Q4 2021 Allegion PLC Earnings Call
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Tom Martineau. Please go ahead.
Thank you Jason Good morning, everyone welcome and thank you for joining us for allegiance fourth quarter and full year 2021 earnings call.
With me today are Dave Petraeus, Chairman, President and Chief Executive Officer, and Patrick Shannon Senior Vice President and Chief Financial Officer of Allegiant.
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 day, The Legion Dot 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 them.
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 fourth quarter and full year 2021 results and provide an outlook for 2022, which will be followed by a Q&A session for the Q&A, we would like to ask each caller to limit themselves to one question and then reenter the queue, we would like to give everyone an opportunity given the time allotted now.
Now I'd like to turn the call over to Dave.
Thanks, Tom.
Morning, and thank you for joining US today. Please go to slide number four.
Q4 was tough for Allegiant.
Although each achieved the expected results, we discussed last quarter I was disappointed that we weren't able to fully meet the market opportunity presented.
The strength in demand, particularly in Americas nonresidential end markets continue.
And as I said last quarter. This trend began softly in Q1 accelerated in Q2 and continued throughout the back half of the year.
Leading indicators like specs written for Allegiant Americas.
Dodge New construction indices retail point of sales and macroeconomic indicators in our religion International segment all remain positive.
These indicators suggest continued strength in all end markets for the foreseeable future.
However, with some supply chain challenges, we continue to experience difficulty converting that demand into revenue.
Typically we'd be able to gear up our supply base in short fashion.
Well the accelerated increase in demand occurred during an unprecedented time when suppliers were experiencing labor raw material transportation and electronic component shortages create creating tremendous global disruption.
What we typically resolve in a quarter is now taking much longer.
We are making good progress on product Redesigns and alternative sourcing, which should alleviate some of the supply chain pressure.
But we do expect revenue to continue to be constrained in the near term.
Even with the supply chain improvements, we are making it is important to note that the pressures in electronic components are expected to continue throughout 2022.
Looking at price versus cost, we continue to experience high inflationary impacts for material costs labor and freight.
The pricing that we put in place last year is currently lagging inflation.
That coupled with productivity challenges is a major contributor to margin declines in Q4.
We implemented additional price increases during the fourth quarter and have already announced another price increase for Q1 2022 that goes into effect this month.
We are aggressively pursuing price across all products and in all channels to offset unprecedented inflation and expect price to exceed inflation in 2022.
I do want to highlight our Allegiant international business, which had another good quarter and closed out a strong year.
The segment delivered robust organic revenue growth and solid margin expansion in 2021.
Looking forward the increased demand and supply chain shortages have led to record backlogs in our American nonresidential business.
And coupled with the progress, we're making on Redesigns and alternative sourcing we expect solid revenue growth in 2022 and into 2023.
As supply chain pressures ease operational efficiencies will improve which along with the accelerated pricing will allow us to expand margins in 2022 and exited the year on a glide path back to peak performance.
Now, let's turn to the quarter performance for more details. Please go to slide five.
Revenue for the fourth quarter was $709 million, a decrease of two 5% compared to last year.
Organic revenue declined one 4%.
The organic revenue decline in the quarter was driven by Allegiant Americas, which experienced continued supply chain pressures that led to electronic and other component shortages.
Also embedded in the decline is a tough comparable to last year.
During the fourth quarter of 2020, we had a large residential channel loading that was necessary to catch up from the shutdowns experienced earlier that year.
The Americas volume declines more than offset the sequential improvements in price realization and the growth that the Allegiant International segment delivered.
Patrick will share more details on the business segments segments in a moment.
Adjusted operating margin decreased by 610 basis points in the fourth quarter.
Continued inflationary pressures productivity challenges and volume deleverage drove most of the decrease Inc.
Incremental investments for future growth cause 80 basis points of the decline.
Adjusted earnings adjusted earnings per share of $1 11 decreased 38 cents or approximately 26% versus the prior year.
Lower operating income was partially offset by favorable share count.
Year over year tax rate reduction in other income.
