Allegion plc (ALLE) — Q2 2020 Earnings Call Transcript

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 two and three. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company has 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. Please for the Q&A, we would like to ask each caller to limit themselves to one question and a 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.

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 along with the social concerns related to inclusion and diversity. With these challenges comes needed reflection. Before I turn to business results, I'd 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; 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 on a journey of listening, learning, and reflection, and we will continue building the right roadmap for Allegion. With our employees, we must also help build a better world with our voices, minds, hands, and 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. Our value and code of conduct have been our lighthouse since the creation of Allegion. They will help us to improve inclusion and diversity at the company. In a similar way, our values and corporate business strategy have 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. You could equip with a culture of safety, and 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 number 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 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 healthcare 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. 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 to support 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 pulls, our products can help avoid hand to surface contact. Further, by integrating our wave to open and other innovations with identity management partners, we're able to enable seamless access through our partners of choice strategy. Fourth, our keyless solutions around the world are often 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 Simons Voss paired with the strength of our supply chain and 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. 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 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, which also contributed to total revenue weakening. All regions have experienced substantial revenue declines. Patrick will share more detail on the regions at 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 pricing, productivity, inflation dynamics, which helped; this was aided by reductions in variable and share-based compensation, non-U.S. government incentives, in addition to the impact of cost actions including reductions in discretionary spending, a freeze on non-essential investments and hiring, restructuring, and re-prioritization 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 lowered 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 networking 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 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 pricing 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. These 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 a $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 three 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 offsets 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 for 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 non-residential 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. Through the Mexico plant closures early in the quarter and improving residential markets, we enter the third quarter with a healthy backlog for the residential business. Although the non-residential 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. Adjusted operating margin for the quarter decreased by 190 basis points. Volume deleverage drove the decline and was offset slightly by pricing 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 on 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 was 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 pricing and productivity inflation dynamic was positive and was aided by reductions in variable compensation and other discretionary spending. As with the 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 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 networking 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 and 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, optimize working capital to continue driving substantial cash flow conversion. Our financial and liquidity position remains extremely solid. Our net debt to EBITDA ratio is 1.8 based on the last 12-month performance, we have close to $500 million available under a 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 to review 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 are 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 non-residential. We have seen sequential increases in home builder 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 forced many to work from home. In 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're 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 our 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 reductions 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 full adjusted effective tax rates 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 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 in 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.

Thanks and good morning, everyone. So two 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 trend 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 sector and I think last mile delivery, with the growth of e-commerce and 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 up this morning show that out of 37,000 comments on Amazon, it has about a 4.8 rating, so I feel extremely good about that. I think the weakness in the quarter was really driven by the overall lockdowns, but in terms of integrators' ability to enter college campuses, none of us wanted people coming on site and that work to see. So I like the long-term trends and I believe it's a key factor going forward. I think when you think about some of the capabilities that we're putting together, the ability to seamlessly travel without touch—whether it's a wave of the hand or your edge device—these things will continue to be drivers. Add things like our investment in understanding how many people are in a room, area or building; these are things that will continue to expand as we go forward.

Hi, good morning. I 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 demand has played out. Tax, this is kind of the second year in a row that we'll have this lower rate. How should we think about the investment spending going forward in the sustainability of the tax rate from here?

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 types of things will help us, in particular, as we begin to come out of this pandemic. So I feel good about those investments and the ability to drive incremental revenue and as we've indicated historically, those investments have enabled us to drive revenue faster than the overall market. I think we get a good return on those in terms of invested capital. So going forward, we’ll 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 for the tax rate, we are anticipating a lower rate again than what was originally provided at the beginning of the year. Some of that is due to favorable items that came through FIN48 reserves and those types of things. Some of it is quite frankly that we've been able to implement some new tax planning strategies that will take effect and feel good about the work 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 the high teens area; more guidance will come when we release the 2021 information, but I feel fairly confident it will be better than that, maybe mid-teens at least in the near term and that's all due to where we find ourselves today and some of the great tax planning strategy work that has been going on.

Great. Thank you for that color. And then maybe just a follow-up here. You talked about in the Americas exiting with some strength in residential and stabilization in non-residential. Can you put any numbers around that? Either what the exit rate was in June or what you're seeing here in July?

