Allegion plc (ALLE) Q1 2021 Earnings Report, Transcript and Summary

Good morning and welcome to the Allegion First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Martineau, Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, Andrew. Good morning, everyone. Welcome and thank you for joining us for Allegion's first quarter 2021 earnings call. With me today are Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release which was issued earlier this morning and a presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to Slides 2 and 3. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our most recent SEC filings for description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures, please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will now discuss our first quarter 2021 results, which will be followed by a Q&A session. 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.

Thanks, Tom. Good morning and thank you for joining us today. I'm pleased with the company's first quarter performance. We delivered revenue growth, margin expansion, double digit earnings growth and strong available cash flow against a tough prior year comparable. We continue to make progress on our seamless access strategy, while maintaining the focus on keeping our employees safe and serving our customers efficiently. Let's begin by walking through the first quarter financial summary. Revenue for the first quarter was $694.3 million, an increase of 2.9% or 0.5% organically. The organic revenue increase was driven by strength in the Americas' residential and Allegion's international businesses, offsetting continued softness in Americas' non-residential. Currency tailwinds provided a boost to total revenue and more than offset the impact of divestitures. Patrick will share more detail on the regions in a moment. Adjusted operating margin increased by 30 basis points in the first quarter. We executed extremely well, and the restructuring and cost management actions taken during 2020 along with the volume leverage on the businesses that grew offset the mix headwinds we are experiencing. Adjusted earnings per share of $1.20 increased $0.16 or - 15.4% versus the prior year. The increase was driven by expanded operating income along with favorable other income and share count. Year-to-date available cash flow came in at $105.5 million, an increase of more than $86 million versus the prior year. The increased cash flow was driven by improvement in net working capital, growth and net earnings and reduced capital expenditures. Please go to Slide 5. As we discussed previously, reflecting on 2020 despite the ongoing pandemic, Allegion continues to invest in our future, most notably through our innovation engines. From industrial design, engineering, and IT to ventures, partnerships and acquisitions, we're building a build-borrow-buy approach to accelerate seamless access. Investing in our capabilities, partnering and integration are all core to our innovation strategy. Let's review some of Allegion's innovation and investments. Allegion's Overtur, our cloud-based ecosystem where project teams collaborate on the specification, design and construction of door security and openings expanded in multiple ways during the past year. Key and credential management was added, more functionality and integration for our billing information modeling customers and automation that helps hardware specification writers. Overtur allows digital connectivity to our customers over the life of the structure. It's - proving its value as a single source of truth for hardware requirements and decisions and to empower our partners to work more productively. Our ISONAS brand also launched a significant upgrade of its software platform in - Q1 the Pure Access Cloud 4.0 reader controllers are preconfigured to the cloud and only require a network connection on-site, making the ISONAS system truly plug and play. The software upgrade includes new front-end technology with customized dashboards gives a boost to cybersecurity and anticipate added capabilities and future new devices. Our product innovation spans the world of Allegion. SimonsVoss recently released the SmartLocker, a retrofit, no drilling lock option for lockers and furnitures in schools, hospitals and industrial facilities. This innovation was customer inspired, based on trends and needs in the market. Importantly, it integrates the existing SimonsVoss digital ecosystem, and there's additional functionality to [provide] (ph) or open each lock remotely, to display break-in attempts in the software and to send notifications. And just as our internal innovations continue to delight our customers, innovation is built through key partnerships in our early leadership in the IoT market has established us as a go-to partner. In Q1 Homebase announced that they're working with Allegion and Walmart InHome to enable direct-to-fridge grocery delivery for apartment residents starting in the Kansas City Metro. Homebase enables communities - Homebase enabled communities come with preinstalled Schlage smart locks, meaning, that the Walmart associate making the delivery gets secure, one-time access for entry during a designated timeframe for a delivery. This is a clear demonstration of seamless access adding value to people's everyday lives. Partnering with CBORD, Apple and Android has rapidly expanded seamless access use cases on higher education campuses. By enabling mobile credential technologies, we are part of the ecosystem that supports contactless student IDs for iPhones, Apple Watches and Google [Pay] (ph). CBORD also brings our Von Duprin exit devices into play, giving colleges new remote lockdown and monitoring capabilities. These integrations are good for campus securities and help universities and colleges operate more efficiently and safely. Rounding out our build-borrow-buy approach to innovation, Allegion Ventures continues to invest in companies like Kasa, Mint House, VergeSense and Openpath. We also acquired Yonomi, a technology company and leader in IoT cloud platforms. Founded in 2013, by building automation and enterprise computing experts, Yonomi was the first to create a smart home ecosystem, one that automatically discovers and coordinates devices. Allegion was an early customer and investor. Today Yonomi solutions are used in more than 150 countries connected to millions of IoT devices. IoT - excuse me, Yonomi also holds unique intellectual property that matches well to Allegion's strategic priorities for accelerating growth through seamless access, innovation and meaningful partnership. Our goal is to be the provider of choice among IoT developers and integrators. You’ll continue to see more examples of investment in innovation through our build-borrow and buy approach in '21 and we look forward to sharing more with you in the future. Patrick will now walk you through the financials, and I'll be back later to discuss our '21 outlook and wrap up.

