Good day and welcome to the Allegion First Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. Please note this event is being recorded.

I would now like to turn the conference over to Thomas Martineau, Vice President, Treasurer and Investor Relations. Please go ahead..

Thank you, Jason. Good morning everyone. Welcome and thank you for joining us for Allegion's first quarter 2020 earnings call. With me today are Dave Petratis, Chairman President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion.

Our earnings release, which was issued earlier this morning and the presentation which we will refer to in today's call are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to slides two and three.

Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections.

The company 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 2020 results, which will be followed by a Q&A session. Given the high uncertainty around the duration and severity of the COVID-19 pandemic, we had previously pulled our outlook for 2020 and will not be providing an update during this call.

For the Q&A, we would like to ask each caller to limit themselves to one question and one follow-up and then reenter the queue. We will do our best to get to everyone 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. Like all responsible global companies, Allegion is closely monitoring and assessing the COVID-19 outbreak, which continues to evolve. We are focused on doing what's right for our employees, customers and communities.

We're also maintaining our business health and supporting a central critical infrastructure around the world. Allegion operates within several different critical infrastructure sectors, making our work essential to our customers, and in many cases, their customers.

Our people create the security and life safety devices so many others depend on, whether for private homes, government buildings, or medical facilities.

We are regularly called on to provide our products and solutions for hospitals and health care facilities, most recently new construction for laboratories that will support the fight against COVID-19. This work gives us clear purpose, especially in these unprecedented times.

With the exception of Italy and Mexico, where government health decrees have temporarily paused production, our manufacturing sites may operate. We monitor for demand and material shortages related to COVID-19, taking necessary short-term actions such as adjustments to production to protect the long-term future of Allegion.

Such majors are being implemented in a way that minimizes disruption to customers and the overall business. In the case of Italy, we are shipping orders for finished goods with government approval and continue to engage in dialogue with Mexican authorities to open prior to the lifting of its general decree.

In the meantime, we are working with our supply chain, existing inventory, and channel partners to fulfill customer requirements for goods normally coming out of Mexico. It remains our intention to continue to serve our customers to the best of our abilities. You've heard me say before, but it bears repeating.

We have one of the safest workforces in the world. I could not be prouder of our company of experts who have leveraged our strength and safety to adapt to the current reality. We have faced COVID-19 since mid-January in China and developed operational practices that keep our people safe.

We're modeling best practice safe hygiene guidelines based on standards from the World Health Organization and the Centers for Disease Control and Prevention. We're conducting deep cleaning of our facilities on a regular basis. We're social distancing where we were and we're limiting crowds.

We've increased our personal protective equipment and supplies. There's additional cleaning solution, wipes, hand sanitizers throughout our facilities. Employees can ask for PPE supplies like gloves and who're requiring face masks in manufacturing and distribution facilities.

We paused all nonessential meetings and visitors, as well as air travel early in the crisis. Essential meetings are encouraged in virtual ways. We're adhering to government decrees and orders and monitoring health conditions, and wherever possible and where necessary, employees are working from home.

The strength of Allegion's global supply chain is a major asset and allows us to continue servicing our customers. We have many levers to pull from utilizing safety stocks and inventories to leveraging dual and alternate supply to sharing components across our own facilities and regions.

Without doubt, these options that our team have in place are increasing Allegion's credibility and customer loyalty in the marketplace. Of course, our business must be healthy to continue to support our employees, customers, and communities. We have proactively taken actions to mitigate financial implications associated with COVID-19.

These actions include reductions in discretionary spending, elimination of nonessential investments, a hiring freeze and reprioritization of all capital expenditures, including a temporary suspension of share repurchases.

Importantly, we believe Allegion has an extremely strong balance sheet and liquidity that provides flexibility and positions us well throughout this time. Our net debt-to-adjusted EBITDA ratio was 1.6 times at December 31, 2019.

We have an undrawn credit facility of up to $500 million if needed and no principal payments due on an outstanding debt until September 22. Our business generates significant cash flow due to industry-leading EBITDA margins and low capital intensity.

Allegion's available cash flow conversion to earnings ratio has averaged over 100% as a stand-alone company. Yet there will be challenges ahead. The start of 2020 has made that clear.

Allegion can take on great challenges with an engaged, safe, and healthy workforce, financial strength, legacy brands that have stood the test of time, and a steady focus. Allegion will remain true to our values and strong business fundamentals. Please go to Slide 5. Let's turn to the results for the first quarter.

We have a strong disciplined supply chain, and our team did an outstanding job navigating the early challenges posed by COVID-19 pandemic as evidenced by the revenue growth we experienced in the quarter. In particular, the Americas had a stellar quarter offset by weakness in Europe and Asia Pacific.

The Americas region had reported growth of 7.7% and organic growth of 8.2% in the quarter, driven by both nonresidential and residential businesses. EMEIA markets continue to be soft through the quarter, and our business was further impacted by the COVID-19 pandemic impact beginning in March.

For Asia-Pacific, Asian markets remained weak, and the region as a whole experienced the COVID-19 impacts as well. Electronics growth in the Americas came in at 12% in the quarter. We continue to see electronics as a long-term positive trend as more and more products become connected for ease of access.

The underlying fundamentals of the business are strong and will serve us well as the global pandemic subsides. Adjusted operating margin were up a 190 basis points in the quarter. Margin expansion led by the Americas region, which saw adjusted margins up 270 basis points. EMEIA and Asia-Pacific margins were down due to volume declines in both regions.

