Good morning, and welcome to the Allegion Second Quarter 2021 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Tom Martineau. Please go ahead.
Thank you, Andrew. Good morning. Welcome and thank you for joining us for Allegion's Q2 2021 earnings call. With me today are Dave Petratis, Chairman, President and Chief Executive Officer and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning and the presentation, which we will refer to in today's call, are available on our website at investor.
Allegion .com. This call will be recorded and archived on our website. Please go to Slides 23. 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 projections.
The company assumes no obligation to update these forward looking statements. Today's presentation and commentary include non GAAP measures. Please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will now discuss our 2nd quarter 2021 results, which will be followed by a Q and A session. Please, for the Q and A, we would like to ask each caller to limit 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. Allegion delivered a very strong quarter and I would like to thank the employees of Allegion for their contributions and efforts. Our employees are the greatest adapt to opportunities in a dynamic market. Before I jump into the financials, I want to give you a high level update on recovery trends and the business overall.
The pandemic has changed our world and created volatility throughout the last 18 months, both in terms of the economic contraction last year and the current economic rebound we are seeing. This is a positive sign and provides confidence in the sustainable economic recovery. In fact, Allegion is already returning to pre pandemic demand levels. At the same time, the robust Demand is constraining the global supply chain's ability to fully meet the pull for labor and materials, specialty electronic components. Allegion has built a record non residential backlog in 2021, which is a healthy sign of strong demand, and we believe Allegion will be well positioned for the remainder of this year and for 2022.
And another positive sign of recovery, our Americas Electronics grew more than 20% in the second quarter. There was strong demand for electronic residential products and in the non residential retrofit repair and small project opportunities. Allegion is not immune to inflation and the supply chain constraints impacting industrial markets. Allegion navigated well during Q2, but these industry wide constraints will persist for the remainder of the year and put pressure on margins for the short term. We will leverage the strength of our supply chain management capabilities as well as price to mitigate these impacts.
During the pandemic, we were also able to restructure the business and make it leaner, while keeping our front facing and strategic investments. Allegion is stronger exiting the pandemic than when we entered it. Now let's turn to the Q2 performance for more details. Please go to Slide 5. I am pleased with the company's 2nd quarter results.
We delivered strong performance in all areas. Revenue for the 2nd quarter was $746,900,000 an increase of 26 7% or 23.8 percent organically. The organic revenue increase was driven by the favorable comparable created by last year's shutdowns, solid price realization from the price increase announced earlier this year and the increased market demand, which returned to pre pandemic levels. Currency tailwinds provided a boost to total revenue and more than offset the impact Adjusted operating margin increased by 70 basis points in the second quarter. The restructuring and cost management taken during 2020 along with volume leverage have offset the accelerated inflation.
We are also seeing cost creep back from reductions experienced last year during the pandemic. Mix is also a margin headwind due to our strong residential growth. Adjusted earnings per share of $1.32 increased $0.40 or 43.5 percent versus the prior year. The increase was driven largely by the expanded operating income with some benefits also coming from a favorable tax rate and share count. Year to date available cash flow came in at $249,600,000 an increase of $146,000,000 versus the prior year.
The increased cash flow was driven by higher net earnings along with improvements in networking capital and reduced capital expenditures. Please go to Slide 6. Last quarter, I shared with you Allegion's build, borrow, buy approach to accelerating seamless access. Today, I want to briefly focus on the borrow innovation engine and our strategic pillar to be the partner of choice. Allegion participates in recognized secure industry leading platforms.
We expand our reach through strategic relationships with recognized experts and tech innovators and we leverage open standards. By doing this, we not only set up Allegion as the partner of choice and a continued leader in the IoT marketplace, we also ensure Allegion has its Choice of Strategic Partners as well. Allegion has a growing breadth of strategic partners. Megatext, Software and Product Integrators, our Venture Portfolio and Technology Alliance and Industry Consortium. We are executing on our partnership strategic pillar and here are a few recent examples.
Allegion was showcased at Apple's Worldwide Developer Conference. We are expanding our innovation with Apple in both the residential commercial marketplaces. In the smart home space, Schlage will soon be growing its connected portfolio with a new device that allows people to easily and securely unlock their doors with just a tap using home keys for the iPhone or the Apple Watch. At the same time, we are extending our work with student ID in the Apple Wallet to for more access control options to universities and colleges, enterprises and their students plus employees. Allegion renewed our engagement with the Matterword Group, a mega tech consortium.