First, I'd go to the backlogs. We've got effectively record backlogs between commercial, institutional, and residential. The residential demand is extremely strong as we look at point-of-sale. If you look at May, June, and July, there's a 12% increase in dollars and 7% in units, really liking that trend. This morning's Wall Street Journal discussed strength in housing. The other thing as you think about our residential performance, especially in the first half, there was a mandate in the country of Mexico to shut down; that impacted about 25% of our workforce and a major supplier of our residential supply chain. We depleted inventories in a situation where demand was accelerating at the point of sale that I referred to. We have record backlogs in residential, and I think we've got a great set of product capabilities. I believe our supply chain is stronger than the people we’re competing against, so I like our opportunities as we go through the second half and early next year.

Thank you. Good morning. Two from me also—David, I'd be interested in your forward opinion on the non-res cycle overall. You introduced, on the Q1 call, the very logical possibility that 2021 could be down given the later cycle nature for some of these end markets. Based on what you're seeing in the channels now and just pipeline work and others on the ground, what's your thought around that large question on everyone's mind?

When you think about the institutional and commercial verticals, everyone should be cautious. Clearly, there are shifts going on. I think we saw the ABI come out, and it doesn’t drive optimism. However, as I look at Allegion's healthy backlogs, our commercial and institutional backlogs as we exited June are high. Yet we’ve seen some disruption in spec writing and demand from architectural firms, which was to be expected. We'll have a better call on specs written as we exit Q3. If I look at specs written today, it has improved every week as we've gone through the crisis, but this is more of a long-term trend. We anticipate softer markets for educational, healthcare, and total commercial. We will put our foot on the gas to drive seamless access, and we believe we can outperform in a weaker position because of our installed base and the strength of our spec writing and Allegion's capabilities.

Thanks. And then, second question perhaps for Patrick—just around the cost reduction actions. Patrick, can you just provide a little more granularity on what's been done structurally from a cost-saving standpoint and what perhaps is temporary? Some of these temporary actions are feeling like maybe they're at least semi-permanent as folks think about travel budgets and the like. If you could frame that up for us, it would be helpful.

Good question. Let me try to provide a framework around that. First of all, we've identified and are executing a plan of about $80 million of cost reduction year-over-year. I would bucket that into three categories. The first is structural, mostly fixed cost; predominantly headcount reduction that for this year is about 30% of the $80 million. Then you've got another bucket, what I call discretionary type expenditures, i.e. T&E, contractor spend, consulting, and so on. That's probably another 30% of the $80 million for this year. Lastly, the variable type of items, the things that are compensation-related— a large portion of which will probably resume next year—comprises the balance of the $80 million or 40% of the total. The key point here is that, offsetting the variable stuff i.e. the things we expect to rebound next year, we will have carry-forward benefits associated with some of the permanent cost reductions that will continue into next year. We won't be at a full year run rate level on these identified costs until Q4. So we have that as Dave mentioned in the script. We will continue to work on further cost reductions to help mitigate that as well. TBD on further actions that will be identified for the second half of the year.

I would just add some additional color as well. I think we got after this early—even before COVID-19, you could see that in our in-flight restructuring plans. It’s essential that we continue to accelerate investments around electronics and seamless access, while transforming the company into a leaner structure.

Hi. Good morning. 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 continue into July now?

Absolutely. As you can feel the pulse of the economy coming back, I put cautions around that because in some cases they've gone too fast, but we feel it. If you're in the wholesale retail channel, on-shelf inventories are down, and we're seeing that in terms of spec quotes, point-of-sale, and our own shipments.

And then I guess as a follow-up, non-res came in better than res, 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, the majority was volume-related, but as we saw in Q1, pricing relative to non-res was better than the residential performance. We will continue to push that dynamic to the extent we can, and so far year-to-date, we've been fairly successful in getting solid price realization in the non-residential segment.

Thanks. Good morning, everyone. So, Dave, my first question is 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 out. I'm just trying to understand, one, what kind of the impact you had in the first quarter from maybe running out of inventory. And then secondly, how we should be potentially thinking about a restock as you get back online in Mexico.