EMEIA margins were further pressured by continued operational inefficiencies from the move of our operations from Turkey to Poland. We highlighted last quarter our expectation that the impact would carry over in the first half of this year.

In the first quarter, adjusted EPS growth came in at a robust 18% and available cash flow was up nearly $44 million versus the prior quarter – prior year. Overall, I'm very pleased with our Q1 2020 results.

That said, the near-term future will be more difficult as we continue to navigate the uncertainty brought on by the COVID-19 pandemic, and I expect financial headwinds. Beyond the expense and cash management actions previously discussed, we are implementing cost reduction actions to optimize and simplify the European and Asia-Pacific regions.

These actions are intended to address weaker end market fundamentals, enable enhanced customer focus, and will help position these regions for future success. And there's one accounting item to mention. We recognized a $96.3 million non-cash charge related to goodwill and indefinite-lived trade name impairments for our non-U.S.

operations predominantly related to the COVID-19 and the expected future impacts. Please go to Slide 6, and I'll take you through the first quarter financial summary. Revenue for the first quarter was $674.7 million, an increase of 3%, inclusive of 4.3% organic growth.

Currency headwinds and the impact of the divestitures of our business in Colombia and Turkey offset some of the organic growth. Americas led the way on revenue growth, offsetting the weakness we experienced in EMEIA and Asia Pacific. Patrick will share more detail on the regions in a moment.

Adjusted operating margin increased by 190 basis points in the first quarter. As I stated earlier, we saw a significant margin expansion in the Americas with declines in Europe and Asia. Adjusted earnings per share of $1.04 increased $0.16 or just over 18% versus the prior year.

The increase was driven primarily by higher operating income, favorable share count and tax rate offset the increase in other expense. Available cash flow came in at $19 million, an increase of nearly $44 million versus the prior year. Increased adjusted earnings and improvement in net working capital were the driving factors for the increase.

Patrick will now walk you through the financial results, and I'll be back to wrap-up..

Thanks, Dave and good morning, everyone. Thank you for joining today's call. Please go to slide number 7. This slide depicts the components of our revenue growth for the first quarter. I'll focus on the total Allegion results and cover the regions on their respective slides.

As indicated, we delivered 4.3% organic growth in the first quarter led by the Americas region with strong growth in both the non-residential and residential businesses. Price realization was again solid in the quarter more than offsetting material inflation.

The impact of the divestiture of our businesses in Colombia and Turkey along with continued currency pressure in EMEIA and Asia-Pacific were headwinds of total growth. Please go to slide number 8. Reported net revenues for the first quarter were $674.7 million.

As stated earlier, this reflects an increase of 3% versus the prior year up 4.3% on an organic basis. We delivered good price realization and saw a solid volume driven by the Americas region.

We experienced an estimated $10 million revenue loss related to COVID-19 during the quarter primarily in our international regions as a result of business closures. Adjusted operating income of $128.2 million increased more than 14% over the same timeframe from last year. Adjusted operating margin of 19% increased 190 basis points.

The margin expansion was primarily driven by solid operating leverage on incremental volumes in the Americas along with pricing and productivity outpacing inflation.

Headwinds of margin performance include incremental investments which had a 30 basis point impact on adjusted operating margins and an estimated $4 million impact to adjusted operating income related to COVID-19. Please go to slide number 9. This slide reflects our earnings per share reconciliation for the first quarter.

For the first quarter of 2019 reported earnings per share was $0.84. Adjusting $0.04 for the prior year restructuring expenses and integration costs related to acquisitions, the 2019 adjusted earnings per share was $0.88. Operational results increased earnings per share by $0.16 as favorable price.

Operating leverage on incremental volume and productivity more than offset inflationary impacts and unfavorable currency. A year-over-year decrease in the adjusted effective tax rate drove another $0.04 increase. Favorable year-over-year share count increased adjusted earnings per share by another $0.02.

The impact of incremental investments in the quarter was a $0.02 reduction and an increase in other expense drove another negative $0.04 per share impact. This results in adjusted first quarter 2020 earnings per share of $1.04 an increase of $0.16 or 18.2% compared to the prior year.

Lastly, we had a $1.04 per share reduction for charges primarily related to goodwill and indefinite-live trade name impairments. These charges were related to COVID-19 and its impact on expected future results. After giving effect to these onetime items you arrive at first quarter 2020 reported earnings per share of $0. Please go to slide number 10.

First quarter revenues for the Americas region were $502.1 million up 7.7% on a reported basis and up 8.2% organically. The growth was driven by solid price realization and strong volume. Both the non-residential and residential businesses grew high single-digits.

The business saw a growth across all product segments and verticals particularly in institutional end markets. The electronics growth for the quarter was 12%. Electronic products continue to be a long-term growth driver as consumers and end users value the connectivity and convenience they offer over their mechanical counterparts.

The overall growth in the Americas reflects the company's strong position in the market as well as the returns associated with incremental investments in new product development and channel strategies.

Americas adjusted operating income of $146.6 million increased 19.1% versus the prior year period and adjusted operating margin for the quarter increased 270 basis points. Volume leverage on the revenue increase along with price and productivity significantly exceeding inflation drove the substantial margin expansion.

The team continues to deliver solid cost leverage and productivity to further improve operating performance in our competitive position. Lastly, incremental investments were a 40 basis point decrease on margins. Please go to slide number 11. First quarter revenues for the EMEIA region were $129.9 million down 9.1% and down 6.2% on an organic basis.

