Allegion plc (ALLE) on Q2 2021 Results - Earnings Call Transcript

Operator: Good morning, and welcome to the Allegion Second Quarter 2021 Earnings Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . Please ask one question and one follow up, and after that you’re welcome to enter the queue. Please note this event is being recorded. I would now like to turn the conference over to Tom Martineau. Please go ahead. Tom Martineau: Thank you, Andrew. Good morning. Welcome and thank you for joining us for Allegion's second quarter 2021 earnings call. With me today are Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release which was issued earlier this morning and the presentation, which we will refer to in today's call, are available on our Web site at investor.allegion.com. This call will be recorded and archived on our Web site. 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 2021 results, which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up and then reenter the queue. 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. Dave Petratis: Thanks, Tom. Good morning and thank you for joining us today. Allegion delivered a very strong quarter. And I would like to thank the employees of Allegion for their contributions and efforts. Our employees are the greatest strength of Allegion, their dedication to safety and customer excellence is outstanding, and our teams have moved quickly to adapt to opportunities in a dynamic market. Before I jump into the financials, I want to give you a high-level update on recovery trends in the business overall. The pandemic has changed our world and created volatility throughout the last 18 months, both in terms of the economic contraction last year and the current economic rebound we are seeing. Starting in Q1 and accelerating in Q2, demand surged faster and stronger than expected. This is a positive sign and provides confidence in the sustainable economic recovery. In fact, Allegion is already returning to pre-pandemic demand levels. At the same time, the robust demand is constraining the global supply chain’s ability to fully meet the poll for labor and materials, especially electronic components. Patrick Shannon: Thanks, Dave, and good morning, everyone. Thank you for joining today's call. Please go to Slide 7. This slide reflects our earnings per share reconciliation for the second quarter. For the second quarter 2020, reported earnings per share was $0.80. Adjusting $0.12 for charges related to restructuring expenses, the 2020 adjusted earnings per share was $0.92. Operational results increased earnings per share by $0.36 driven by volume leverage, along with continued benefits from cost control measures and restructuring actions taken in 2020. Favorable price and currency also contributed to the increase. The combination of these items offset headwinds from inflation, bounce back variable costs related to reduce volume from the COVID-19 pandemic and unfavorable mix. Favorable tax rate drove a $0.06 increase in earnings per share. Divestitures had a positive $0.01 per share impact and offset the impact of other income and interest expense. Investment spend increased during the quarter and reduced earnings per share by $0.05. As a reminder, the incremental investment spend is predominantly related to R&D, technology and market investments to accelerate future growth. This results in adjusted second quarter 2021 earnings per share of $1.32, an increase of $0.40 or 43.5% compared to the prior year. Lastly, we had a $0.01 per share reduction related to restructuring charges and acquisition integration expenses. After giving effect to these items, you arrive at the second quarter 2021 reported earnings per share of $1.31. Please go to Slide 8. 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 organic revenue growth of 23.8% in the second quarter, as higher demand and a favorable comparable drove significant volume increases versus the prior year. We also experienced solid price performance coming in over 2%, which is up sequentially. Currency continued to be a tailwind to total growth and more than offset the impact of divestitures. In total, reported revenue came in at 26.7% growth. Please go to Slide 9. Second quarter revenues for the Allegion Americas segment were 549.4 million, up 23.7% on a reported basis and 22.9% organically. While the strong growth reflects the impact of COVID-related shutdowns last year, it is also the result of accelerated market demand. The region continued to deliver good price realization. Dave Petratis: Thank you, Patrick. Please go to Slide 12. At the end of Q2, leading indicators continue to be positive. I’m increasingly optimistic on the economic recovery. The Americas residential business continues to be high. On the non-residential side of Americas, demand accelerated for retrofit, repair and small projects, and is recovering in new construction. However, labor and part charges are proving to be challenging, and we are building a strong backlog that will benefit us in the future. With these parameters in place, we are raising our outlook for total revenue in the Americas to be at 4.5% to 5% and organic revenue to be up 4% to 4.5% in 2021. In the Allegion International segment, markets continue to recover led by our Germanic and Global Portable Security businesses. Currency tailwinds more than offset the divestiture of our QMI door business and contribute to total growth. For that region, we are raising our outlook for total revenue growth to 13.5% to 14.5% with organic growth of 8.5% to 9.5%. All-in for total Allegion, we are now projecting total revenue to be up 7% to 7.5% and organic revenue to increase to 5.5% to 6%. We are also raising our earnings per share outlook with reported EPS at a range of $5.15 to $5.30 