Thanks, Dave and good morning, everyone. Thank you for joining today's call. If you would, please go to Slide number 6. This slide reflects our earnings per share reconciliation for the first quarter. For the first quarter 2020, reported earnings per share was zero. Adjusting $1.04 for charges related to intangible asset impairments, restructuring expenses and integration costs related to acquisitions, the 2020 adjusted earnings per share was $1.04. Operational results increased earnings per share by $0.06 driven by volume leverage, along with continued benefits from cost control measures and restructuring actions taken in 2020. Favorable price and currency also contributed to the increase. The combination of these items offset the unfavorable mix. Favorable other income and interest expense increased earnings per share by $0.08 and was driven primarily by favorable unrealized investment gains in 2021 compared to unrealized investment losses experienced in 2020. Favorable share count drove another $0.03 per share impact more than offsetting the $0.01 reduction from investments. This results in adjusted first quarter 2021 earnings per share of $1.20 an increase of $0.16 cents or 15.4% compared to the prior year. Lastly, we have a $0.02 per share reduction for charges related to restructuring costs. After giving effect to these items, you arrive at the first quarter 2021 reported earnings per share of $1.18. Please go to Slide number 7. This slide depicts the components of our revenue performance for the first quarter. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we experienced a 0.5% organic revenue growth in the first quarter as solid price performance was able to offset lower volume. Although the total company volume was slightly down, we did see strength in the Americas residential and international businesses. Currency also provided a tailwind to total growth and more than offset the impact of divestitures. Please go to Slide number 8. First quarter revenues for the Allegion Americas segment were $498.9 million, down 2.6% on a reported basis and down 2.9% organically. The region continued to deliver good price realization. On volume, Americas residential was outstanding again, experiencing low 20% growth boosted by continued strength in retail point of sale, new home construction and electronics growth which nearly offset the anticipated decline in the non-residential business caused by lower new construction and discretionary project delays. Electronics revenue was down mid single-digits with growth in residential products that was offset by reduced commercial electronics driven by delays in discretionary projects. We continue to see electronics and touchless solutions as long-term growth drivers and expect electronics accelerated growth to resume when market conditions normalize. Americas adjusted operating income of $135.5 million decreased 7.6% versus the prior year period and adjusted operating margin for the quarter was down 140 basis points. The decrease was driven primarily by volume deleverage, negative mix and incremental investments partially offset by benefits from cost reduction actions and restructuring. Please go to Slide number 9. First quarter revenues for the Allegion International segment were $195.4 million, up 20.2% and up 11% on an organic basis. The organic growth was driven by strength across all major geographies and businesses as markets continue to rebound. Part of the year-over-year growth was due to the comparative impact of COVID related shutdowns in the prior year. Favorable currency impacts also contributed to total revenue growth and were slightly offset by divestiture impacts. International adjusted operating income of $18 million increased nearly 1000% versus the prior year period. Adjusted operating margin for the quarter increased by 820 basis points. The margin increase was driven primarily by solid volume leverage, benefits from lower operating costs from the restructuring cost control actions taken during 2020 as well as favorable currency impacts. This is also our first quarter reporting under the new Allegion International segment. The transition was seamless and made possible by having strong leadership in place to drive effective change. Please go to Slide number 10. Year-to-date available cash flow for the first quarter 2021 came in at $105.5 million, which is an increase of more than $86 million compared to the prior year period. The increase was driven by improvements in net working capital, higher earnings and reduced capital expenditures. Our strong cash flow generation continues to be an asset of the company. Looking at the chart to the right, it shows working capital as a percent of revenues decreased based on a 4-point quarter average. This was driven by reduced working capital needs from the lower volume throughout 2020, as well as strong collections performance. The business continues to generate strong cash flow and we remain committed to effective and efficient use of working capital. We will continue to evaluate opportunities to optimize working capital and drive effective cash flow conversion. I will now hand it back over to Dave for an update on our full year 2021 outlook.