The lower volume was driven by continued weakening in end markets across the region and COVID-19 impacts, primarily, in the southern region. The impact of the divestiture of the business in Turkey and currency headwinds also contributed to the reported revenue decline.

EMEIA adjusted operating income of $3.3 million decreased 71.8% versus the prior year period. Adjusted operating margin for the quarter decreased by 570 basis points. Also, during the quarter inflation exceeded price plus productivity.

Revenue declines had a negative impact on operating margin, and we continue to experience cost pressure associated with the plant relocation from Turkey to Poland.

Earlier in April, we announced cost reduction initiatives aimed at optimizing and simplifying our operations, improving our customer service, as well as addressing the cost structure in our non-U.S. locations. These are not specific to the COVID-19 pandemic, but part of our long-range business planning process. Please go to slide number 12.

First quarter revenues for the Asia-Pacific region were $32.7 million, down 11.1% versus the prior year. Organic revenue was down 4.9%. The decline was driven by continued weakness in Australian end markets, primarily residential as well as impacts related to COVID 19. Total revenue continued to be affected by currency headwinds.

Asia-Pacific adjusted operating loss for the quarter was $1.6 million, a decrease of $0.9 million with adjusted operating margins down 300 basis points versus the prior year period. Significant volume declines and unfavorable mix had a large impact on the reduced income and margin.

Of note, we did have approximately $95 million in impairment charges for goodwill and indefinite live trade names. These charges were related to COVID-19 and its impact to expected future results. As with the EMEIA region, the cost reduction actions announced earlier in April will have a favorable impact on operations in Asia-Pacific.

These actions are also the result of our long-range business planning and not specific to COVID-19 impacts. Please go to slide number 13. Year-to-date available cash flow for the first quarter of 2020 came in at $19 million, which is an increase of nearly $44 million compared to the prior year period.

The increase was driven by higher adjusted net earnings and improvements in net working capital. Looking at the chart at the bottom of the slide, it shows working capital as a percent of revenues decreased based on a four point quarter average. On a year-over-year point in time basis, working capital as a percent of revenue is down 220 basis points.

This was driven by accelerated turnover in both inventory and receivables. As always, we remain committed to an effective and efficient use of working capital. We will continue to evaluate opportunities to minimize investments in working capital in order to continue to drive substantial cash flow conversion. Please go to slide number 14.

This slide provides an update on our capital structure. As you can see, our leverage has dropped steadily over the past five years and we ended 2019 at 2.1 times gross leverage and 1.6 times net leverage to adjusted EBITDA. In looking at our debt maturity profile, we do not have any loans maturing until September 2022.

We also have a $500 million untapped credit facility should we need additional liquidity. Our balance sheet is in a strong position and our high level cash flow conversion provides us flexibility and optionality to run the business going forward.

These same strengths have led Allegion to six consecutive years of annual increase in dividends and our most recent dividend increase of nearly 19% announced in February remains intact. During the first quarter, the company repurchased approximately $94 million of stock.

Due to the uncertainties related to the pandemic, we have placed repurchase plans on hold and we will review further as the year progresses. I will now hand it back over to Dave to wrap-up..

Thank you, Patrick. Please go to slide number 15. We recently announced that we were withdrawing our outlook for 2020 based on the magnitude and uncertainties surrounding the COVID-19 pandemic. We respect the need for financial guidance for the analyst community and shareholders. However, the COVID-19 pandemic is ongoing.

Health care experts are still learning about the virus and there is tremendous speculation on the economic recovery and the path it will take. The many unknowns include the scope and effect of further government regulatory, fiscal monetary and public health responses. Our update will come when we release Q2 2020 results.

The fundamentals of Allegion are strong. And as the world adapts to the new normal, we should have more clarity on the rest of 2020 at that time.

We do expect that COVID-19 will have a near-term negative financial impact on the business, including the reduction in year-over-year revenues, operating profit and cash flow due to government decrees and softening demand.

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

For the past several years, we have delivered above-market organic growth, the strength of our channel relationships, new product development, large installed base brand and market positions have helped us continually drive higher organic growth than the market. Since spin, Allegion has delivered a 5.4% organic revenue CAGR.

In the first quarter, the company grew organically at 4.3% with the Americas at 8.2%. Our strategy of seamless access takes full advantage of the keyless and connected technologies increasingly demanded in our industry. The electronic products needed to facilitate these demands continue to be a long-term growth driver for the company.

The Americas business experienced 12% growth in electronics in Q1. Even with the growth we have seen in these products, since we became a stand-alone company, adoption is still in the early stages. Therefore, the industry conversion opportunity remains robust.

Although, Allegion has industry-leading EBIT margins, our focus on price realization productivity and cost management allows us to expand margins when volumes are up like the 170 basis point increase we produced in Q1, but also facilitates the margin profile to be resilient through economic cycles.

Our strong balance sheet, low capital requirements in tandem with a high level of cash flow conversion our business generates allows us to have capital allocation optionality. We are well within our debt covenants and have no near-term debt repayments.

For the six full years, that Allegion has been a stand-alone company, the conversion of net income to available cash flow has on average exceeded 100%. The COVID pandemic has caused worldwide disruption in economic markets, whether haltering growing economies or furthering softening ones that were in decline.

Nonetheless, we feel that our company is set up well to weather the storm and our strong fundamentals will serve us well when the pandemic subsides. Allegion has the right people in place to help ensure this. Our employees have shown a great deal of adaptability during these uncertain times. I could not be prouder of our people.