and adjusted EPS to be between $5.25 and $5.40. This guide incorporates pricing actions to mitigate the expected impact of direct material inflation. We anticipate these inflationary challenges will persist for the balance of the year, and we will continue to monitor and adapt to changing market conditions. Our outlook for available capital is also being raised and is now projected to be 490 million to 510 million. The outlook assumes investment spend of approximately $0.20 per share. The full adjusted effective tax rate is expected to be approximately 12%. The outlook for outstanding diluted shares continues to be approximately 91 million shares. Please go to Slide 13. Allegion continues its great start in 2021. We have managed the business extremely well and leading indicators of specific market indices related to our business continue to be positive. Looking forward, we are prepared to navigate the pressures related to accelerated inflation in labor and part shortages. We are encouraged by the positive resiliency of our supply chain, and we will continue to manage these challenges for the balance of the year. Thank you. Now Patrick and I will be happy to take your questions. Operator: We will now begin the question-and-answer session. . The first question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead. Josh Pokrzywinski: Hi. Good morning, guys. Dave Petratis: Good morning, Josh. Josh Pokrzywinski: So I guess first question on the margin front. Obviously, there's kind of the tyranny of the math on price costs, even though you're positive on the dollar basis. And I would imagine a little bit of a mix headwind on the revenue side as well. But if you just kind of take a giant step back and put some of the mechanical items aside, do you feel like getting price or managing inflation and logistics and all the other kind of inflationary headwinds, labor is any different than it has been normally, or that has got gotten a little bit more challenging? It’s sort of hard to parse through some of the different moving pieces there. Dave Petratis: Yes, I would characterize it this way. And you're right. There's a lot of tyranny in the math. But what we've seen is an acceleration of inflation, predominantly in commodity costs, material components, freight packaging, et cetera. It’s continued to be a headwind. As you know, we're pretty aggressive moving on price. And we're taking similar actions in the back half of this year. We went ahead and announced a price increase that will take effect at the beginning of Q4. So there's going to be some margin pressure, I would say, given the acceleration in inflation, particularly in Q3. I expect price to offset material inflation. The issue is really in some of the other components as it relates to packaging, freight, those type of things, will drive productivity to help mitigate those type of things, like we have previously. But it's going to be a challenge. There will be some margin pressure in the back half of the year. But I feel very confident relative to margin improvement as we go into 2022, predominantly because of the carryover price. And we'll continue to take pricing actions next year. We'll have an improved mix profile, as it relates to the non-residential business growing faster and accelerating more so than the residential business. And we're not going to have these bounce back costs, which were an issue for us in Q2, and will kind of linger during Q3, Q4 this year. So I think to answer your question, Josh, we’ll continue to manage the business. We'll get through some of the supply chain challenges. That in of itself also put a little bit of margin pressure because of some of the inefficiencies at the factories. But we'll manage through it. Margin sequentially will improve in the second half relative to the first half, still down year-over-year. But then in 2022, expect margin improvement to accelerate. Josh Pokrzywinski: Got it. That's helpful. And then I guess just a follow up on the comment, Dave, you made on record backlog. Maybe if you could unpack that a little, because I would imagine some of that is resi where you probably don't really want a lot of backlog there and it's more indicative of lead times and supply chain stuff than it is necessarily like a long cycle business. So maybe break down the components of that of how much is non-resi, is the market getting better and reopening and retrofit versus we're just hearing more backlog in resi because the whole supply chain lengthens? Thanks. Dave Petratis: So, I want to be clear. The backlog issue is not a residential problem. Our residential backlog is slightly above what we normally run. The backlog creation has been on the commercial side of the business and the rapid build has really happened over the last 60 to 90 days. The commercial backlog predominantly on the Americas business is double normal. And it was really driven by the acceleration of order demand that we started seeing in April. And I’ll give you some backdrop here. If you go back December, January, February, March, and we would have talked about this in the Q1 call, commercial institutional demand in the Americas business was down low double digits, and it's like someone turned on a light. And it's -- extremely pleased with that demand acceleration. We're doing a good job of I think processing that through, but there's supply constraints and it's resulted in a record backlog that I think we'll continue to see. There's been analysts out there that have said, we've done a better job of managing this. And I believe that to be true. Our supply chain is strong and we're going to benefit from that trend. I'd also share one other comment is the macroeconomic forecast on what I'd say the commercial break fix was not particularly clear. In