Through this partnership, we're working to establish a Pure Connectivity Standard for the future of the smart home that will ultimately allow more seamless connections between more IoT devices. We announced Allegion Venture Investments in both MinHouse and Mapped 2 startups driving new value in a post COVID world through revolutionary experiences and technology. And we completed a brand new cloud to cloud integration with OpenPath, leveraging our Engage technology and Schlage NDE and the LE mobile enabled Through these partnerships, we're investing in promising innovation. We're leveraging developer friendly APIs and Open Standards. Allegion is building strategic, commercial and technical relationships.
We are collaborating with recognized experts who also understand and embrace how Allegion creates value by securing people and assets with seamless access wherever they reside, work and thrive. Patrick will now take you through the financial results and I'll be back to discuss our revised 21 outlook and a wrap up.
Thanks, Dave, and good morning, everyone. Thank you for joining today's call. Please go to Slide 7. This slide reflects our earnings per share reconciliation for the Q2. For the Q2 20 reported earnings per share was $0.80 adjusting 0 point 12 dollars for charges related to restructuring expenses, the 2020 adjusted earnings per share was $0.92 Operational results increased earnings per share by volume leverage, along with continued benefits from cost control measures and restructuring actions taken in 2020.
Favorable price and currency also contributed to the increase. The combination of these items offset headwinds from inflation, balance backed variable costs related to reduced volume from the COVID-nineteen pandemic and unfavorable mix. Favorable tax rate drove a $0.06 increase in earnings per share. Divestitures had a positive $0.01 per share impact and offset the impact of other income and interest expense. Investment spend increased during the quarter and reduced earnings per share by $0.05 As a reminder, the incremental investment spend is predominantly related to R and D, technology investments to accelerate future growth.
This results in adjusted second quarter 2021 earnings per share of $1.32 an increase of $0.40 or 43.5 percent compared to the prior year. Lastly, we had a $0.01 per share reduction related to restructuring charges and acquisition and integration expenses. After giving effect to these items, you This slide depicts the components of our revenue performance for the Q2. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we experienced organic revenue growth of 23.8% in the 2nd quarter as higher demand and a favorable comparable drove significant volume increases versus the prior year.
We also experienced solid price performance coming in over 2%, which is up sequentially. Currency continued to be a tailwind to total growth and more than offset the impact of divestitures. In total, reported revenue came in at 26 point 7% growth. Please go to Slide number 9. 2nd quarter revenues 0.9% organically.
While the strong growth reflects the impact of COVID related shutdowns last year, it is also the result of accelerated market demand. The region continued to deliver good price realization. On volume, America's non residential experienced high single digit growth driven by retrofit repair and small projects. Americas residential was outstanding again, experiencing growth of more than 70%. The significant growth from the prior year was primarily due to facility closures in 2020.
However, we continue to see strength in retail point of sale and new home construction. Electronics revenue was up high 20s set. We experienced electronics growth in both the non residential and residential businesses. Electronics and touchless solutions will continue to be a long term growth drivers. The accelerated demand coupled with labor and parts shortages, especially in electronic components is resulting in elevated backlogs as we enter the Q3, particularly in non residential.
The timing of when we see the revenue could shift as the industry works through the supply chain constraints. Americas adjusted operating income of 150 point $5,000,000 increased 21.3 percent versus the prior year period and adjusted operating margin for the quarter was down basis points. The decrease was driven by headwinds related to inflation, bounce back costs and unfavorable mix more than offsetting the volume leverage. While the price productivity inflation dynamic was slightly positive on a dollar basis, it did have a 60 basis point dilutive impact on adjusted margins as did the incremental investment spend. Please go to Slide number 10.
2nd quarter revenues for the Allegion International segment were $197,500,000 up 36 and up 26.6 percent on an organic basis. The organic growth was driven predominantly by strength across all European countries 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 $18,500,000 increased more than $18,000,000 versus the prior year period.
Adjusted operating margin for the quarter increased by 9 20 basis points. The margin increase was driven primarily by solid volume leverage, benefits from lower operating costs due to the restructuring and cost control actions during 2020 as well as favorable currency impacts. All of these offset the higher inflation and bounce back cost, which had 150 basis point impact and incremental investments, which were a 20 basis point headwind. Please go to Slide number 11. Year to date available cash flow for the Q2 2021 came in at 249 point $6,000,000 which is an increase of $146,000,000 compared to the prior year period.