Our management acted early to mitigate the economic impact. Our supply chain has proven itself to be flexible, proficient and dependable and we are positioned to continue leveraging as a strength moving forward. And of course, our legacy brands have stood the test of time and delivered incredible value.

Allegion is strong, its people are resilient and we remain focused and disciplined. I do want to thank every member of the Allegion team on a successful Q1 2020. Everyone stay safe and healthy. And now Patrick and I will be happy to take your questions..

[Operator Instructions] First question comes from Tim Wojs from Baird. Please go ahead..

Hey, gentlemen, good morning. Hope everybody is well..

Good morning..

Good morning..

Maybe if -- just my first question.

Maybe if we can just add a little bit color particularly in Americas of how the demand trajectory you saw kind of trended through the quarter? And maybe, if you could give us just some flavor of how April has trended here, just to give us an idea what Q2 and kind of the near-term may look like?.

Glad to do that. I would say first, the company got on to COVID-19 response early with a focus on our supply chain and protecting our people with a strategy for us to gain market share in Q1. So, we went extremely strong through the first quarter.

I think that's reflected in our Americas results, and the strength, our ability to keep our supply chain strong. As we got into March, we saw a slight decline in the last two weeks. But again, we had our foot on the gas, and we communicated that. As we moved into April, we're 17 days into this.

I think the things that we're seeing are rather predictable. We see some softness in the overall residential. I would say we have a view into point-of-sale in the bid box, and I'd say it's off low-teens. And as I look at that, I'd say, yes, that probably makes sense.

Second, I think from a positive standpoint, our -- we see softness in bookings in the commercial and institutional. Our backlog is strong. We see the continuation of construction projects and we think if ground's broken, if permits are issued, these projects are going to roll in.

As I came into work this morning, I see construction continue to move forward. The last thing I'd add Tim is our specs and quotes continue to be very positive. I know you can spec yourself and quote yourself right off a cliff, but it's a positive indicator. That work continues to roll..

Okay. Okay.

Is that -- as you guys look into maybe the back half of this year and into 2021, is that really the part of your leading indicator or what might give you confidence that COVID is really more of kind of a temporary issue as opposed to something maybe more cyclical for non-residential construction in general?.

I think you've got to be more critical than people would call it a V. I think the construction pipeline that we have today again, projects that are approved and are in progress will roll. I've got uncertainty about 2021 commercial and institutional. Commercial is going to be soft.

I think that's where the strength of our spec writing, our wholesale channels, whatever the market gives us at Allegion, we expect to do better than the market..

Thanks, Tim..

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

Thank you. Good morning everyone. Hope everyone is well.

Thanks for that color and also just trying to now kind of think about -- since we're all going to make our assumptions here, could you give us a little additional thought on decrementals and how linear or not linear the relationship is in other words, if revenues are down 10, what do you think the decrementals might be? And if they're down 20, what they might be and frame it however you like, but we've all got to kind of take a shot here at what's coming at us and try to put a stake in the ground in terms of an earnings estimate..

Yes. So, the big question mark, I think Jeff relates to what's on the demand horizon.

And as we've highlighted, very difficult to predict just kind of given the government decrees, and as we've highlighted we have a couple of plant closures today that will inhibit us a little bit on the top side and also will provide some cost pressure just from an under absorption perspective near term.

As I think about it, and you try to run some correlations to prior cycles that type of thing, I mean, everyone knows a way it was pretty drastic, I think it's too early to make some comparisons to that.

Right now, we're still -- as everyone else is collecting data from economists and a lot of people have different opinions, but as I think about it related to Allegion, some couple of points I'd like to highlight why I think we're better positioned than perhaps we were at the last downturn for several reasons.

Number one, we have a much stronger business franchise, a lot better stronger portfolio of businesses. As you know, we've divested poor-performing businesses. We added businesses to our portfolio that I think are more resilient in a downturn and less susceptible to market downturns.

This whole convergence of electronics is a -- you kind of look back 10 years ago, it wasn't a big driver in the business and whereas today it is a driver, it's growing at 1.5 times to 2 times the market today, and as you know we continue to put up really good numbers related to that.

So, I think that's an item that needs to -- or will continue to grow and will be a continued focus for us going forward. And as you know, it's a higher average selling price similar margin, which means more EBIT dollars.

The channel investments we've made, particularly in the repair retrofit market discretionary markets, we have a much broader product portfolio to serve our customers in that segment. And I think we're better positioned to participate in that market segment, whereas at time of spin we weren't, I think that will be good for us going forward.

And then to your question on the margin profile, we would say historically, we've been able to adjust our cost profile. We can react pretty quickly. We historically have shown some margin decrements related to the last cycles, if you kind of go back to 2008, small margin deterioration. We adjusted our cost position fairly aggressively.

Pricing we will continue to push that lever. It was a good driver for us in the quarter. So, I would say maybe some margin pressure, but not substantial relative to where we are. And if you think about where we are today, we're at a high watermark. Again, we had another record Q1 performance, up 190 basis points.

And so, we're coming from peak margin performance, and we'll continue to take the actions necessary to address our cost base.

We talked about those eliminating the discretionary spend, hiring freeze kind of re-prioritization of essential investments, you will see a reduction in some of the incremental investment, but we'll be focused on long-term areas.