Available cash flow for the year came in at $443 million, which was flat to 2020.
Slightly lower adjusted earnings were offset by slightly lower capital expenditures the cash flow impact of working capital was nearly neutral as well with increased inventory offset by other components of working capital.
As I think about the road ahead I firmly believe our vision strategy and support of our seamless access is more relevant than ever I. Also believe we have the right team and an engaged workforce that will respond to the challenges we face today.
We are bullish on construction and DIY markets for 2022 and continue to expect the Iot trend of electronic adoption and smart buildings to fuel growth for many years.
<unk> future is bright and we will return to the peak performance and profit profitability that you expect.
Patrick will now walk you through the financial results and I'll be back to discuss our 2022 outlook.
Thanks, Dave and good morning, everyone. Thank you for joining today's call. Please go to slide number six.
This slide reflects our earnings per share reconciliation for the fourth quarter.
For the fourth quarter of 2020 reported earnings per share was $1 <unk>.
Adjusting 48 cents for charges related to restructuring M&A costs impairments as well as a loss on held for sale assets. The 2020 adjusted earnings per share was $1 49.
Favorable year over year tax rate and share count drove another <unk> <unk> increase respectively.
Interest and other income were slightly positive as were the impact of acquisitions and divestitures. Both are at a penny per share.
The story for the quarter as reflected in the operational results, which decreased earnings per share by 41.
The inflation on productivity headwinds were predominantly driven from higher input costs wage increases inefficiencies from supply chain challenges and the bounce back of variable related costs, which were not as high in the prior year.
These added costs were partially offset by price pricing sequentially improved in the quarter and will continue to accelerate in 2022.
Investment spending increased during the quarter and reduced earnings per share by <unk> <unk>.
We remain committed to investing in new product innovation and technology that will accelerate future growth and deliver solutions that enhance customer and end user experiences and connectivity.
This results in adjusted fourth quarter 2021 earnings per share of $1 11, a decrease of <unk> 38, or 25, 5% compared to the prior year.
Lastly, we have a 15 cent per share increase for the combination of a noncash gain on a remeasurement of an allegiant ventures investment offset by charges related to restructuring M&A and debt refinancing after giving effect to these items you arrive at the fourth quarter of 2021 reported earnings per share with <unk>.
26.
Please go to slide number seven.
This slide depicts the components of our revenue growth for the fourth quarter as well as for the full year of 2021 as indicated we experienced a one 4% organic revenue decline in the fourth quarter like Q3, the electronics and other component shortages, primarily in the Americas region had an.
<unk>, our ability to meet continued strong demand.
We achieved our highest quarter price realization in the year, which offset some of the volume decline.
For the full year, you can see that total revenue was up five 4% with organic revenue growth of four 5% both segments of the business delivered organic growth for the year with the international segment at 10, 4% and Americas at two 4% has mentioned and market demand increased.
<unk> faster than we anticipated in 2021, and although we were able to deliver significantly more than our initial outlook.
We're.
Unable to meet the full market opportunity. Currently however, our record backlogs will enable accelerated revenue in the future once the supply chain constraints are mitigated.
Please go to slide number eight.
Fourth quarter revenues for the Allegiant Americas segment were $499 5 million down four 2% on a reported basis and four 3% organically.
The organic decline was driven by continued supply chain pressures for both mechanical and electronic products on the plus side, we did see sequential improvement in price in the Americas has announced another increase that goes into effect. This month, we're driving price in all channels and products and our expectation is that pricing will exceed <unk>.
<unk> in 2022.
The Americas non residential business was up low single digits as strong price was offset by delayed volume related to electronic allocations and other component shortages. These supply chain constraints paired with robust market demand slowed the pace of revenue realization that led to historic levels of backlogs at the end of the year.
Americas residential was down mid teens similar to last quarter I mentioned previously the main drivers of the decrease or the prior year being inflated by channel refill coming out of the pandemic shutdowns experienced in Q2 2020, and the shortage of electronic components that primarily impact us in the DIY space a big bar.