The increase was driven by higher earnings, improvements capital and reduced capital expenditures. Our cash flow generation continues to be a strong asset for 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 proved asset turnover in both receivables and inventory. The business continues to generate strong cash flow and is well positioned to deliver $500,000,000 available cash flow for the year.
I will now hand it back over to Dave date for our full year 2021 outlook.
Thank you, Patrick. Please go to Slide number 12. At the end of Q2, leading indicators continue to be positive. I'm increasingly optimistic on the economic recovery. Americas Residential business continues to be hot.
On the non residential side of Americas, demand accelerated for retrofit repair and small projects and is recovering in new construction. However, labor and power charges are proving to be challenging and we are building a strong backlog that will benefit us in the future. With these parameters in place, we are raising our outlook for total revenue in the Americas to be up 4.5% to 5% and organic revenue to be up 4% to 4.5% in In the Allegion International segments, markets continue to recover led by our Germanic and Global Portable Security Businesses. Currency tailwinds more than offset the divestiture of our QMI door business and contribute
to total growth.
For that region, we are raising our outlook for total revenue growth to 13.5 to 14.5% with organic growth of 8.5% to 9.5%. All in for Total Allegion, we are now projecting total revenue to be up 7% to 7.5% and organic revenue to increase to 5.5% to 6 percent. We are also raising our earnings per share outlook with reported EPS at a range of $5.15 to $5.30 and adjusted EPS to be between $5.25 $5.40 This guide incorporates pricing actions to mitigate the expected pack of direct material inflation. We anticipate these inflationary challenges will persist for the balance of the year and we will continue to monitor and adapt to changing market conditions. Our outlook for available cash flow is also being raised and is now projected to be $490,000,000 to $510,000,000 The outlook assumes investment spend of approximately $0.20 per share.
The full adjusted effective tax rate is expected to be approximately 12%. The outlook for outstanding diluted shares continues be approximately 91,000,000 shares. Please go to Slide 13. Allegion continued its great start in 20 We have managed the business extremely well and leading indicators of specific market indices related to our business continue to be positive. Looking forward, we are prepared to navigate the pressures related to accelerated inflation and labor and part shortages.
We are encouraged by the positive resiliency of our supply chain and we will continue to manage these challenges just for the balance of the year. Thank you. Now Patrick and I will be happy to take your questions.
We will now begin the question and answer session. Then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Josh Pompa Wincky with Morgan Stanley.
Please go ahead.
Hi, good morning guys.
Good morning, Josh.
So I guess First question on the margin front. Obviously, there's kind of the tyranny of the math on price cost, you know, you're positive on a dollar basis. And I would imagine a little bit of mix headwind on the resi side as well. But if you just kind of take a giant step back and put some of the mechanical items aside, do you feel like getting price or managing inflation and all the other kind of inflationary headwind labor is any different than it has been normally or is that has gotten a little bit more challenging and sort of hard to parse through some of the different moving pieces there?
Yes, I would characterize it this way, and you're right. There's a lot of tyranny in the math. But what we've seen is an acceleration of inflation predominantly in commodity cost, sub material components, freight, packaging, etcetera. It's continued to be a headwind. As you know, we're pretty aggressive moving on price and we're taking Similar actions in the back half of this year.
We've went ahead and announced a price increase that will take effect at the beginning of Q4. So, there is going to be some margin pressure, I would say, given the acceleration inflation, particularly in Q3. I expect price to offset material inflation. The issue is really in some of the other components as it relates to packaging, freight, those type of things. We'll drive productivity to help mitigate those type of things like we have previously, but it's going to be a challenge.
There'll be some margin pressure in the back half of the year, but I feel very Confident relative to margin improvement as we go into 2022 predominantly because of the carryover in price and we'll continue to take pricing actions next year. We'll have an improved mix profile as it relates The non residential business growing faster and accelerating more so than the residential business and we're not going to have these bounce back costs, which were an issue for us in Q2 and will kind of linger during Q3, Q4 this year. So I think to answer your question, Josh, we'll continue to manage the business. We'll get through some of these supply chain challenges. That in of itself will also put a little bit of margin pressure because of some of the inefficiencies at the factories, but we'll manage through it.
Margins sequentially We'll improve in the second half relative to the first half, still down year over year, but then in 2020, expect margin improvement to All right.