And so I just -- we'll see how things kind of pan out here, but I think it's going to be more demand-driven and we'll adjust our cost profile to meet future demand both at the factory and SG&A level..

Thanks. And as an unrelated second question. Just on the good will, it's awful early in the COVID. It sounds like you're kind of using that as a kind of a justification for knocking out that goodwill. It sounds like -- but you've really beyond kind of COVID made a clear judgment that those acquisitions just have not lived up the snuff.

And I just wonder if any of the other acquisitions in Europe or anything as you've gone through this goodwill testing are kind of close to being on the bubble here?.

So Asia-Pacific as we indicated a write-down there goodwill and indefinite-live assets which pretty much releases the entire balance there. I think there's a de-minimis amount that remains. As we kind of talked about in Q4 the pressure there really given from the Australian market and just weak end-market fundamentals.

And so we re-looked at that particularly given the COVID-19 which really accelerated the market decline, kind of as we look at it going forward and so put us in a position to kind of do that analysis which is kind of a discounted cash flow et cetera. When we look at Europe there is some cushion left there. We didn't need to take an impairment.

I think hopefully, we took a conservative view on the discounted cash flow and hopefully, we're okay. But time will tell and we'll see where this pans out going forward. But again end markets continued weakness particularly in Southern Europe. But I feel really good about our electronics business there in the Germanic area. You mentioned acquisitions.

SimonsVoss has been a home run for us. And I think there's some good growth opportunity there going forward. So again we'll kind of reevaluate as the year progresses and we'll see what happens when the fog lifts..

I'd add one other comment. If you think about the Asia-Pacific, our acquisition profile has been Australia and one acquisition in Korea. All of those markets were in free fall in the second half of 2019 through the COVID-19 and it's hard to retain that goodwill on the books..

Okay. Thanks for the color. Thanks a lot..

Thank you..

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

Hi, good morning..

Good morning, Andrew..

I'm just wondering so the first question I have, how should I think about your ability to release working capital in this environment because a lot of companies are telling us that they're going to run-off inventories run for cash. But my understanding also is that a lot of your product in the U.S. is highly customized.

So how should I think about your ability to release working capital in second and third quarter as the COVID-19 sort of sweeps through the U.S.

as well I guess?.

Yes. Most companies with downturns would show a higher cash conversion net earnings because of the runoff in working capital. I think we'll be no different in that situation. However, I just remind everyone our working capital as a percent of revenue is fairly low; 4-point average, we're at like 6% of revenue.

So there's not a lot of room there for significant cash flow conversion on further reductions in working capital. And actually, Q1 we made substantial progress in both inventory turns and receivable DSO.

So there's probably a little improvement there, but I wouldn't look at it as a significant opportunity and further cash flow generation for us, just kind of given where we are relative to maybe other industrial companies..

I'd add to that too. That one of our objectives coming through the first quarter was to have the right inventory. And we made some investments there. As we go through the summer here, we'll probably run a little stronger on finished good inventories as an opportunity.

The strength of our supply chain and the ability to get the component parts into the right products where we need them, I think gives us an advantage. And then I'll use that advantage in some inventories to try and get orders to help the business..

And the second question, I have sort of unrelated. But given that a lot of municipalities are shut down, how do you deal with the whole -- how does the industry deal with the whole permitting process? And what does it mean for the construction activity in the summer both in residential and institutional space? Thank you. .

I think you've got to keep an eye on permits. You've got to assume that that will -- the permitting processes that run through government will slow down. I think though two -- when -- whether it's institutional or commercial housing when people want to commit capital, they'll force that process to move forward.

But as you well know permits is a key indicator for us, we'll keep an eye on it. And see where that trend goes. I think today Andrew, from a -- you could think about, if we in fact do go into recovery, the permit process the ability to do that will loosen up. It's been how is, capital deployed to be able to go out and drive this industry..

So, you think its economic activity driving permitting process. And if economy improves permitting logjam will improve as well..

Yeah..

Thank you very much..

The next question comes from David MacGregor from Longbow Research. Please go ahead..

Hey, good morning, everyone. Just -- hope you're well. Just wanted to ask about the strength of the North American volume here in the first quarter and there's been various observations for different people in the industry about, pull forward particularly in the case of education, but maybe in some healthcare applications as well.

And I'm just wondering if you're able to characterize the degree to which you may have pulled forward revenue from the summer quarters here in 1Q?.

We announced a price increase. So we would get some natural pull through, as a result of that. But I'd say, generally if you look could across North America a rather mild winter, I think and we executed, at a high level. And we picked up opportunities, in the quarter that others could not serve.

So I'd say a robust market, really in Q4 and Q1, you've got the electronics driver. And I think the strength of Allegion is shown hard. And the price increase pulled forward slight demand which I like, as we go through Q2 to be able to serve the local markets..

Okay. I guess, just as a follow-up, you're undertaking restructuring in Europe. I know you've been working on Turkey for a while now. We talked about that last quarter, again this quarter. And those things never happen quickly, I understand.

But when you think about sort of the disparate nature of -- from scale and a profitability and a growth standpoint between the North American business, and what you're doing now or what you have been doing recently, in Europe and in Asia, I guess, the question at a high level is do you need to be in Asia and Europe? Or would this be a stronger business if you were just solely in North American business? And as a part of that, maybe if you could talk about the extent to which North American results may benefit to some degree from being in Europe and Asia? Thank you..