Thank you, Patrick. Please go to Slide 11. We have more visibility into our markets and I am increasingly optimistic on the economic recovery. The Americas residential business continues to be hot and is expected to grow in 2021. We anticipate strength at residential to persist for the foreseeable future. DIY demand remained strong and the construction market is strengthened by a shortage of available new homes, continued low mortgage rates and improved trends in permits and starts. However, completion rates have been lagging starts due to labor and supply shortages, which should improve as we move further past the pandemic. Looking at the Americas non-residential business, we saw demand begin to increase on the repair retrofit projects sooner than we previously anticipated. We expect this trend to continue for the remainder of the year. In new constructions, we are starting to see positive movement in macroeconomic indicators, but it's important to remember the late cycle nature of this market. For 2021, I expect non-residential new construction to remain soft. But the monthly change in the architectural building index, Dodge construction starts and potential stimulus spending are trending favorable and assuming this continues, it will lead to growth in 2022 and beyond. Seamless access, software and electronics continue to be long-term growth drivers and they will remain our top investment priorities. They are the future of Allegion. With these parameters in place, we are now projecting total inorganic revenue in the Americas to be flat to up 1% in 2021. In the Allegion International segments, markets continue to recover and we expect full year growth in most of our international segments led by our Germanic and Global Portable Securities business. We continue to monitor the pace of vaccine rollouts internationally, as this will lead to sustainable improvements in the economic environment. Currency tailwinds more than offset the divestiture of our QMI door business and contribute to total growth. For the region, we are raising our outlook for total revenue growth to 12% to 13% with our organic growth of 7.5% to 8.5%. All in, for total Allegion, we are now projecting total revenue to be up 3% to 4% and organic revenue to increase 2% to 3%. We are also raising earnings per share outlook with reported EPS at a range of $4.85 to $5.05 per share and adjusted EPS to be between $5 and $5.15. This guide incorporates pricing actions to offset direct material inflation, as well as reflecting our supply chain capability to mitigate industry challenges on supply and electronic component shortages. We anticipate that these challenges will persist for the balance of the year and we will continue to monitor and adapt to changing market conditions. Our outlook for available cash flow is also being raised and now projected to be $430 million to $450 million. The outlook assumes investment spend of approximately $0.10 to $0.15 per share. The full year adjusted effective tax rate is expected to be approximately 12.5%. The outlook for outstanding diluted shares continues to be approximately 91 million. Please go to Slide 12. Allegion is off to a great start. We experienced reported and organic revenue growth, expanded operating margins and delivered strong cash flow. We have solid business fundamentals and a proven ability to execute and adapt to changing and uncertain market conditions. We have managed the business extremely well to set us up for success as markets returned to normal. Macroeconomic indicators and specific indices related to our business are trending positive and I'm increasingly confident in the recovery. The Allegion commitment to shareholders, employees and customers is to be stronger, exiting the pandemic than when we entered, our work continues. I want to take this opportunity to thank our employees for their diligence and dedication during the pandemic. It is their commitment that has driven the company to perform well and accelerated our vision of seamless access in a safer world. Allegion future is bright. Thank you. Now Patrick and I will be happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe just wanted to dial in on the revised Americas organic sales growth outlook. Maybe just help us understand you know how that guidance increase was split between your residential and your non-residential assumptions changing? And then within non-residential specifically, how should we think about that slope of decline shrinking over the balance of this year as you've been running at a sort of down low double-digit rate for four quarters in a row now?

Yeah. Julian so I would characterize it this way. You know, first of all, you know, during the course of the quarter, you know, things progressively got better, particularly as we looked at our non-residential business. And by that, I mean just kind of the level of activity orders, you know, customer enthusiasm, specifically related to discretionary projects. And so that piece of information plus with the improvement and uncertain indices leading indicators relative to our business, i.e., ABI new construction starts, those types of things, which I'll remind you relative to new construction, it doesn't necessarily mean it's going to be incremental business this year, but continued improvement, particularly as we look out beyond 2021. With the improvement in non-resi, you know, really relates to discretionary projects, you know are continuing to be favorable more than what we had originally anticipated. Last time, we were on the conference call, residential continues its strength really across the board. You know, just really seeing good improvement in DIY, new build construction, et cetera, we expect that strength to continue. I would just, you know, remind you, you know, keep in mind that last year as we're coming, exiting out of Q2 after the plant shutdowns, demand started to surge, we were kind of catching our feet relative to production and kind of keeping up with demand. We didn't start kind of filling channel inventory until late Q3, Q4, that will be non-recurring right this year. And so you get into a tougher comp, if you will, in the back half of this year as it relates to the residential business, but still growth on a normalized basis.