Got it. That's helpful. And then I guess just a follow-up on the comment, Dave, you made on record backlog. Maybe if you could unpack that a little. So imagine some of that is resi where you probably don't Really want a lot of backlog there and it's more indicative of lead times and supply chain stuff than it is necessarily like long cycle business.
So maybe break down the components of that of how much is non resi as a market getting and reopening in retrofit versus we're just carrying more backlog in resi because the whole supply chain Thanks.
So, I want to be clear, the backlog issue is not a residential problem. Our residential backlog, Slightly above what we'd normally run. The backlog creation has been on the commercial side of the business And the rapid build has really happened over the last 60 to 90 days. The commercial backlog predominantly on the Americas business is double normal and It was really driven by the acceleration of order demand that we started seeing in April. And I'll give you some backdrop here.
If you go back December, January, February, March, and we would have talked about this in the Q1 call, commercial institutional demand in the Americas business was down low double digits and it's like Someone turned on a light and it's extremely pleased with that demand acceleration. We're doing a good job of, I think, processing that through, but there's supply constraints and it's resulted in a record backlog that I think we'll continue to see. There's been that I think we'll continue to see. There's been analysts out there that have said we've done a better job of managing this and I believe that to be true. Our supply chain is strong and we're going to Supply chain is strong and we're going to benefit from that trend.
I'd also share one other comment is The macroeconomic forecast on what I'd say, the commercial break fix was not particularly clear. In fact, I've got economic reports that would suggest that the replacement would have been soft even today. That switch came back on. We've gained that opportunity. So why couldn't we have seen it?
When you shut off access to college campuses, hospitals and commercial buildings for 400 Dave, you get pent up demand and that's what we're seeing reacting positively in the marketplace.
Got it. Very helpful. Thanks, guys. Thank you.
The next question comes from Chris Snyder with UBS. Please go ahead.
Thank you. And I just hey, good morning guys. Thank you. And I kind of want to follow-up on the margin commentary, but maybe from a bit of a angle. So guidance implies a pretty material ramp in margins into the back half of 2021.
My back of
the envelope math puts maybe
margin in the low 21% range versus low to mid-nineteen percent s in the first half. Can you just kind of help unpack the drivers of this step higher? Because guidance is not implying much volume leverage into the half. So is this more price catching up to cost, freight normalizing, mix normalizing? Any color on that step higher into the back half would be appreciated.
Yes. So that trend is not uncharacteristic from a seasonality perspective. Margins, If
you kind of look at
it over historical time period, stronger back half of the year. So that's not unusual. I think as we characterize sequentially margins are expected to increase. It's the year over year comparisons that we would expect some degradation just kind of given some of the things we outlined To inflation.
Appreciate that. And then I guess following up also on the record backlogs. It sounds like revenue on some level was constrained just by the supply chain issues that everyone is feeling. And it also sounds like the back half or the full year growth guidance is also reflecting uncertainty as to when these backlogs will be released whether it's the back half of 'twenty one or into 'twenty two. Could you provide any color on maybe how much Sure.
How significant revenues were maybe constrained in the quarter just because of those supply chain issues? And then how we what level of maybe supply chain conservatism is baked into the full year organic growth guidance?
So we when we look at the demand relative to what we could ship, I mean, there is going to be a disconnect there, just kind of Then the supply chain constraints and I think you're aware, Chris, we normally carry a light backlog, highly specified engineered product, quick turnover in our manufacturing facilities to the customer. That has been elevated kind of given But to answer your question specifically, it could be 1%, 1.5% kind of total revenue, Allegion that's constrained that we'll get the revenue. So it's not a question of if, it's just a question of timing. So We look at it as a timing kind of transitory issue. And if the supply chain strengths persist, we'll get that in 2022, which means revenue at 2022 would be accelerated more so than the overall market demand.
Thank you
for that.
I would add a couple other comments. Clearly, supply constraints and the rapid acceleration of demand that we saw help build backlog. I would We will over this entire pandemic and downturn, the resiliency of the Allegion supply chain, I believe was stronger than the competition. And we're going to come out of this better. So, I feel good about that.
I think the other thing you've got to think about, we're not alone in this. In the retrofit community and new construction, the entire project is affected by this and we just got to navigate in that environment.
Appreciate that. Thank you.
The next question comes from Brian Gruntenberg of Imperial Capital. Please go ahead.