<unk> retail and e-commerce .
Electronics revenue was down low twenty's percent driven by continued shortages of electronic components in both the nonresidential and residential businesses. The prior year residential channel refill also had an impact on year over year electronics performance.
Legion Americas, adjusted operating income of $105 5 million decreased 29% versus the prior year period, and adjusted operating margin for the quarter was down 740 basis points. The decrease was driven by inflationary pressures productivity challenges related to supply chain and volume deleverage.
Rental investments had a 90 basis point dilutive impact on adjusted margins.
Although margins were down significantly in the quarter down 370 basis points for the full year margins will improve in 2022 compared to 2021 from increased price realization volume leverage and improved business mix.
Please go to slide number nine.
The Allegiant International segment had another solid quarter fourth quarter revenues were $209 7 million up one 7% and up five 8% on an organic basis. The organic growth was driven by strength in our global portable security business, along with good price realization.
Reported growth reflect the impacts of currency headwinds and divestitures.
International adjusted operating income of $29 4 million decreased 11, 2% versus the prior year period.
Adjusted operating margin for the quarter decreased by 200 basis points.
The margin decrease was driven primarily by inflation exceeding price and productivity, along with negative product mix, which more than offset the positive volume leverage.
Incremental investments reduced margins by 50 basis points.
I would also note the full year performance of the international segment double digit organic growth and achievement of 11% operating margin. This was a record year for the segment and reflects a tremendous amount of effort and dedication by the entire team.
Please go to slide number 10.
Available cash flow for 2021 came in at $443 million, which is which is flat compared to the prior year period.
The adjusted net earnings were slightly lower and was offset by slightly lower capital expenditures in total the working capital impact was near neutral with increased inventories offset by other components of working capital.
Looking at the working capital chart. It shows working capital as a percentage of revenues and the cash conversion cycle decreased based on a four quarter average.
Last chart on the slide shows our net leverage the net debt to EBITDA ratio increased from $1 five last year to $1 seven this year.
The increase in the ratio was driven primarily by a reduced cash position from shareholder distributions for the year.
The business continues to generate strong cash flow conversion of net earnings we have a healthy balance sheet, and we executed $542 million in shareholder distributions with $413 million in share repurchases and $129 million in dividends. We also.
Recently announced a 14% increase in our dividend coming later in March.
During the quarter, we entered into a new $750 million unsecured credit agreement consisting of a 250 million term facility.
$500 million revolving facility.
We obtain a rating upgrade with Moody's and a move to positive outlook by Fitch, our capital structures and asset of the company and we continue to execute on our balanced capital allocation strategy that will deploy capital through incremental high returning organic investments capex M&A or share.
A holder distributions.
I'll now hand, it back over to Dave for some comments on 2022, Thank you Patrick.
Please go to slide 11.
Before I get into our outlook for the year I want to highlight the actions, we are taking to mitigate constraints and drive growth and profitability in 2022.
Our expectation is to fully cover inflation with price.
We are in the midst of executing the aggressive pricing actions across the globe in all product categories in all channels.
We will remain vigilant during the year and we will not hesitate to pull the pricing lever if inflation headwinds increased further.
With regard to timing, we expect net margin pressures during the first half with the price versus cost dynamic improving sequentially throughout the year and turning positive in the middle of the year.
Our product Redesigns and alternative sourcing work is expected to be completed by the end of Q2.
This will help alleviate the supply chain pressures related to our mechanical business and provide access to additional electronic component solutions.
However, electronic chip allocations will continue to be choppy throughout the year.
As the supply chain normalizes, we will continuously improve our lead times and reduce our record backlog.
Our greatest strength lies in the people of Allegiant.
With broad tightness in the labor market, we are protecting our labor pipeline, we have implemented pay increases and are not flexing labor to the degree we normally would this.
This is operationally inefficient in the short term, but when supply chain pressures ease we wanted to be sure. We have the labor in place to move product out of the factories and reduce backlogs.
We expect to return to margin expansion this year.