I would say, it again the adjustments that we made in the quarter with the restructuring announcement will strengthen those franchises. I think, both regions -- I'd also emphasize I've been very clear that we lack scale outside of North America.

I think the moves that we're making allow us to focus, where we can win rip out cost that we think will simplify the business. And continue to sharpen our focus on, what we call seamless access. There is some complementary nature to the Australia/New Zealand business, especially along residential which is still developing.

And I think our, SimonsVoss, Interflex business, which we've been extremely pleased with gives us a looking glass into a seamless access.

And again, I think we look to Allegion to have more focus on where this business is going deploy more human and financial capital into that seamless access experienced as we compete wherever, we're at in the world..

Great, thanks very much gentlemen. Stay well..

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

Hi. Good morning, guys..

Good morning..

Dave, just on the pipeline of spec writing that you mentioned was fairly strong. Did folks use this opportunity, or if you look back at other points in time where we've had kind of pauses in activity? Is there kind of a natural lag where, everyone says, okay, here's something I was working on.

But I'm going to rethink it and maybe that adds, three or six months to kind of the recovery time frame where there is just an air pocket. Is that the way you guys have experienced it in the past? And how should we think about kind of like a natural delay as folks kind of get back to work.

And the economy reopens, or does activity continue throughout on the spec writing side?.

So Josh, this is my seventh little disruption in the economy, since I began my career in 1980. So I think the experiences give you some strength as you go through this. There will be an air pocket. And that's what we're trying to understand. Our bids our quote activity specs we track that in terms of the dollar level of activity.

But you can actually have specs kick back and say, "Hey let's revalue engineer this." You can't look at this current situation and say, "Hey there's going to be an air pocket of demand activity because of all supply chain factors, spec writing quotation, wholesale activity, construction, other supply challenges on the construction side.

So, it's a part of our thinking. But I think as a lead indicator that spec writing is a clear strength of Allegion and it will help us as we navigate through this..

That's helpful. And then unrelated and kind of back to the Jeff's question on decrementals. If I look back to the same business or at least most of it under Ingersoll ownership back in 2009, the margin expansion during that timeframe on a pretty significant revenue decline was pretty phenomenal hundreds of basis points.

Obviously, a higher starting point today. So, not all those levers are available.

Can -- but Dave or Patrick, can you just remind us some of what happened since then? And maybe what if those actions can be revisited or reexamined today versus stuff that was maybe more of kind of a one-time realignment of the cost base?.

I would characterize it this way entering the 2008 financial crisis there was probably more options to reduce the cost profile particularly on manufacturing footprint. I think IR at the time was fairly aggressive in closing certain factories related to the security technologies business at that time that helped protect the margin profile.

Pricing was another lever I think was pushed pretty hard. You kind of have to look at it over the 2008-2010 timeframe. And if I remember correctly, it showed a slight margin decrement over that time period.

I would characterize today relative to going into the situation where a better franchise stronger portfolio of businesses that you can maybe protect ourselves more on the topline side. And again we are taking the appropriate actions to reduce our cost structure. Dave talked about actions we're taking in international arena.

Yes, we're doing things here to tighten the belt. Obviously, in Americas, we'll continue to do that and adjust to future demand. I would say quite frankly we don't maybe have as many levers to pull. But having said that, I wouldn't expect a significant margin degradation relative to where we are today. So, dollars will come down basis of demand, i.e.

topline, but margin percent we'll do what we can to try to maintain that..

Got it. Appreciate the color and best of luck guys..

And let me -- so one other quick thing is probably worth noting is that short-term again given the governmental decrees and the fact that some of our facilities are closed, I mean you're going to have it's going to be a lot more choppy right? I mean you kind of have to -- if you're talking about margin profile; you need to really look at it over a 12-month period.

You're always going to get hit initially. Immediately you make adjustments and then you start to kind of level out. And so just kind of keep that in mind as you're thinking through this..

Got it. Will do. Appreciate that..

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

Good morning John..

Hi, good morning and glad to hear everyone is well. Wanted to follow-up on to that question. Clearly, you're getting ahead on the cost action. Is there a way to quantify how much is kind of structural? You did make the comment that some of it would have been done regardless of COVID-19 and then kind of those variable cost actions.

Just wondering what might come back if -- as volume returns paying employees et cetera things like that?.

So, there are variable components relative to our cost structure as you would expect in any business and it could be anything from the way that we have our pricing structure kind of volume rebates, for example, you can look at things like salesmen commissions those type of things naturally will come down and correspond with the volume decrease.

The things that we're adjusting now some of the discretionary spend really relooking at some of our things relative to investments.

And making sure that we went through a re-prioritization of those that's really focused on things that matter so that we're coming out of this stronger particularly on revenue growth opportunities associated with electronics. So, we're taking that into consideration.

But collectively these variable costs I mean it's tens of millions is how I would -- if you're looking for a type of a magnitude. We will give you more color as in Q2 as Dave mentioned when we have a better kind of outlook on revenue but it's fairly significant..

I would add the announced restructuring we saw significant softening in Asia Pacific and in areas of Europe as we exited the second half of 2019. We were not pleased with our position and we took actions regardless of the COVID-19 and a pandemic does not.

The other thing I would say, when you're in the construction-related industries you do have variation in demand and Allegion's ability to adjust our cost structure, I think can be seen over the last 20 years and we'll be making the moves that help keep this business strong..

Great. And then maybe one about end markets. So I guess the Cares Act fixed somewhat of a bonus depreciation glitch that wasn't part of the tax plan.