Yes. Thank you very much. So I have two questions. Can you talk about the commercial office performance in the quarter, how much was this sector down year over year? How much did commercial office represent in terms of revenue in the quarter?
I'm trying to get a data point where you are?
Yes. So we don't really provide revenue by vertical market. But I would just say in terms of market demand, I. E. Order intake activity, what we're seeing in specification, etcetera, commercial office space is lagging institutional segment And a lot of that is just not kind of keeping pace with what we're seeing in terms of the rebound and repair retrofit So hopefully that provides you with ample color there.
I'll maybe give you a little bit more. Again, we don't split out that commercial segment as a standalone, but the strength that we saw in the first half was really driven by strong wholesale, small project and retrofit business. Where that business ends up, we don't have precise data on, but there The snapback of that volume would say, even in the commercial office space, there's investment going in there to repurpose, to reposition. And I like The opportunity for Allegion as we move through there from an electronic standpoint. If you go back 6 months ago, I was concerned About the return to office, and we're going to have a lot of vacancies out there.
Capital will go in and redefine that space and it's going to be good for our industry.
Great. Well, thank you. The second question I have just coming off of the ISC West and meeting with a lot of companies private and public, we see a lot of competition coming at Access Control with a total solution, white and there one of the trends I'm seeing is white labeling of hardware at a discount and integrating software. So it's all about delivering a total solution. The hardware maybe name doesn't mean as much.
That's what I'm hearing at least. So some of these companies that are investing large sums of money in this total access control solution, that's what we're seeing. Can you address what you're seeing in the industry and how you're addressing
this threat?
I think in today's presentation, we try to emphasize our build, borrow, buy emphasis and our partnerships with the megatex. I certainly see this private labeling, white labeling phenomena. I would just suggest the core part of our business has a level of connect of Complexity and connectivity that I'll bet on over the long haul. When you get into a complex business or a complex event space like you were at ISC West, It's easy to look at this and say, okay, I can have a small offering of white label products. But when you start adding code requirements, Master Key Systems, the connectivity with an Apple, a Google, a 1L, The game gets a lot tougher.
Great. Well, thank you very much for addressing those. I really appreciate it.
The next question comes from Julian Mitchell with Barclays. Please Go ahead.
Hi, good morning. Just wanted to circle back to the Americas revenue guide for the year. You're embedding, I think, maybe very low single digit growth year on year in the second half in the Americas. Just trying to understand what's embedded in that for residential versus non residential show and what sort of pace of slowdown of residential growth you're assuming?
Yes. So Julian, just as a Reminder, last year as we're coming out of the pandemic and demand started to surge for replacement demand on residential products, backlog accelerated, channel inventories were depleted. And so a lot of the revenue growth last year was channel fill, big box, Retail, e commerce, etcetera. And so you're getting a tough comp, particularly in the second half as it relates Residential business. And so that's going to impact the comparability, particularly when you're looking at overall Allegion Americas business.
As we indicated, non residential business starting to show good demand, A little bit constrained relative to the supply chain issues, but we'll start seeing some growth kind of year over year. So It's really that the guide you have to take into account last year had a higher growth component associated with channel fill related to the residential business.
Sure. But I guess I'm trying to understand that you're assuming that residential revenues are down year on year in the second half or?
No, they're still in Cresec.
Okay, got it. That's just what I wanted to check. Thank you. And then on the margin front, Looking at yes, we keep attacking it different ways, but let's look at it sort of second half margin year on year because think that makes more sense in terms of the information you provide in the 10 Q and so on. So it looks like your second half operating margin firm wide maybe down something like 100, 200 bps year on year in the second half.
Is the way to think about that, it's about 200 bps headwind from inflation net of price productivity and then maybe another 100 bps headwind from investment spend. I mean, that's roughly the right orders of magnitude?
Yes. And I would just a little bit more color on the price productivity inflation dynamic. Included in that guide would include some of the effect of these bounce back costs We've been highlighting, it was much more pronounced in Q2, but you've got kind of some of Costs that continue in Q3, Q4. So that's some of the pressure as well year over year.
Perfect. Thank you.
The next question comes from David MacGregor with Mongo Research. Please go ahead.
Hi, this is Joe Nolan on for David MacGregor.
Good morning, Joe.
Good morning. I was just wondering, could you talk about field inventory levels in both the residential and commercial business? And then just how you expect the timing of the channel rate that play out?
