunity and could take longer.

We'll take on that challenge.

In terms of the nonres commercial institutional supply chains, those are responding back quickly.

I think some of the leverage that we had was, we built backlog in some of our institutional products, we're able to fill that, but that's normalizing much quicker.

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

Maybe just a first question around -- circling back to residential.

Just trying to understand, when you put everything together around the Mexico impact and inventories and so forth and the point-of-sale data, how likely is it, do you think, that the residential revenues in the Americas can grow in the second half?

It's certainly something that we're seeing at other resi-related products.

And any color you could give on the differing outlooks you have within resi of new construction versus the replacement side?

I would characterize it this way, Julian.

As we look at the residential business and you kind of look at all the factors you mentioned, clearly, in the second half, sequential improvement as we progress throughout the year.

Growth year-over-year will be dependent upon our ability to get the labor in place to produce the product and get it through the channel to the end customer.

And so a little bit constrained there from a capacity perspective is kind of going to be the driver whether we can show year-over-year growth.

But nonetheless, we'll kind of continue to drive that.

Like the overall trend in electronics, that's going to rebound as well to provide some additional growth as well.

So I'd be maybe a little bit more aggressive in that I believe Allegion has a better supply chain than our competitors, and I believe that is going to allow us to take some advantages here in the marketplace.

And you think about that, these products come from Southeast Asia, the complexity can get pretty hard.

Where ours tend to be is more North American centric.

Even though we had to take a pause to keep our people healthy, I think I've got a better supply chain.

I'd say, second, the point-of-sale orders are reflecting that we're creating opportunities.

Our electronics are some of the highest regarded and highest quality in the marketplace.

And then some of the builder activity, that part of the market is growing today in the Wall Street Journal.

And if you've got a question, are my suppliers going to be able to support me as that market expands, if you're any of the big builders, who are you going to look to?

And I like our opportunities to have those discussions.

When you've got to depend on products coming halfway around the world to support your homebuilding effort in an environment of uncertainty, this pandemic, I like our opportunities.

And any color on replacement trends, in particular?

I think, as you said, new home building very strong.

Are you seeing replacements perhaps growing at an equal pace in the second half or similar revenue trajectory as OE?

Amazing, as I work from home, the amount of activity in the do-it-yourself centers, then think about the more frequent deliveries of point-of-sale and then people just investing back in their home.

Schlage is the #1 replacement brand.

It's a nice spot in the market.

So I like our opportunity.

This concludes our question-and-answer session.

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

Thanks.

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

Please have a safe day.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.