Thank you. And then my follow-up would be switching to the Americas margin outlook. So if I look in the 10-Q, you have that pricing and productivity in excess of inflation line, you know, that was only about a 20 bps tailwind to margins in the first quarter? How should we think about that playing out over the balance of the year, you know, both in terms of sort of what's happening with inflation and also your pricing measures?

It's going to be more difficult. And, you know, the reason being is the inflationary item will step up, it's going to be worse as we progress kind of throughout the course of the year. Why, because of the input costs, you know, specific to commodities and material components. The other thing I would remind you of is, remember, we talked last year about some of the boomerang effect of the cost kind of coming back in into 2021, that was not there in 2020. So that's another item, plus, you know, we're going to have incremental investments, so all those are going to weigh a little bit more on margin. And will put a, you know, more pressure, if you will, on margins in the back half of the year that, you know, for '21 that we didn't experience in 2020. But let me just add something else. I think the - on the non-resi side of things is you know, relative to the reduced volume, even though things were getting better as we progressed throughout the year, we do have volume deleverage. We have taken the necessary actions to extract variable costs, okay. So it's really a volume deleverage issue. It's not a permanent item, when volumes come back margins will accelerate and - because we've taken the necessary cost control actions.

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

Great, thank you.

The next question comes from Colton West of Longbow Research. Please go ahead.

Hi, good morning and thanks for taking my question. It looks like some great progress was made this quarter. I guess firstly, you know, as we speak to contacts and we hear of a pickup in non-res quoting activity and in the prepared remarks, you called out an acceleration on the R&R side. With where conditions stand today, are you able to give us a more concrete sense of when we start to see orders and then the corresponding top line growth? And this is something you know, do we start to see quotes turn into orders as early as 2Q? Or is this - does this not materialize until maybe the back half for next year?

You know, we see some favorable indicators, one, the broader indicators that you all see, ABI, Dodge, you know, it's, you know, starts, not Dodge starts. But momentum. So we like what we see there too. Our own specification is up. The challenge with that is specification doesn't mean orders tomorrow or next week or even next quarter, you know, we would see that, you know, gaining momentum as we exit '21 and then into '22. I also like the, you know, where the investment is going in terms of our mix and strengths of the company, as we see end markets dynamics, you know, in major projects and in construction, hospitals, K through 12, college campuses and institutions, that's where the market is rebounding and it attends to complement the strengths of the company.

Okay. And then my next one is from sort of a 30,000 foot view. Would you consider the current level of earnings to be trough earnings? And if so, can you walk us through the moving parts that will push earnings to the next peak?

Yeah, so, you know, I would characterize, you know, the earnings, you know, really good performance, obviously in Q1. You know, if we look at the full year guide, you know, kind of in line with last year, in terms of where we ended up. You know, I would expect, you know, what the improvement in terms of our outlook, particularly on the non-residential business gaining momentum that will hopefully continue to accelerate in 2022. As I mentioned before, you would see continuous improvement in margins relative to that business, with the continuation of residential in the strength of the end markets, would expect growth there. So, yeah, I would characterize, you know, as long as the end markets continue to be favorable, you know, we'll see, you know, earnings growth, you know, accelerate, you know, from '22 and beyond.

Okay, great. That's all I had. Thank you.

The next question comes from Andrew Obin of Bank of America. Please go ahead.

Yes. Good morning.

Good morning, Andrew.

Yeah, so a question in the last stimulus bill, and I think HVAC companies had been talking about it and also electrical companies have been talking about it. There's a lot of money allocated for schools. And I think, if you look in the last stimulus, I think 70% of the money was spent on capital improvement project, right. And the money seems to be like sort of $67 billion a year for the next three years. So, you know, I think HVAC companies and electrical companies are talking about the fact that they'll see an impact from this in next quarter, right, because you do a school remodeling in the summer. So institutional vertical is quite a big deal for you guys. Are you going to see any impact from it? And what's your assessment of the impact of this portion of the stimulus on your business this year and next year? Thank you.

So thanks for your question. You know we absolutely see the billions of dollars that are being allocated into K through 12's campuses. We will see benefit from that, hard to quantify each project, you know, we'll have different attributes, but it's clear, school security remains on the minds of Americans. And I think to the rise in violence, which is disturbing across the country, you know, will coupled with the stimulus, school security will get a portion of that investment and benefit Allegion.

Great. But is it in your guidance here or is it just too hard to quantify at this point?

You know, I would say, Andrew, a little bit too hard to quantify at this point. However, you know, as we talked about earlier, a step up in terms of order activity relative to discretionary projects, we did see and that will turn into we'll call it, new business, you know, Q2, Q3 type of timeframe. But I think trying to kind of quantify a larger impact specific to the stimulus bill right now is probably premature.