Wondering if you're hearing from folks that with the QIP adjustment that they're more willing to do interior improvements or if that's something that's nice, but just given the severity of what's happening right now it's not enough to kind of offset some of the demand?.

I'm not aware of that feature of the Cares Act. I'm sure that the people here at Allegion if we feel that's an opportunity we'll go after it. So I can't give you a good response to that one..

Okay. Thanks for the color. I appreciate it..

Okay, John. Thank you..

The next question comes from Joe Ritchie from Goldman Sachs. Please go ahead..

Thanks. Good morning, everyone..

Good morning..

Yeah. Just -- maybe just starting off I know a lot of the questions so far have been on the forward. But maybe just going back to 1Q for a second, clearly the margins in Americas I mean this is your best 1Q margins by a long shot.

I'm just wondering was there anything either like one-time-ish that came through in the quarter, or maybe you can elaborate a little bit more on like pricing this quarter? And how you expect that to hold up as the year progresses?.

Yeah. So nothing unusual in the quarter that accelerated the margin improvement. It's the old blocking and tackling and execution. The team did a great job. We went into the year, I'd say with a really healthy pipeline of productivity activity around both material and the factory. We got great volume leverage on the incremental volume.

And then you add on top of that price was good particularly in the commercial segment we're going to continue to drive that. And so everything played out, and again no real big surprises, but the team really kind of continued to drive good execution all around..

I'd go back even farther Joe. As we exited 2018 as a leadership team, we felt we left margin on the table. We put a pipeline of activities and in 2019 that we worked on throughout the year and we picked up strength as we went into the second half of 2019 and 2020 that strengthened the business..

The other comment I just mentioned too on the input costs. So think about commodity prices, they've come down. So year-over-year there was some benefit there where we didn't have any inflation on the material side..

Got it. No, that makes sense.

But Patrick is that something that's going to continue as the year progresses as well? I mean it can -- and how sticky you think the pricing will be?.

Yeah. Basis of the current cost for steel, zinc, copper, brass et cetera that will continue throughout the course of the year, yes..

Okay. That's helpful. And then maybe my one follow-up. Going back into several years, several quarters, the level of outgrowth you saw this quarter relative to your biggest competitor based in Europe in the Americas was I think like higher than any other quarter that we've seen.

I guess, I'm curious if maybe you can elaborate what you're doing or the effect of the share gains that you're seeing specifically this quarter? And if -- I know we're all trying to figure out what the demand environment is going to be like, but should you continue to outpace your peers in this downturn?.

So, I think number one, I'll give you a sports analogy. Why did the Patriots roll up six championship, six rooms same head coach, great quarterback, good offensive strategy. If you look at our competitors over the last 24 months, quite a bit of turnover at the top. A lot of management change. One of the strengths of Allegion is our experience.

We have a system of management here that we're pretty disciplined to. It doesn't mean it's perfect. But I think the strength of the leadership team the knowledge that cascades through our business and some favorable markets regionally in the country helped us to continue to put up growth that we have built on over the last six years.

So a combination of things there. I think the electronics as well is another -- this is an industry trend and we continue to prioritize our investments to take advantage of that opportunity. And I think it will continue to reward us Joe..

And I'll add Joe too, to be fair on the analysis. So we did have a little bit easier comparison on residential. You may recall, we had some channel difficulties in Q1 last year. Those obviously have been worked through. We continue to get really good electronics growth.

And we added a substantial customer on the new construction Lennar that helped our year-over-year comparisons as well..

Yeah. That makes a lot of sense. Thanks guys..

Thank you..

The next question comes from Julian Mitchell from Barclays. Please go ahead..

Hi, good morning. Maybe just wanted to double check again the mix of business.

So within the Americas, if you could just remind us in terms of 2019 split, let's say how much -- within the resi and non-resi pieces of the business, how much of each of those was related to new build versus aftermarket or replacement activity for Allegion?.

So we would say, it's around 50-50 collectively across the entire portfolio..

I see..

Hey, Julian, you'd want to think that the non-residential is a little heavier I think on the new construction versus the aftermarket and then it's flipped on the residential, but then it nets out to about 50-50..

Thank you.

And how much related to that of your resi sales are going via the big box channel nowadays?.

So it's a about a third 40% of the business 50% maybe up to 50%..

Thanks very much. And then my second question would following up on that question from Joe around pricing and productivity. So those items were I think almost a 200-point tailwind to margins in the first quarter year-on-year.

Based on your comments, should we assume that that remains a very strong tailwind for the next nine months, perhaps not quite at the level of Q1, but should be a material contributor?.

Yes. I think we'll have -- we'll continue to have a tailwind there. But again, some of the issues associated with the closure reduced demand et cetera we'll put some pressure on those comparisons..

Understood. Thank you very much..

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

Thank you. Hope you guys are doing well..

And you too..

A quick question on the -- looking at the channel, the integration and the installation channel, we've been seeing that there is continuation of big projects going on. There are some problems in getting people on to sites at some of the midsized projects.

And obviously when they get on, they have to be wearing the types of PPE and things like that that are mandated by the local ordinances. And in some places, the smaller SMB market seems to be shut down completely.

Can you make some comments on how your -- what you're getting back from your installers and integrators with regard to their ability to do work on projects what's continuing where -- what's out there where there's some restriction on their ability to get to the site and what's out there which is completely closed down?.