fact, I've got economic reports that would suggest that the repair, replacement would have been soft even today. That switch came back on. We've gained that opportunity. So why couldn't we have seen it? When you shut off access to college campuses, hospitals and commercial buildings for 400 days, you get pent-up demand and that's what we're seeing reacting positively in the marketplace. Josh Pokrzywinski: Got it, very helpful. Thanks, guys. Dave Petratis: Thank you. Operator: The next question comes from Chris Snyder with UBS. Please go ahead. Chris Snyder: Good morning, guys. Thank you. And I kind of want to follow up on the margin commentary, but maybe from a bit of a different angle. So guidance implies a pretty material ramp in margins into the back half of 2021. My back of the envelope math puts margins in the low 21% range -- low to mid 19% in the first half. Can you just kind of help unpack the drivers of this step higher? Because guidance is not implying much volume leverage into the back half. So is this more price catching up the cost, freight normalizing, mix normalizing, any color on that step higher into the back half will be appreciated? Dave Petratis: Yes, so that trend is not uncharacteristic. From a seasonality perspective, margins -- if you kind of look at it over historical time period, stronger back half of the year. So that's not unusual. I think as we characterize sequentially, margins are expected to increase. It's the year-over-year comparisons that we would expect some degradation, just kind of given some of the things we outlined relative to inflation. Chris Snyder: I appreciate that. And then I guess following up also on the record backlogs, it sounds like revenue on some level was constrained just by the supply chain issues that everyone is feeling. And it also sounds like the back half or the full year of growth guidance is also reflecting uncertainty as to when these backlogs will be released, whether it's the back half of '21 or into '22. Could you provide any color on maybe how much or how significant revenues were maybe constrained in the quarter just because of those supply chain issues? And then how we should -- what level of maybe supply chain conservatism is baked into the full year organic growth guidance? Dave Petratis: When we look at the demand relative to what we could ship, there is going to be a disconnect there just kind of given the supply chain constraints. And I think you're aware, Chris, we normally carry a light backlog, highly specified engineered product, quick turnover in our manufacturing facilities to the customer. That has been elevated kind of given some of the constraints. But to answer your question, specifically, it could be 1%, 1.5% kind of total revenue at Allegion that's constrained that we’ll get the revenue. So it's not a question of -- it's just a question of timing. So we look at it as a timing kind of transitory issue. And if the supply chain constraints persist, we'll get that in 2022, which means revenue in '22 would be accelerated more so than the overall market demand. Chris Snyder: Thank you for that. Patrick Shannon: I would add a couple other comments. Clearly, supply constraints ended the rapid acceleration of demand that we saw helped build backlogs. I would say, we will -- over this entire pandemic and downturn, the resiliency of the Allegion supply chain I believe was stronger than the competition. And we're going to come out of this better. So feel good about that. I think the other thing you've got to think about, we're not alone in this. In the retrofit community and new construction, the entire project is affected by this. And we just got to navigate in that environment. Chris Snyder: I appreciate that. Thank you. Operator: The next question comes from Brian Ruttenbur of Imperial Capital. Please go ahead. Brian Ruttenbur: Yes. Thank you very much. So I have two questions. Can you talk about the commercial office performance in the quarter? How much was the sector down year-over-year? How much did commercial office represent in terms of revenue in the quarter? I'm just trying to get a data point where you are. Dave Petratis: Yes, so we don't really provide revenue by vertical markets. But I would just say, in terms of market demand, i.e. order intake activity, what we're seeing in specification, et cetera, commercial office space is lagging institutional segment. And a lot of that is just not kind of keeping pace with what we're seeing in terms of the rebound in repair, retrofit and new construction. So hopefully that provides you with ample color there. Patrick Shannon: Maybe to give you a little bit more, again, we don't split out that commercial segment as a standalone, but the strength that we saw in the first half was really driven by strong wholesale, small project and retrofit business. Where that business ends up, we don't have precise data on but there's -- the snapback of that volume would say, even in the commercial office space, there's definitely going in there to repurpose, to reposition and I like the opportunity for Allegion as we move through there from an electronic standpoint. You go back six months ago, I was concerned about the return to office and we're going to have a lot of vacancies out there. Capital will go in and redefine that space, and it's going to be good for our industry. Brian Ruttenbur: Great. Well, thank you. The second question I have just coming off of ISC West and meeting with a lot of companies, private and public, we see a lot of competition coming at access control with a total solution, white and -- one of the trends I'm seeing is white labeling of hardware at a discount and integrating software. So it's all about delivering a total solution, the hardware, maybe name doesn't