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

Got you. And just a follow-up question on international sort of starting to build impressive momentum there in terms of operating turnaround. Can you just give us more granularity you know, what's driving it? Is it Italy? Is it Poland? Is it Korea? Is it Australia? As I said, it's been all of a sudden, there's real momentum, just would love to get a better sense of what's happening there. Thank you.

So, one, remember the pandemic started, you know, internationally before it started here. So you know, Asia Pacific, particularly Italy hit hard early. So we're seeing that recovery, even though the pandemic continues to move. Number two, our continued investment in electronics and software, our Interflex and SimonsVoss businesses are performing extremely well and quite proud of the work. The leverage of investment to drive top line which we will continue. Third, success in our GPS business, you know, for those of you that have gone to try and buy a bike, there's no inventory in, and we made supply chain changes that gives us some advantages versus importers. We like that. And then we're beginning to see early recovery as well, Australia, New Zealand, remember, our Gainsborough acquisition as residential recovery drives in Australia we'll do extremely well there. I'd add something else. Over the last four to five quarters, we've been working hard to reposition that. We collapsed, you know, three divisions into two that gave us some cost efficiencies, driving more accountability down and the ability to invest back in those businesses for future growth. I like our position and the future's bright as we move through recovery.

Thank you. Really appreciate it.

The next question comes from Tim Wojs with Baird. Please go ahead.

Hey, everybody. Good morning. Nice work.

Thanks, Tim.

Thank you, Tim.

Maybe just a bigger picture question for you guys. Just as you're seeing buildings reopened where in the budget stack is security from a priority perspective? And I guess I'm just kind of wondering if you're seeing other areas within buildings like HVAC taking focus away from security? Are you seeing kind of the interest in the budget priorities, you know, relatively unchanged relative to where they were pre-COVID?

I would describe it as this, and I think it's consistent as I have painted it. I think over the last 12 months, there's been absence of any type of preventive maintenance and small project work because the focus was on the health and safety of the occupants of buildings. I believe what we saw strongly, you know, beginning mid-March and continues on is the return of that, people going after those projects, those small projects preventive maintenance activity, particularly if it's security related, carry a pretty high priority versus other preventive maintenance aspects. Let's say the door doesn't show up properly, it's not locking, I have a security breach. You know, maintenance people are always making tradeoffs as we move into the air-conditioning season, where we don't have a heat, those tends to be a, you know, a red priority, we could fall into yellow. But, Tim, I believe there's an absence - there have been an absence of preventive maintenance, the small projects and those are moving in, I believe the budgets are there. I've also been refreshed that in larger projects that have - that were delayed, those are coming back, you know, in the mid price project level. An example would be the University of Tennessee, they had a project, you know, that was, you know, slated to go in '20, that's come back on. So, you know, was fully budgeted. I think, again, what that will naturally occur and we'll get our share of that wallet and as the new construction comes back, it will add more momentum to Allegion.

Okay. Okay, great, that's good to hear. And then maybe just my second question, just on the M&A side of things. How would you kind of characterize the development in the pipeline over the last three months to six months? And any sort of increased, you know, kind of activity or actionability there, you know, just given you know, like more of a meeting of the minds in terms of, you know, people's perspective on the end market?

I would say, the attention of the leadership team has never been stronger. You know, focused on, you know, moves that can help improve the scale of Allegion. We believe as we move harder in seamless access scale matters, we're pushing hard on moves that we think would help us participate in the connection of access, seamless access at a faster pace. I'd say less time spent on you know, smaller projects and deals. But you know, we've been working on this now for seven, eight years and we're pushing on those relationships. We believe there's further consolidation opportunities within the market. And the faster that we, you know, accelerate this convergence it's going to force some action.

Okay. Okay, great. Well, good luck on the rest of year guys. Nice job.

Thank you. Good to hear from you.

The next question comes from John Walsh with Credit Suisse. Please go ahead.

Hi, good morning and really impressive execution in the international business. Wanted to actually ask you about where you see the margins going for that segment now? I mean, really strong out of the gate here with that kind of high end of upper single-digits performance? What should we kind of be thinking about for the full year there in terms of margins?