In terms of the second quarter performance, there was a decree from Mexico that mandated a 30-day shutdown. We were open well ahead of that, and it was our ability to point out that we were essential. More importantly, our ability to keep our people safe was key. If you dig into it, the governor of the Baja highlighted Allegion in a press conference regarding our safe practices and the confidence that we could do that, so that was important. If you look at the whole region, we got restarted quicker. The government mandated that anyone over the age of 55, anyone immune compromised, or pregnant could not work for us; that impacted about 300 to 400 employees, we had to reload many of our most experienced workers, and now we are producing at a higher level. We are producing out of the Baja today at the highest level since I’ve been at Allegion, since we created the company. If you think about that, we've got 42 discrete manufacturing lines in Enemata; if you have ever visited them, they have the ability to bring on that number of employees and pull that lever to replenish the supply chain. Very few companies in the world could do what we did. So I’m extremely proud of the team and our ability to reinvent ourselves. A second point to consider: you don't see point-of-sale data but our teams did an outstanding job of maximizing our inventory, keeping customers and products, and working with other partners in the supply chain. We were able to optimize that. Again, I thought we did a better job than some of our competitors. Lastly, 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 may be expected to change over the next four months—your copper prices right now are surging. I noticed that while pricing was still positive this quarter, I think it's 70 bps from the Americas, it was still, you saw a tick down versus Q1. So I'm just trying to understand, as we kind of move forward in this environment where volumes really aren't at normal levels, 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 the mixed shift that you're seeing in your business.

I'm always confident about price. I would say the market is disciplined. Our first caution is always steel—we purchase a lot more steel than brass, but we're continuing. We'll continue to be aggressive on price realization, trying to offset the effects of inflation, but I'm net positive, and I feel that way every day. Patrick will provide some realization to it.

For sure, Joe. You're right. I mean, the commodity prices have continued to rise here over the last 90 days or so. I'd say for the balance of the year, think about sequential improvement as we progress throughout the year; just through more efficiency and some of the cost measures we're taking will help us navigate the balance of the year. Next year will be another question we’ll be monitoring as this year progresses, but as Dave mentioned, we will continue to push price and if we're unable to offset the inflationary impact, we'll drive productivity. We'll make appropriate investments to do whatever we can to mitigate the inflationary impact.

Hi, guys. Good morning. Question: can you just comment on regional trends in the U.S.? How is California trending versus Texas versus Florida versus the Northeast? I mean frankly, just trying to figure out how COVID and the second wave is just impacting demand, and if there is close correlation between what we see with hospitalizations and demand trends by region? Thank you.

I would say the stoppage in New York and the Northeast has some pretty strong governor mandates and decrees, especially in Boston with no public construction. We do very well in those big metro markets, so we're seeing that recovery as the Northeast gets better. Again, if you look to California, the construction and Allegion was able to operate during the first shutdown. We’ll see how it drives, as they move, I guess, towards a second shutdown. I think you really need to dig into the data on COVID; you're seeing growing pockets of infection among construction workers and how government mandates around it will respond. We've got to keep an eye on it, but construction has been considered essential in most areas of the country, so I think it will continue.

And then just a follow-up—sort of talked about seamless access, but how do you think about rethinking the access business post-COVID? Do you expect any structural changes in what customers will demand in terms of being able to sort of get in and out of the building without touching things?

I absolutely believe it. The number of inquiries on our antimicrobial products would be a clear example, but I really believe that your edge device is how we’ll navigate through society. The long-term trend looks positive. We have the ability today to monitor your temperature as you approach the door; if you're out of an accepted range, will you 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 the efforts to keep people healthy.

Hey, guys. Good morning. Just maybe going back to the Americas and just some of the cadence through the quarter. Is there any way to think about how June kind of finished up relative to the quarter in both residential and non-residential?

Yes, Tim, I would say again during the course of the quarter, sequential improvement came as the quarter progressed. June much stronger than May, and May was stronger than April; feel pretty good relative to the visibility and the strengths relative to the backlog and the order intake. Residential demand is really strong, and non-residential stabilized as we exited Q2, now much better commensurate with the guidance we gave—that’s how we're seeing things right now, though with a little conservatism there.

I would also say we look at a variety of indicators on non-resi 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.

Hey, good morning, guys. Just before my question, Dave, thanks for your leadership on employee safety, health, and societal awareness—all that. I think it’s very clear those aren’t just talking points. I really appreciate that. Just a couple of questions on the non-residential business. First on backlog visibility—how far does that stretch out? Does that get you through your year-end? As I get into 2021, 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 relative to some other products out there, security retrofit is either completely non-discretionary 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.