mean as much. That's what I'm hearing at least. So some of these companies that are investing large sums of money in this total access control solution, that's what we're seeing. Can you address what you're seeing in the industry and how you're addressing this threat? Dave Petratis: I think in today's presentation, we try to emphasize our build-borrow-buy emphasis and our partnerships with the mega-techs. I certainly see this private labeling, white labeling phenomena. I would just suggest the core part of our business has a level of complexity and connectivity that I'll bet on over the long haul. When you get into a complex business or a complex event space, like you were at ISC West, it's easy to look at this and say, okay, I can have a small offering of white label products. But when you start adding code requirements, master key systems, the connectivity with an Apple, a Google, a Lenel, the game gets a lot tougher. Brian Ruttenbur: Great. Well, thank you very much for addressing those. I really appreciate it. I'll get back. Dave Petratis: You’re welcome. Operator: The next question comes from Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: Hi. Good morning. I just wanted to circle back to the Americas revenue guide for the year. You're embedding I think maybe very low-single digit growth year-on-year in the second half in the Americas. Just trying to understand what's embedded in that for residential versus non-residential and what sort of pace of slowdown of residential growth you’re assuming? Dave Petratis: Yes. So, Julian, just as a reminder, last year as we're coming out of the pandemic and demand started to surge for replacement demand on residential products, backlog accelerated, channel inventories were depleted. And so a lot of the revenue growth last year was channel fill; big box retail, e-commerce, et cetera. So you're getting a tough comp, particularly in the second half as it relates to the residential business. And so that's going to impact the comparability, particularly when you're looking at overall Allegion Americas business. As we indicated, non-residential business, starting to show good demand, a little bit constrained relative to the supply chain issues, but we'll start seeing some growth kind of year-over-year. So, it's really that the guide, you have to take into account last year, had a higher growth component associated with channel fill related to the residential business. Julian Mitchell: Sure. But I guess I’m trying to understand, are you assuming that residential revenues are down year-on-year in the second half or -- Dave Petratis: No. They're still increasing. Julian Mitchell: Okay, got it. That's just what I wanted to check. Thank you. And then on the margin front, looking at -- yes, we keep attacking it different ways. But let's look at it sort of second half margin year-on-year, because I think that makes more sense in terms of the information you provide in the 10-Q and so on. So it looks like your second half operating margins firm-wide maybe down something like 100, 200 bips year-on-year in the second half. Is the way to think about that it's about 200 bips headwind from inflation net of price productivity, and then maybe another 100 bips headwind from investment spend? Are those roughly the right orders of magnitude? Dave Petratis: Yes. And I would -- just a little bit more color on the price productivity inflation dynamic. Included in that guide would include some of the effect of these bounce back costs that we've been highlighting. It was much more pronounced in Q2, but you've got kind of some of those costs that continue in Q3, Q4. So that's some of the pressure as well year-over-year. Julian Mitchell: Perfect. Thank you. Operator: The next question comes from David MacGregor with Longbow Research. Please go ahead. Joseph Nolan: Hi. This is Joe Nolan on for David MacGregor. Dave Petratis: Good morning, Joe. Joseph Nolan: Good morning. I was just wondering could you talk about field inventory levels in both the residential and infomercial business. And then just how you expect the timing of the channel restock to play out? Dave Petratis: On the residential side, big box, our res pro partners, I think the restocking of that supply chain is essentially complete. There is pressure on any type of electronic-related product, again, which we’re navigating well, but that will be a problem that moves through in the next four quarters. On the commercial wholesale side, as I talked about, the bounce back in demand, I think part of that is wholesalers seeing the confidence in the marketplace and restocking, but I think much of it is going straight through because of the availability or really green light on small projects that were delayed over a continued period. So I would suggest that the restocking of the wholesale and contract supply chain will be completed over the next two to three quarters. Joseph Nolan: Okay. Thanks for that. And then also just on your education business, given the year-ago pull forward and the timing of seasonal maintenance into 2Q '20. Was that a growth headwind that you experienced in 2Q '21 this year, and do you think that becomes a tailwind here in 3Q? Dave Petratis: State your question again. You broke up. Joseph Nolan: I’m sorry. Just on the education business, given the year-ago pull forward and the timing of seasonal maintenance into 2Q '20. Was that a growth headwind this year in 2Q '21? And does that become a tailwind here in the third quarter? Dave Petratis: I would look at the opportunity in K-12 as part of the bounce back, but more a positive as we move into '22 and '23. Americas going to continue to invest in its K-12 infrastructure for a variety of reasons; age, increased security, more automation, and Allegion will