Yeah, John. So, you know, again, as you indicated, really strong performance, you know, both top line and you know, margin, you know, rates, particularly relative compared to prior year. Just as a reminder, you may recall last year, we were pretty quick out of the gate in terms of implementing cost control measures, you know, going in with the restructuring programs across the board, in Asia as well as Europe. And so you're seeing kind of the full benefit of that, if you will, reflected in the '21 results. So the restructuring actions taken last year begin to lap in the back half of the year. So you're not going to see kind of a step up in the margin performance that you saw in Q1. However, I would suggest that margins will continue to improve year-over-year, you know, as we continue throughout the year, and we should finish on an aggregate basis, i.e. the consolidation of Asia and Europe together, that kind of a record performance in terms of margin percent. And that's really reflective as Dave kind of highlighted earlier, the continued strength in electronics, which has a higher margin profile, the - all the cost reduction actions that we've taken will continue to manifest itself and the collapse and consolidation of the two segments together, we're seeing the benefits of that as well. I feel like we're in a really good position kind of going forward, not only to drive top line, but ensure that we do it in a profitable basis and we continue from here on out getting margin accretion as the business continues to grow.

Great, thank you. And then just as a follow-up, I think it was in response to Julian's question about residential, you called out kind of some stock orders in Q3, Q4, just curious here in Q1, if you were still seeing those stock orders or if kind of sell in is equal to sell out at this point? Yeah.

Yeah, so we did experience some of that, not to the magnitude that we did in the latter half of last year. And I would say too, you know, quite frankly, if you kind of look at inventory levels in the channel, you know, particularly a big box like that on like a trailing kind of 12-month basis, basis of future demand, still probably lower than where it needs to be. So it's a matter of kind of, you know, trying to produce at a higher level, which is difficult right now, kind of given some of the supply constraints in our business. So there is maybe a little bit more that we could put into the channel. But you know, right now as that we're kind of assuming we're more on a normalized basis, producing, you know, basis of demand type of thing.

Great. Appreciate taking the questions. Thank you.

The next question comes from Jeff Sprague with Vertical Research. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Jeff.

Yeah, I just wanted to put my finger a little bit more on kind of the cyclical trajectory also. And I thought maybe it'd be helpful to kind of discuss things a little bit sequentially, given how wild some of the year-over-year comps are with COVID and the like. Just thinking about Americas in aggregate, right, with commercial coming off the bottom and resi still strong I mean, is there any reason to think you don't have your normal sequential lift in revenues there from Q1 to Q2?

I think, you know, first, let's look at the lay of the land, you know, backwards. You know, we had the rupture of the pandemic, then let's go even back, we had a record Q1, we had the rupture of the pandemic, but as we compare to competition, I believe we were stronger, you know, quarter in, quarter out over several of the last quarter. So, you know, whether it was up or down the sequential nature of it, remember, we talked about, you know, plowing through our backlog. So with that as a backdrop, as we move through, we should expect some lift in the second and third quarters that we would normally see. I think that's why we highlight the return of the discretionary and small projects, which I think will certainly be better than it was a year ago. The but is, you know, that new construction demand is not as robust as it was going into the pandemic. So I think it takes '21 to normalize itself. And we'll see, probably a truer picture of what the markets going to be and we believe better as we go into '22.

Yeah, the nature of my question is really, you know, I hate to just kind of play math exercise with you, right. But, you know, Q2 sales typically rise 15% to 20% sequentially, right. For that to happen, you know, you need almost 30% organic growth in Q2. And if you do 30% organic growth in Q2, you know, you're implying kind of negative 10% in the back half to get to your guide.

Patrick will have the math, I would suggest, and we are suggesting a forecast that's not going to happen. And I think one of the key drivers is new - non-residential construction starts, they had been down 28% for the last four quarters. And that is clearly a driver of our business that's got to be in place to get that type of ramp.

So, Jeff, keep in mind, going into Q2 last year, we're coming off a record quarter Q1 2020. Backlogs were really, really healthy both on discretionary, new construction you know, projects that were started were kind of still being completed some of them may have been delayed and pushed out during the back half of the year. So you still have a real tough comp on non-res, okay, new construction, it begins to improve year-over-year and sequentially, but by Q2 is still going to be, you know, a non-resi now, okay, non-residential, a non-resi still kind of be tough, okay. We didn't have plant shutdowns like we did in residential business in Q2.

Right, thank you.

The next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

Hey, good morning, guys.

Good morning, Josh.

Hi, Josh.

Dave, just on a bit of a snap the line update versus where you were in kind of three months or six months ago. I think the expectation was that when we get into the second half, folks will be back in, you know, some of these institutions or offices and will drive some retrofit activity. It sounds like some of that is starting to percolate a bit quicker. But I guess one, am I reading that right? And two, is that something that could show up as soon as 2Q? I know, there's still plenty of chop in the new side of the market, but you know just versus that prior expectation of a second half improvement in non-resi retrofit.