I think it's clearly a step back in terms of being able to go in service install. Here at Allegion, we have a policy. Visitors are highly controlled. We don't want infection. With that said, it depends on where you're at. The Dallas market continues to be very active. We are moving around college campuses, but it's not going to happen in New York City.

It certainly could happen in Denver. So again, it depends on where you're at and it puts an air pocket into the work. So I actually think if things straighten themselves out, there'll be a pickup in intensity short term. And over time, it schedules itself out.

I do think the normal project activity that we have typically that goes on college campuses will roll to schedule, which is really May through August. It's an important driver for us. Could be moved up a little early, if access is there, but it depends on where you're at geographically Jeff..

Okay..

Higher infection rates, more difficult access..

I see. We'll see what happens at West over the next few weeks. Second thing is, do you -- what investments have you made? And I know you've made some in the past with regard to obviously collaborative spec writing, if you want to call that in the cloud, touchless access NFC things like that.

Are you in a position to take market share because of number one touchless access. Number two, some of the – let's just call it, some of the newer investments that you've made in trying to – in trying to just make the process easier for your customers.

Is that something that that can continue a market share gain in the – at least in the Americas for the moment because it seems to have been – have worked at least over the last year or so?.

I believe if you look at our overall growth, the investments that we're making in collaborative tools Overture, which we'll continue to invest and develop.

Overture has been rolled out in the bulk of the world as a collaborative working tool and it's been extremely well received by our partners, spec writers architects and they have been collaborative in the creation of Overture. So I really give Tim Eckersley credit to creating that. We continue to invest in the electronics side of this.

I think you may have seen Jeff our investment in open path as a partnership and investment that we think will help expand the world of seamless access. Schlage Sense [ph] would be another and our continued investment in electronics and new products.

We also brought together SimonsVoss and Interflex under one leadership team, because we believe that that's a looking glass into seamless access. And our growth there in electronics in the DAC region is gaining share.

So I think you've got the right sense in that collaborative tools, electronics and seamless access is going to help us as we go through this crisis and come out the other end..

Is that at the margin, or is that something that can actually really move the needle as we come out of this recession?.

I think the drivers of seamless access keyless activity simplifying the world that our customers live in eliminating master keys and intelligence that goes with seamless access is going to be a driver for the next two decades..

Thank you very much. Appreciate it..

Thank you..

The next question comes from Deepa Raghavan from Wells Fargo Securities. Please go ahead..

Hey, good morning. Dave you touched a little bit on the restrictions on construction site actually impacting project activity, especially you mentioned institutional. Now institutionally we've always considered it long tail in nature and more defensive as we go into a down cycle.

Now, does that dynamic now make it less defensive this down cycle? And the other – extending that question, if site access continue to be restricted through this construction selling season, does it mean you can – you're able to recover beyond fall or in winter season, or you think that's been now pushed to the next construction season which is next summer?.

So I like our position in institutional. I was looking last night. 22 of the states have – are generally in pretty good financial shape. Infrastructure has aged. We still have the driver of security in public settings. So you got to like that. And then our spec activity would also suggest that that this whole market continued to develop.

With that said, an earlier question described an air pocket, we're going to have to have our eyes wide open and understand that air pocket. Part of it is you get some immediate shock.

Second is it's that snowplow effect that we've talked about in the past, projects will get pushed out but we may see that air pocket again as we moved into 2021 because budgets are a little bit tighter. So to be seen, I like our institutional position.

It's been – in my 40 years, the institutional markets have always been a good place to operate and we'll try and get more than our share out of whatever market is there..

Got it.

So can you talk about your Mexico and the Italy plant closures, I mean what percent of sales is coming from those two regions? And when you talk about working with your channel partners to ensure demand is wholesale, does it entail higher costs?.

So, I'll take a stab at the revenue base. I mean just to kind of put it into perspective on Mexico. That's predominantly the supplier for our residential business. Here in Americas, which we've characterized it's about a third of the overall Americas portfolio. Keep in mind, the decree was extended through the end of May.

However, we are -- we've got inventory on hand. We're working with our distribution partners to ensure customers can be served. When that comes back online there will be a restocking in the channels for the depletion of the inventory. So we're kind of working that.

But I think that the message is near term you're going to see a decline and obviously in revenue for some piece of that certainly in Q2. Italy, again, the data I think on that is May three is the current decree. We will see that is subject to change based on what the government dictates. That might be kind of call it 20% of our portfolio in Europe.

We are shipping finished goods inventory out of the warehouse there in Italy today. So that activity is taking place. It's just the production, manufacturing, et cetera right now that were inhibited from producing anything. However, it doesn't necessarily mean we're losing business.

I think it just means delays deferrals that type of thing because the reality is the customers are closed also. And so they don't have the ability to be able to receive inventory. And so this is just going to be a deferral, and we'll see how quickly that may or may not pick up in the back half of this year..

Pete, I have to give a shout out to our Italian teams. We operated safely longer there than many manufacturers. Same in Mexico. We got a few extra days until that decree came down working hard to petition the government now to consider it's essential. I believe in Mexico we can keep our people safer than they are on the streets.

And so we're pushing that. Again, we've got a good supply of residential inventory on the shelf. And if we can cut through this, we're going to be in good shape..

All right, Jason?.

Yeah. There are no more questions in the queue. And this concludes our question-and-answer session. I would like to turn the conference back over to Tom Martineau for any closing remarks..

I appreciate it. So we'd like to thank everyone for participating in today's call. And today more than ever please have a safe day..

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