benefit from that. It's clearly a positive. Joseph Nolan: Okay. Thanks. Operator: The next question comes from Andrew Obin with Bank of America. Please go ahead. Andrew Obin: Hi, guys. Good morning. Dave Petratis: Good morning, Andrew. Andrew Obin: For a while, I thought I would have to use the word unpack in my question. I was wondering if there was a memo that went out to use the term unpack, but -- Dave Petratis: I thought you were going to remind me that you had it right on this bounce back. Andrew Obin: I'll take that too. Thank you. I guess the question is on pricing. Historically, your pricing has been fairly close to that of your large competitor in North America. This quarter, they seem to be ahead of you. And I was just wondering, is there a difference in approach to channel between the two of you or it’s just a matter of timing, as I said, because the industry seems to sort of move in lockstep? Dave Petratis: I wouldn't say, they're ahead of us. My words to our leaders worldwide is use all tools required to address the extraordinary inflationary forces. We were out with a normal Q1 price increase. We've added surcharges on certain products. And we've announced an end of Q3 price increase, two price increases in a year and the other tools that we're using to mitigate price. I think the industry has been disciplined in our stewardship of making sure that we respond to the incredible inflationary forces that work for us. Andrew Obin: Got you. Thank you. Then the second question, as you -- and I think I've asked this question a couple of times. But as you face supply chain constraints, are you rethinking either your approach to your internal supply chain, i.e., sort of more automation, or are you sort of rethinking sourcing any long-term impact from sort of current disruption in the channel, or you think once we sort of get rid of the bullwhip effect, things go back to normal fairly fast? Dave Petratis: I think the weakened supply chain is always a strategic item, as we think about positioning the business, one. Number two, I point to our decrementals during the downturn. Our decrementals on a top line basis was softer than any of the competition, meaning as the markets collapsed, our revenues were stronger on those decrementals, and I would point to supply chain. Third is, I think clearly a lot of work going on, I'd say, managing the complexity of what we do. It's everything from boards to grommets to casting. Part of what the Allegion franchise is built on is managing this complexity. Our supply chain does an important part of -- it plays a critical part of that, but it's rethinking those partnerships, making sure that we've got the availability of any type of part to be able to move it. We've made some pretty significant industrial investments in automation. Those will continue. I think as we go through this, labor availability is going to be in scarcity on a worldwide basis. And so automation investments, investing with strong suppliers and producing in region are key drivers for Allegion, Andrew. Andrew Obin: Okay. Thank you so much. And I appreciate the compliment. I don't get those often. Thank you. Dave Petratis: I should have read that twice. I did read it twice. Operator: The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead. Joe Ritchie: Thanks. Good morning, guys. And no need to fish for compliments on this one. Just a quick question here on the margins. If I take a look at the Americas margins and your commentary around pricing for 4Q, I guess when we think about the sequential change in margins in the Americas, is there kind of like embedded in your expectations that sequentially margins potentially step down in 3Q because of these inflationary pressures and then back up in 4Q? Just trying to understand the cadence a little bit better? Dave Petratis: Yes. So you got it right. Q3 margin decrease year-over-year much more pronounced than Q4. Q4, because of the price increase and some further actions, is still down but improving. Not as far down as 2Q. Joe Ritchie: Okay, all right. That's super helpful. And then I guess maybe just one -- maybe one broader question. I know that you guys consistently get compared to your European peer and the U.S. But if we took a step back and just thought about the industry as a whole and the potential consolidation in the locks market in the U.S., do you guys view the market as being fairly well concentrated today? Are there opportunities to continue to expand either via M&A within the market, you see future consolidation? Just curious on your broader thoughts there? Dave Petratis: I think over the last decade, this is an industry that's consolidated. I would suggest that that's not moved at the pace that other industries have. So there's opportunities, half step adjacencies. I think the brightest growth aspect for Allegion is in the seamless access technologies. Part of the corporate spend this year is we're investing to try and better understand the future of seamless access, and where it could be 5 to 10 years out, because of our unique position in. And my message here, the industry is going to continue to consolidate it, but I believe through innovation of our unique position on the door, electronics, your edge device that it will continue to drive nice growth for Allegion. Joe Ritchie: Okay, that's helpful, Dave. Thanks, guys. Operator: The next question comes from Tim Wojs with Baird. Please go ahead. Tim Wojs: Hi, guys. Good morning. Dave Petratis: Good morning to you. Tim Wojs: Maybe just -- so first question is on investment, and I guess it's two-part. So I guess first, could you just elaborate a little more on where you're making the actual incremental investments this year? And then secondly, could you just talk about the pipeline build