In terms of the backlog in commercial and institutional, I’d say you look at that with a six-month lens, but there are a couple of filters. What we have in the actual backlog, then you start looking at quote specs, job awards—just take the city of Washington D.C., job awards could go out in 18-24 months; do we have the contractor, the architect, the wholesaler? There are things that go beyond just our book of business, but generally, we'll get more than our fair share there. So I think we have good indicators, but then you’ve got to go to the broader macro. I feel pretty good sitting here; I feel very good on 2020 despite caution lines. Second question on discretionary—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 downtown Indianapolis; you're going to get your doors locked. And the thing to consider are shutdowns—people want to ensure their place is secure, so discretionary break aspects of this market tend to roll up and down economies. If you've got LCN, VON Duprin, interflex installed, you're going for like-for-like.

Thank you. In terms of timing on the regions, it seems that in the U.S. and particularly the southern tier, there are going to be some problems, although the Northeast is obviously doing 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 them coming out of the pandemic a little bit earlier than the U.S.?

We see... let me say this. We’ve got our electronics—our Simons Voss and VON Duprin and interflex; they’re mechanical businesses in Europe. The electronic business has performed well during COVID-19 and in lockdowns. You’ve got to look at that strength in terms of geographical position; the trends in electronic conversion and software capabilities are good. We’d like to continue to invest in that, and we were driving some restructuring before COVID-19. Overall, the world is facing GDP challenges, but the darker and Nordic regions are going to be a bit better than the southern, and we're generally confident the electronic trends will continue to operate nicely wherever we are in the world.

Follow-up is you've talked a good amount of seamless and touchless electronics. Are you seeing any move within the sub-sectors, and you've got some Bluetooth connectivity, but obviously NFC has been on the tip of your tongue since you guys were first spun out, and now that Apple has brought it into NFC entirely. The question I'm asking is that it seems that other small companies are moving quickly into the NFC access. Are you seeing the same type of competition? Are you seeing your own business improving in that area? If so, what are the areas you will be focusing on regarding these technologies that have been around but have been suppressed?

I look back—I look backward to understand what our strength is. I think in the last 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; that is the tool that will allow the free flow of people. The problems to be solved are outstanding. Remember, we were the first company in the world saying, 'Open the door!' Our relationships with Apple are strong, and I think these technologies will continue to drive and shape the marketplace, and I like the position of Allegion.

Hi. Good morning. My question is regarding the 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. If we continue to extrapolate that trend, it appears spring could be the likely bottom. By next construction season, we could be talking positive non-res in the Americas. Is that a reasonable way to think about trends if the economy stabilizes here, or could the air pocket and quotation activities push the timeline out materially?

Great question, and not an easy answer. I went back and looked at contraction in the architectural indexes, and these tend to snap back quickly. Is this pandemic going to follow that? I think it depends on how long the pandemic drags on and the real damage that’s been done to institutional budgets. Yet, as we enter the construction season, there’s generally an improvement, and spring could be a revitalizing opportunity, but I think we will 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 residential and non-residential inventory commentary that will be helpful? Thank you very much.

Inventory in the residential channel has been depleted. I'm looking for some numbers here but think about it: we had 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 the first quarter at the significant demand levels to get that back to normal. If there's any weakness in competitive supply, and if you think about some of our competitors, the supply chains can get pretty complex, we could have more opportunity, but it could take longer. We'll take on that challenge in terms of non-res and commercial institutional supply chains. Those are responding back quickly. I believe some of the leverage that we had happened because we were able to fill the backlog of some of our institutional products, and that will normalize much quicker.

Hi. Good morning. Maybe just the 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 do you think it is that the residential revenues in the Americas can grow in the second half? It's something we're seeing at other residential-related products. Can you give any color on the differing outlooks you have within residential of new construction versus the replacement side?

I would characterize it this way, Julian: as we look at the residential business and you consider all the factors you mentioned, clearly there will be sequential improvement in the second half as we progress throughout the year. Growth year-over-year will depend upon our ability to get the labor in place to produce the product and get it through the channel to the end customer. So we are a little bit constrained from a capacity perspective, which is going to be the driver for whether we can show year-over-year growth, but nonetheless we'll continue to drive that. Overall, the trend in electronics is expected to rebound, as this will provide some additional growth as well.

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. If you think about it, these products come from Southeast Asia; the complexity can make it tricky. Our supply chain 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 reflect that we’re creating opportunities. Our electronics are some of the highest regarded and highest quality in the marketplace. The builder activity that part of the market is currently growing today, as mentioned in the Wall Street Journal. If there’s a question of, ‘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? I like our opportunities to have those discussions when you must depend on products coming halfway around the world to support your home-building efforts in an uncertain pandemic environment. I feel positive about our opportunities.

Thanks. We'd like to thank everyone for participating in today's call. Please have a safe day.