On the residential side, Big box, our ResPro partners, I think the restocking of that supply chain is essentially complete. There is pressure on any type of electronic related product, again, which we're navigating well, but that will be a problem that moves through in the next 4 quarters. On the commercial wholesale side, as I talked about the bounce back in demand, I think Part of that is wholesalers seeing the confidence in the marketplace and restocking, but I think much of it's going straight through because of the availability or really green light on small projects that were delayed over a continued period. So I would suggest that the restocking of the wholesale and contract Supply chain will be completed over the next 2 to 3 quarters.
Okay. Thanks for that. And then also just on your Education business, given the year ago pull forward and the timing of seasonal maintenance into 2Q 'twenty. Was that a growth headwind that you experienced in 2Q 'twenty one this year? And do you think that becomes a tailwind here in 3Q?
State your question again, you broke up.
Sorry. Just on the education business, Given the year ago pull forward and the timing of seasonal maintenance into 2Q 'twenty, was that a growth headwind this year in 2Q 'twenty 1 and does that become a tailwind here in the Q3?
I would look at the opportunity in K-twelve as part of the bounce back, but more a positive as we move into 2022 and 2023. America is going to continue to invest in its K-twelve infrastructure from a variety of reasons age, increased security, more automation and Allegion will benefit from that. It's clearly a positive.
Okay. Thanks.
The next question comes from Andrew Obin with Bank of America. Please go ahead.
Hey, guys. Good morning.
Good morning, Andrew.
For a while, I thought I would have to use the word unpack in my question. I was wondering if there memo that went out to the time unpack, but that's all added.
I thought you were going to remind me that you had it right
Historically, your pricing has been fairly close to that of your large competitor in North America. This quarter. They seem to be ahead of you. And I was just wondering, is there a difference in approach to channel between the 2 of you or it's just a matter of timing, as I said, because the industry seems to sort of move in lock step?
I wouldn't say they're ahead of us. My words to Our leaders worldwide is use all tools required to address the extraordinary We were out with a normal Q1 price increase. We've added surcharges on certain products and we've announced a end of Q3 price increase, 2 price increases in a year and the other tools that we're using to mitigate price, I think the industry has been disciplined and our stewardship of making sure that we respond to the Incredible inflationary forces will work for us.
Got you. Thank you. Then the second question, as you and I think I've asked this question a couple of times, but as you face supply chain constraints, are you rethinking either your approach to your internal supply chain, I. E, sort of more automation or are you sort of rethinking sourcing, any long term impact from sort of current disruption in the channel or you think once we sort of get rid of the bullwhip effect things go back normal, Valerie? Fast.
I think the Allegion supply chain is always a strategic item as We think about positioning the business, 1. Number 2, I point to our decrementals during the down Our decrementals on a top line basis were softer than any of the competition, meaning as the markets collapsed, our revenues were stronger on those decrementals and I would point to supply chain. 3rd is, I think, clearly a lot of work going on, I'd say, managing Placity of what we do. It's everything from boards to grommets to casting. Part of what the Allegion franchise is built on is managing this complexity.
Our supply chain does an important part of It plays a critical part of that, but it's rethinking those partnerships, making sure that We've got the availability of any type of part to be able to move it. We've made some pretty significant industrial investments in automation. Those will continue. I think as we go through this labor Availability is going to be in scarcity on a worldwide basis. And so automation investment, investing with strong suppliers and producing in region are Key drivers for Allegion, Andrew.
Okay. Thank you so much and I appreciate compliment. I don't get those often. Thank you.
I should have read that twice. I did read it twice.
The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks. Good morning, guys. And No need to fish for compliments on this one. Just a quick question here on the margins. The if I take a look at the Americas margins and your commentary around pricing for 4Q, I guess when we think about the sequential change in margins in the Americas.
Is there kind of like embedded in your expectations that sequentially margins potentially step down in 3Q because of these inflationary pressures and then back up in 4Q? Just trying to understand the cadence a little bit better.
Yes. So you got it right. Q3 margin decreased year over year much more pronounced than Q4. Q4 because of the price increase and some further actions still down, But improvement, not as far down as Q3.
Okay. All right. That's super helpful. And then I guess maybe just one Broader question, I know that you guys consistently get compared to your European peer in the U. S.
But if we took a step back can just thought about the industry as a whole and the potential consolidation in the locks market in the U. S. Do you guys view the market as being fairly well concentrated today? Are there opportunities to continue to and either via M and A, within the market, do you see future consolidation? Just curious around your broader thoughts there.