for future investments and how the paybacks on those are kind of prospectively versus just history? Are they the kind of same, better or worse? Just kind of curious there? Patrick Shannon: Yes, Tim. So the majority of the incremental investments would be centered around R&D technology type of investments centered around driving electronics, revenue growth and market segmentation, i.e., where are the opportunities where we can expand our business and leverage our franchise globally. And so think about that in relation to some of the things Dave talked about in terms of enhancing our partnerships, to have broader connectivity into electronic seamless access, ecosystems and solutions, very important for the business going forward. So we're putting monies in those that I think will position us extremely well for growth going forward and will help us continue to grow faster than the broader market is the plan there. Your question on ROIC, it's always been a really good payback, not only on investment, but on a cash-on-cash basis, and good things to do that will position us in the marketplace for further growth. And historically, you've kind of seen our revenue kind of trend probably a little bit north of our peer set, and would expect that to kind of continue given the level of investments that we're making and position our franchise going forward. Dave Petratis: I'd build on that a bit, Tim, to say we've had -- take out the pandemic, we've had five, six years of double digit electronics growth. And clearly the market is moving that way. We've got over the next 24 months a nice pipeline of connected products coming out that it will enhance specific investments in software capabilities, what I call software stacks, that enhance the partnership that we talked about today. You have to have the APIs, SDKs that allow our locks to work in our own ecosystems and work in the complex ecosystems that may be present at a hospital, college campus. We believe this differentiates us versus one horse ponies that come in with a solution in an important part of our future growth. I'd add one other is segmenting the market and understanding the future 5, 10 years out in multifamily, K-12, college campuses and hospitals, we think we have an important role to play in our installed base in this connected environment will leverage Allegion’s growth. Patrick Shannon: Tim, also just think about the movement in technology, how fast things are changing. And being part of a broader ecosystem where we can, our products can seamlessly plug and play into a broader set of solutions is very important, and so incremental investments will continue. It is part of our DNA in terms of how we think about accelerating growth. And things are moving quickly and we want to be a market leader in that segment. Dave Petratis: In depth, partnerships with the mega-techs which are important, partnerships with the integrators, like Lenel, our venture arm, I think you saw the announcement on Openpath, the sale to Motorola Solutions, an excellent example of how we're playing that game, and then continuing investments in the digital players that help drive our growth. Tim Wojs: Okay, great. I really appreciate that. It all makes sense. I guess the second question just on maybe bigger picture. Could you just frame for us how you're thinking about a recovery and maybe revenue contribution from the specification business? So you're obviously seeing an uptick on the specification side. But when do you think you could start to see that be a meaningful revenue contributor? Is that a full year benefit next year, or is it skewed towards the second half? Dave Petratis: I think you'll see that really gaining some speed Q2 of next year and through the traditional construction season. ABI has been up for three, four consecutive months at really record high at 60. I think we were there for a peak. It takes about 12 to 18 months based on the scope of those projects for us to really start seeing the momentum. Tim Wojs: Okay, great. Good luck, guys. Thanks for the time, guys. Dave Petratis: Thank you. Operator: The next question comes from John Walsh with Credit Suisse. Please go ahead. John Walsh: Hi. Good morning. Dave Petratis: Good morning. John Walsh: Maybe just two follow ups here. One, you had a little bit of a discussion there on K-12. You talked about the age, the security, more automation. But one thing you didn't mention was stimulus. And just curious, we're hearing that there's a lot of stimulus already been approved for that vertical, a lot of focus on HVAC, but there is a big demand on the infrastructure side for access control. Are you seeing any of that benefit yet or is that what you're kind of talking about might come through in '22 and beyond? Dave Petratis: As we try and unpack the stimulus package, we certainly see access control, school security as a part of that. Again, it's dominated I think by modernization, things that you talked about, HVAC. We're going to benefit as a result of that stimulus. I would also say, there will continue to be a drive in the K-12 sector to modernize. The average K-12 structure is 40 years old. Security threats persist and access into schools is becoming more sophisticated because of people's edge device, electronic locks, and Allegion is going to benefit from that. John Walsh: Great. Thanks. And then, obviously, you've lived through several inflationary cycles. We could argue this one's a little bit different. But can you talk about your ability to hold price when you come out of these inflationary cycles? There's probably some regular pricing activity. I think you used the term surcharges for some things as well that maybe those are a little bit more transitory and go away when inflation abates. But can you just talk