I want to be very clear. Beginning mid-March and through today, we saw an uplift in wholesale and CHD demand that we believe is part of you know, an air pocket that we saw 12 months earlier, preventive maintenance, small projects were delayed. And that's come back and we're very pleased to see that. It was a little earlier, I think the results of the vaccination success we're having here in the US has driven that and overall confidence. So you know, feel good about that. We added to Allegion's commercial - or commercial and institutional backlog in the Americas during the period. And we continue to believe that will - that demand will continue. I think the challenge is that new construction backlog which you know, the projects are complete, I think it's evident in the starts data that comes out of Dodge, and we just got to work through that. I think we've got a reasonable view on it. Again, market demand was better than we anticipated in Q1, reasonably better, it's still softer than it was a year ago.

Got it. That's helpful and maybe that just to follow-up on that. And I think this sort of gets to what Jeff was asking as well. I get the - there's still plenty of uncertainty on new construction. And you just sort of prefaced that with your answer just now that the non-res new backlog is still lower. But, is it lower than what you would have thought a few months ago? I guess that would sort of imply some higher level of conversion. So I guess that's always possible. But it sounds like the market itself is doing better from an orders' perspective just trying to balance that, you know, maybe heightened caution on the back on comment even though I don't know if anything's really changed for you.

I would say you know, the new construction activity is, you know, performing as we would anticipate and we see the benefits of that really rolling in into '22. And it's the nature of the beast. I would also emphasize this. However the market performs, on the retrofits small project and new construction, I believe that we've made the investments here that will continue to beat the market.

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

Thank you.

The next question comes from Chris Snyder with UBS. Please go ahead.

Thank you. Just following-up a little bit more on the non-res comments. If starts inflect to positive here shortly when could we expect the new construction business to bottom? And then just any color you could provide on the R&R trajectory embedded in the 2021 guidance?

I would say, if starts inflect and we believe they'll gain momentum as we go through the year you really see the benefits of that in '22, because dirt in the ground today does not mean revenues for Allegion tomorrow, this is a long cycle nature, most building projects that, you know, have a 12 month to 18-month duration, especially in our sweet spots. And that's how I'd paint it. I'm extremely encouraged by the uplift of our specification activity and the broader indices. And I think, coupled that with the stimulus, you know, we feel good about where this business is going.

Appreciate that - all that color. And then, you know, just kind of following up. So non-res has been running at a low double-digit or down low double-digits for the last three quarters. Can you provide any color on the under the surface movements between new construction, which kind of based on your last comment seems like it would be continually getting worse through at least Q1, and just, you know, any mix there between new construction or just the under the surface movements?

As you know, we don't really give specific guidance associated with a breakdown in those, you know, kind of end markets, but, you know, I would, you know, characterize it this way that, you know, continued, you know, pressure as we kind of continue to go through '21, relative to new construction, year-over-year, but getting sequentially better in the back half of the year, i.e. as we progress, the rate of decline becomes less. The repair and retrofit was the first area that kind of saw the decline, you know, last year and that will start to hopefully improve in the back half of the year, you know, year-over-year, but keep in mind, the new construction part of our non-residential business is roughly 65% relative to or compared to the discretionary total.

I would also -

Appreciate that -

…suggest you know, just a little bit more color on that. The range of capabilities that Allegion has today, opening price point, mid price point and full price point in terms of our commercial and institution offerings is it’s significantly better than it was in the last downturn. We're seeing that growth, we're flexing, you know, our strength in the channel to make sure if the dollar’s available for revenue, that we get more than our fair share of that.

Thank you.

The next question comes from Ryan Merkel with William Blair. Please go ahead.

Hey, everyone. First off, can you just talk about the supply chain pressures you're seeing? And is this risk manageable? Or are you expecting to see a revenue impact in '21?

So, you know, our record speaks for itself here, I think the Allegion's supply chain has performed exceptionally you know, through the last five quarters. You know, it's because of this, you know, strategic choice that we make to produce, you know, in region and it's benefiting us in a lot of ways. There are clear and obvious pressures, particularly on electronics and we're certainly adapting to those. You know, there could be, you know, some shutdowns in terms of we're not able to produce specific products. With that in mind, we were very aggressive early to put in long-term orders to secure our supply chains, we've got tight, vendor relations. And again, my confidence is, yes, we can be affected, but we will navigate it better than the competition.

And I would add that, you know, the current guide assumes that we're going to help mitigate the impact of the inefficiencies. You know, I feel good about that, where we stand today. However, you know, continued pressure there does create inefficiencies, you know, to the extent, you know, we're unable to procure the appropriate supplies needed to produce the products. And so kind of remains to be seen, but we're managing through it. Some of our product lines, you know particularly electronics are hand to mouth and it does create, you know, inefficiencies, but we're working through those issues.