I think over the last decade, this is an industry that's consolidated. I would suggests that that's not moved at the pace that other industries have. So, there's opportunities, half Jeff Adjacencies. I think the brightest growth aspect for Allegion is in the seamless access Technologies. Part of the corporate spend this year is we're investing to try and better understand the future of SeamlessAccess and where it could be 5 to 10 years out because of our unique position.
And My message here, the industry is going to continue to consolidate it, but I believe through innovation of our unique position on the door, electronics, your edge device that it will continue to drive nice growth for Allegion.
Okay. That's helpful, Dave. Thanks, guys.
The next question comes from Tim Wojs with Baird. Please go ahead.
Hey, guys. Good morning.
Good morning to you.
Maybe just So first question is on investments, and I guess it's 2 parts. So I guess first, could you just elaborate a little more on where you're making the actual incremental investments this year? And then secondly, could you just talk about the pipeline build for future investments and how the paybacks on those are kind of prospectively versus history? Are they the kind of same, better or worse? Just kind of curious there.
Yes, Tim. So the majority of the incremental investments would be centered around R and D technology type of investment centered around driving electronics revenue growth and market segmentation, I. E, where are the opportunities where we expand our business and leverage our franchise globally. And so think about that in relation to some of the things Dave Extremely well for growth going forward and will help us continue to grow faster than the broader market is the plan there. Your question on ROIC, it's always been a really good payback, not only on investment, but on cash on cash basis and good things to do that will position us in the marketplace for further growth.
And historically, you've We've seen our revenue kind of trend probably a little bit north of our peer set and would expect that to kind of continue given the level of investments We're making and position our franchise going forward.
I'd build on that a bit, Tim, to say, we've had take out the pandemic, we've had 5, 6 years of double digit electronics growth and clearly the market moving that way. We've got over the next 24 months a nice pipeline of connected products coming out that will enhance. Specific investments in software capabilities, what I call software stacks that enhance the partnership that we talked about today. You have to have the APIs, STKs that allow our locks to work in our own ecosystems and work in the complex ecosystems that may be present at a hospital, a college campus. We believe this differentiates us versus 1 horse ponies that come in with a solution and an important part of our future growth.
I'd add one other is Segmenting the market and understanding the future 5, 10 years out in multifamily, K-twelve, College campuses and hospitals. We think we have an important role to play and our installed base in this connected environment will leverage Allegion's growth.
I just Tim also just think about the movement How fast things are changing and being part of a broader ecosystem where we can our products And seamlessly plug and play into broader set of solutions very important. And so investments, Incremental investments will continue. I mean, it's part of our DNA in terms of how we think about Accelerating growth and things are moving quickly and we want to be a market leader in that segment.
On in the deck, partnerships with the megatex, which are important, partnerships with the integrators like LNL, Our venture arm, I think you saw the announcement on OpenPath, the sale to Motorola Solutions, an excellent example of how we're playing that game and then continue investments in the digital players that help drive our growth.
Okay, great. No, I really appreciate it. All makes sense. I guess the second question just on maybe bigger picture. Could you just frame for us how you're thinking about recovery and maybe revenue contribution from the specification business.
So you're obviously seeing an uptick on the specification But when do you think you could start to see that be a meaningful revenue contributor? Is that a full year benefit next year or is it skewed towards the second half?
I think you'll see that really gaining some speed Q2 of next year and through the traditional construction season. ABI has been up for 3, 4 consecutive months at really record highs, 60, I think we were there for
a peak, takes about 12
to 18 months based on the scope of those projects for us to really start seeing the momentum.
Okay. Okay, great. Well, good luck. Thanks for the time guys.
The next question comes from John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Good morning.
Maybe just two follow ups here. 1, you had a little bit of a discussion there on PK through 12. You talked about the age, the security, more automation, but one thing you didn't mention was stimulus. And just curious, we're that there's a lot of stimulus already been approved for that vertical, a lot of focus on HVAC, but there is a big demand on the infrastructure side for access control. Are you seeing any of that benefit yet?
Or is that what you're kind of talking about might come through in '22 and beyond?