about your historical experience if we’re thinking about margin next year? Patrick Shannon: Yes. Sure, John. So historically, price increases announced that are permanent in nature stick going forward, okay, i.e., even in deflationary periods, prices remain the same. And fairly disciplined industry here. We did announce some surcharges on particular products that are more heavy in steel-related components. And those, of course, go away assuming the price of steel comes down. But the majority of our price increases are permanent price increase that we expect will stick going forward, even when inflation comes down. Dave Petratis: I would add to that. The majority of my industrial career in the electrical industry and now security, we have as a guiding management principle as our input costs go up, I expect to capture that plus. And we're very driven on the inputs as well as the pricing systems here. And it's part of our DNA. And it's never been more important as we face inflationary pressures. John Walsh: Thanks. I appreciate you taking the questions. Operator: The next question comes from Jeff Sprague with Vertical Research. Please go ahead. Jeff Sprague: Thank you. Good morning, everyone. Maybe just a couple loose ends here, a lot of ground covered. First, maybe a little shout out to your international friends. Just wonder if you could give a little bit of color how you're thinking about the margins in the back half there, right? Usually we start fairly low in the first half and step up materially. I'm assuming from this kind of better run rates here in the first half, you’re not expecting the same magnitude of step up by assuming margins are going higher. Can you just elaborate on the trajectory there, the price cost dynamics in those markets collectively? And what if any other restructuring benefits you have coming through? Dave Petratis: Yes, Jeff, so thanks for bringing that up. Outstanding performance by the international team, particularly when you're looking at not only margin increase but the top line growth, and that's been a key contributor to the margin expansion there as well. But you may recall, if you kind of look at that segment in isolation, they were probably out in front of this pandemic quicker in terms of reducing costs, managing that side of the equation, restructuring programs that kind of went through both in Europe and Asia Pacific. We also are seeing the benefit of the amalgamation of both the Asia Pacific and European segments coming together as Allegion International. All that combined has really accelerated the margin improvement year-over-year. The restructuring actions, the benefits we saw in the first half, kind of lapped, if you will, beginning in Q3. So you're not going to see the step up in margin expansion year-over-year. Seasonally, you know this Jeff that the margins expand in Q4 for that segment, in particular. We would expect the same seasonal increase. But the year-over-year margin improvement you're not going to see and there was some one-time benefits in Q4 that are non-recurring this year, bounce back in cost, higher inflation, these type of things. But a great performance first half. We would expect kind of this continuous margin improvement going into next year too. And so really like what the team has done there, how they're executing, driving top line growth, those types of things, a great performance. Jeff Sprague: Great. Understood. And then just back to kind of the whole backlog top line calculus here. I guess your guide essentially kind of indicates revenues in Q3 and Q4 will be similar to Q2, which is not atypical for your business. But I guess I'm also hearing though that perhaps you're suggesting the top line is just governed here by the supply and other constraints. Is that really the message that they're kind of in normal circumstances, there would be more upside into the back half just unlocking this backlog, but just the physical ability to get it out the door, whether it's your own factory or inputs from suppliers, just keeping a lid on what you can actually execute on in 2021? Dave Petratis: You read that correctly. I think we've assessed, okay, what's possible here? We'll move that backlog through. I think we are mindful of the constraints on our supply base. We're also I think grounded that labor may be the tightest element in all of this, and it affects our customers and suppliers. So you've got to kind of take a stiff view at this. When are people going to come back to work and availability improve? We think that's a long-term problem. We think the culture of Allegion, how we run our business and the strength of our supply chain will do better than the competition in that battle. Jeff Sprague: Great. Thanks for the color. Dave Petratis: Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dave Petratis for any closing remarks. Dave Petratis: Thanks for joining today's call. Allegion’s future remains bright. And I'd like to leave you with some key highlights of our call. Market demand is robust and it has returned to pre-pandemic levels faster and stronger than anticipated. This is extremely encouraging. Inflation has accelerated and there are industry-wide supply chain pressures. These constraints are not unique to us and we will actively manage both of these dynamics. The resulting backlog we are building sets us up well for the remainder of '21 and '22. Last, Allegion is stronger, more structurally sound as we continue to invest during the pandemic. As a result, we are positioned well for profitable growth, and we'll continue to aggressively execute on our strategy of seamless access. Have a great day today. Thanks for your attendance. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Allegion plc (NYSE:ALLE) Earnings Report Highlights