That's helpful -

I would also, you know - 40 years of dealing with this type of thing we made moves early, you know, that will help us. And we're extremely proud of our supply team. And you know, what they've done to mitigate a variety of issues and we were well out ahead of this, and I think we'll come out of it stronger.

Got it. All right and then just quickly, you know, great to hear the non-res rentals coming back. Is that a broad-based comment? Or is it just happening in certain sectors today?

So, you know, I think if you go across the geographies, you know, we see stronger activity, particularly in the South, East Texas, you can kind of look at where COVID’s come, you know, had harder hits or, you know, where shutdowns have been harder, you know, it reflects the strength as you go into the different segments, think about, were you completing your preventive maintenance list at any hospital in the United States over the last, you know, 15 months? I would suggest the answer is no. College campuses are similar and we see confidence in our wholesale distribution orders, incoming orders. And it's going into those segments that have really been, you know, battered in their ability just to, you know, meet the needs of their customers.

Perfect, thanks.

Thank you.

The next question comes from Jeff Kessler with Imperial Capital. Please go ahead.

Thank you and thank you for taking the question. First, just quickly on international, again, congratulations on the numbers. You've explained them. I'd love to give Tim all the credit. But of course, I won't yet. But I do want to know, what his game plan is or what the game plan is for getting what in general for getting in International, essentially moving so that the - so that currency and other factors are not what we're going to be talking about in two or three years. But the - but gains in market share, et cetera. Because obviously, having international move forward is just another quiver in your growth cap.

So, you know, Tim does have a lot of instant talent. And, you know, we give him you know, great kudos in the first 90 days. Jeff, there - there's been a tremendous amount of work that's gone on in that business over the last couple of years. And one is, you know, I talked about the restructuring, significant investment in prioritization around Interflex and SimonsVoss really nice growth over the last six quarters, the Interflex and SimonsVoss performed exceptionally during the pandemic, and I think that momentum will continue. As you think about strategic priorities for Tim, it's to continue that growth and expand the cloud and technical capabilities. You know better than others that SimonsVoss really thrives on what we call active technologies. Driving more investment that goes into some of the passive areas will help fuel those - their growth which could include also acquisition. But we like that SimonsVoss Interflex. I think, second important for Tim, is, we acquired the Gainsborough asset, that's well positioned. We launched the first electronic tri-lock in the region. And we think we're well positioned to be with new - in the newbuild and the DIY to see nice growth as that residential market recovers in Gainsborough. I think third what has been surprising to Tim in his first 90 days, is the opportunity to export more capability from the Americas which he has more knowledge than anybody in the company, and you know, so looking forward to taking some of the real strengths we have here in the Americas and helping our international partners grow even faster.

Okay. My follow-up question quickly is and maybe the answer may not be so quick, is, just underneath your level, I would say we're perhaps down level from where you folks operate, we're seeing a shift, some - a small shift in growth from away from video and toward we'll call it, you want to call it software-based access control, everything from obviously NFC to Bluetooth to ultrahigh frequency as well as, you know, as - just as well as the just power, you know, Power over Ethernet, which you folks know a little bit about. And what we're also seeing - is simply put a gain in software as the driver as opposed to hardware as a driver in getting into access control. And with access control, let's say becoming a faster growth area than even video, and we've seen some crazy valuations in the venture and private equity markets for some of these companies that are getting involved in areas that are either adjacent to you or actually may compete with you from intercoms all the way to you know to SaaS-based things. What is the company looking at in terms of, you know, trying to make sure that both protects its flank and grow this business?

So, I would describe it as one of the most exciting opportunities that I've seen in you know my 40 years of industrial participation. The company has been invested heavily and increased our investment as we went through the pandemic, you know, the, Yonomi acquisition would be reflective. But if you looked under the covers and saw the growth of our investments in Bangalore and our engineering capabilities, since I created - since we created Allegion, we tripled the feet on the street there to be able to position ourselves more strongly in the connectivity and the software elements. Third, Jeff, would be the venture activity you know, and you see some of the investments Kasa, Mint House, Openpath, I don't believe we - our strategy has been to be in the fast lanes to you know with new technology to be observe, learn, partner, invest potentially own, Yonomi went through that entire cycle. I think we continue to sharpen our position and I like our opportunities to be able to participate in the world of seamless access that you described.

All right, great. Look forward to interacting with you guys in the future. Thank you.

We're always a leader in this and we appreciate your thought leadership, Jeff. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Martineau for any closing remarks.

We'd like to thank everybody for participating in today's call and have a safe day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.