As we try and unpack the stimulus package, we certainly see access control, school security as a part of that. Again, it's dominated, I think, by modernization, things that you talked about, We're going to benefit as a result of that stimulus. I would also say there will continue to be a drive in the K-twelve secondtor The average K-twelve structure is 40 years old. Security threats Persist in accessing the schools is becoming more sophisticated because of People's Edge device electronic locks and Allegion is going to benefit from that.
Great. Thanks. And then, obviously, you've lived through several inflationary cycles. We could argue this one's a little bit different, but can you talk about your ability to hold price when you come out of these inflationary cycles, there's probably some regular pricing activity. I think you used the term surcharges or some things as well that maybe those are a little bit more transitory and go away when inflation abates.
But can you just talk about your historical experience there margin
next year? Yes, sure, John. So historically, price increases announced that are permanent in nature deck going forward, okay, I. E. Even in deflationary periods, prices remain the same and fairly disciplined industry here.
We did announced some surcharges on particular products that are more heavy and steel related components and those of course go away assuming the price of steel comes But the majority of our price increases are permanent price increase that we expect will pick going forward even when inflation comes down.
I would add to that The majority of my industrial career in the electrical industry and now security, we have As a guiding management principle, as our input costs go up, I expect to capture that plus and we're very driven on the inputs as well as the pricing
The next question comes from Jeff Sprague with Vertical Research. Please go ahead.
Hey, thank you. Good morning, everyone. Maybe just a couple of loose ends here, a lot of ground covered. First, Maybe a little shout out to your international friends. Just wondering if you could give a little bit of color on how you're thinking about the margins in the back half there, right?
Usually, we start fairly low in the first half and step up materially. I'm assuming from this kind of better run rate here in the first half. You're not expecting the same magnitude to step up, but I assume margins are going higher. Could you just elaborate on the trajectory there, the price cost dynamics in those markets collectively and what if any other restructuring benefits you have coming through?
Yes, Jeff. So thanks for bringing that up. The outstanding performance by the international team, particularly When you're looking at not only margin increase, but the top line growth and that's been a key contributor to the margin expansion quicker in terms of reducing costs, managing that side of the equation, restructuring programs that kind of went through both in Europe and Asia Pacific, we also are seeing the benefit of the amalgamation of both the Asia Pacific and European segments coming together as Allegion International. All that combined is really accelerated the margin improvement year over year. The restructuring actions, the benefits we saw in the first half kind of lapped, if you will, Beginning in Q3, so you're not going to see the step up in margin expansion year over year.
Seasonally, you know this, Jeff, that the margins expand in Q4 for that segment in particular. We expect the Same seasonal increase, but the year over year margin improvement, you're not going to see there was some one time benefits In Q4 that are non recurring this year, bounce back in costs, higher inflation, these type of things. But Great performance first half. We would expect kind of this kind of continuous margin improvement going into next year or 2. And So really like what the team has done there, how they're executing, driving top line growth, those type of things, great performance.
Right. Now understood. And then just back to kind of the whole backlog top line calculus here. I guess your guide Essentially, it kind of indicates revenues in Q3 and Q4 will be similar to Q2, which is not atypical for your business. But I guess I'm also hearing though that perhaps you're suggesting the Top line is just governed here by the supply and other constraints.
Is that really the message That there kind of in normal circumstances, there would be more upside into the back half just backlog, but just the physical ability to get it out the door, whether it's your own factory or inputs from suppliers, just keeping a lid on what you actually execute on the
2021. You read that correctly. I think we've assessed, okay, what's possible here. We'll move that backlog through. I think we are Mindful of the constraints on our supply base, we're also, I think, grounded that labor may be the tightest element All of this and it affects our customers and suppliers.
So you've got to kind of take a stiff view at this when are people We're going to come back to work and availability improve. We think that's a long term problem. We think the culture of Allegion, how
This concludes our question and answer session. I would like to turn the conference back over to Dave Petratis for any closing remarks.
Thanks for joining today's call. Allegion's future remains bright and I'd like to leave you with some key highlights of our call. Market demand is robust and has returned to pre pandemic levels faster and stronger than anticipated. This is extremely encouraging. Inflation has accelerated and there are industry wide supply chain pressures, these constraints are not unique to us and we will actively manage both of these dynamics.
The resulting backlog we are building sets us up well for the remainder of 'twenty one and 'twenty two. Last, Allegion is stronger, more structurally sound as we continue to invest during the pandemic. As a result, we are positioned well for profitable growth and will continue to aggressively execute on our strategy of seamless access. Have a great day today. Thanks for your attendance.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.