  • Allegion reported an EPS of $1.64, missing the estimated $1.75.
  • The company's revenue for the quarter ending December 2024 was $945.6 million, surpassing the estimated $938.9 million and demonstrating strong revenue-generating capabilities.
  • Financial metrics reveal a P/E ratio of 18.58 and a debt-to-equity ratio of approximately 1.10, indicating a balanced financial leverage and a solid investment opportunity.

Allegion plc (NYSE:ALLE) is a leading global provider of security products and solutions. The company is known for its innovative approach to safety and security, offering a wide range of products that cater to both residential and commercial markets. Allegion operates within the Zacks Security and Safety Services industry, competing with other major players in the sector.

On February 18, 2025, Allegion reported earnings per share (EPS) of $1.64, which fell short of the estimated $1.75. Despite this, the company has a history of outperforming expectations. Allegion's revenue for the quarter ending December 2024 was $945.6 million, exceeding the estimated $938.9 million. This represents a 0.68% increase over the Zacks Consensus Estimate and a significant rise from the $897.4 million reported in the same period the previous year. The company has consistently surpassed consensus revenue estimates in three of the last four quarters, demonstrating its robust revenue-generating capabilities.

The company's financial metrics provide further insight into its market valuation. Allegion's price-to-earnings (P/E) ratio is approximately 18.58, indicating how the market values its earnings. The price-to-sales ratio stands at about 2.93, reflecting the market's valuation of its revenue. Additionally, the enterprise value to sales ratio is around 3.33, suggesting the market's valuation of the company relative to its sales, including debt and excluding cash.

Allegion's financial health is further supported by its debt-to-equity ratio of approximately 1.10, indicating a balanced approach to financial leverage. The company maintains a current ratio of about 2.04, showcasing its ability to cover short-term liabilities with short-term assets. With an earnings yield of about 5.38%, Allegion offers a return on investment based on its earnings, highlighting its potential as a solid investment opportunity.

Allegion plc (NYSE: ALLE) Surpasses Earnings Expectations

  • Allegion plc (NYSE:ALLE) reported an EPS of $1.99, exceeding estimates and showcasing its ability to surpass market expectations.
  • The company's adjusted net earnings rose to $2.16 per share, indicating an 11.3% increase from the previous year and highlighting Allegion's growth trajectory.
  • Despite a slight shortfall in revenue, Allegion's strong financial performance is evident with net earnings reaching $174 million and a healthy price-to-earnings (P/E) ratio of approximately 22.22.

Allegion plc (NYSE:ALLE) is a global leader in security products and solutions, offering a wide range of products that include locks, door closers, and other security devices. The company operates in a competitive market, with key competitors such as Assa Abloy and Dormakaba. Allegion's focus on innovation and customer satisfaction has helped it maintain a strong market position.

On October 24, 2024, Allegion reported earnings per share (EPS) of $1.99, exceeding the estimated $1.93. This performance highlights the company's ability to surpass market expectations, as also noted by the Zacks Consensus Estimate of $1.93 per share. The adjusted net earnings rose to $2.16 per share, marking an 11.3% increase from the previous year, showcasing Allegion's growth trajectory.

Despite generating revenue of approximately $967.1 million, slightly below the estimated $970.89 million, Allegion's net revenues for the third quarter of 2024 were reported at $967 million. This slight shortfall in revenue did not deter the company's overall financial performance, as net earnings reached $174 million. The company's focus on revenue growth and margin expansion is evident in its financial results.

Allegion's financial metrics provide further insight into its market valuation. With a price-to-earnings (P/E) ratio of approximately 22.22, investors are willing to pay $22.22 for every dollar of earnings. The price-to-sales ratio of about 3.41 and enterprise value to sales ratio of around 3.82 reflect the market's valuation of Allegion's revenue and total worth, respectively.

The company's financial health is also indicated by its debt-to-equity ratio of roughly 1.53, showing a balanced approach to financing its assets. A current ratio of approximately 1.71 suggests Allegion's capability to cover short-term liabilities with its short-term assets. The earnings yield of about 4.50% provides insight into the return on investment for shareholders.

Allegion Stock Falls After Barclays Downgrade

Allegion (NYSE:ALLE) shares fell more than 2% intra-day today after Barclays analysts downgraded the company to Underweight from Equalweight, reducing their price target to $116 from $122.

The analysts cited concerns over Allegion's significant exposure to the US greenfield commercial construction market, which they believe will impact the company's top-line performance. Stable trends in the institutional segment may not be sufficient to offset this impact.

Additionally, the analysts anticipate that margin tailwinds from pricing and cost initiatives will ease, and a potential residential recovery in 2025 could lead to a margin mix headwind.

The lack of secular growth drivers is expected to prevent a re-rating of Allegion's valuation multiple.