Second half margins are anticipated to perform stronger than first half and we will exit the year on our path back to peak margin performance.
We continue to invest in R&D and software development progresses, our seamless access strategy and to build critical talent capabilities and innovation.
Please go to slide 12.
Yeah.
For the 2022 outlook on revenue.
The Americas is expected to strengthen our nonresidential businesses with the continued recovery in those end markets, particularly education healthcare and commercial.
All leading indicators are positive and the level of institutional specification for our business has continued to be strong.
Residential indicators are positive as well and we expect that business to continue growing in 2022.
The under supply of single family home continues to be corrected in the builder channel and retail point of sale has been strong for quite some time.
Electronic and smart home adoption continues to be long term growth drivers.
As underscored earlier, we are aggressively pursuing pricing in all channels.
Products in the Americas and around the globe.
Given the supply chain challenges that persist, we expect our revenue performance to be better in the second half than in the first but still project organic revenue growth in all quarters.
Yes.
With the strength in nonresidential construction continued growth in residential our expectation for electronic chip allocation of redesign work to ease supply chain pressures. We project total organic revenue in the Americas to be up eight 5% to 10% in 2022.
In the Allegiant International segment, we expect growth, but we are starting to see some.
Electronics supply chain issues in that region as well currency headwinds are projected to offset organic growth.
For Allegiant International we project total revenue to be in the minus one to plus 1% range with organic growth of 3% to 5%.
All in for Allegiant, we're projecting total revenue to be up six to seven 5% and organic revenue growth of seven to eight 5%.
Our 22022 outlook for adjusted earnings per share is $5 55 to $5 75.
Timing wise, we expect to realize approximately 60% of the adjusted EPS in the second half of the year.
As indicated adjusted operated our adjusted operational earnings are expected to increase 14% to 18% driven by volume leverage and pricing exceeding inflation.
Incremental investments continue to be a priority as we remain focused on accelerating electronics and seamless access growth in support of our vision and strategy.
These incremental investments predominantly relate to added R&D and engineering to further develop enhance and accelerate new product development and software capabilities.
The combination of interest and other expense is expected to be a headwind as some of the more favorable items that we experienced in 2021 are nonrecurring.
Our outlook assumes a full year adjusted effective tax rate of approximately 13%. It also assumes outstanding weighted average diluted shares of approximately $88 million.
The outlook. Additionally includes approximately <unk> <unk> per share for restructuring charges. During the year as a result reported EPS is projected to be $5 50.
To $5 70.
We are expecting our available cash flow for 2022 to be in the $4 $65 million to $485 million range.
Please go to slide 13.
In summary, and market demand remains strong in the fourth quarter and we expect that to continue.
The supply chain issues, we're experiencing have hindered our ability to meet that demand and as a result, we have built record backlogs.
That will support growth in 2022 and 2023.
The product Redesigns and alternative sourcing should begin to alleviate some of the supply chain pressures by mid year, primarily on the mechanical side of the business.
We are projecting solid organic revenue growth of seven 5% in 2022, even with the expectation that chip allocations will continue to be tight.
We expect year over year growth in electronics and acceleration in that growth throughout the year.
We are aggressively going after price across the globe and in all products and channels for the calendar year pricing will exceed inflation.
This will help allegiant to deliver margin improvement, which we expect will progress as we go throughout the year.
Please go to slide 14.
A final note on some key leadership announcements before we move into Q&A.
Mike Wackness, who leaves the commercial America's strategic business unit will be transitioning to the role of Chief Financial Officer on March one.
He succeeds Patrick Shannon, who will be retiring later this year.
As CFO , Mike brings significant financial experience at a deep understanding of our global business in the markets we serve.
He has been with the Legion for 15 years and many of you know him from his time as treasurer and leading Investor relations.
The board of directors and I have the utmost confidence that he is the right person to step into this important role.
Dave will already has been promoted to senior Vice President of the Americas segment effective March one.
Did currently leads our Legion home and is responsible for the flagship ship slag portfolio of residential solutions.
He has been at the company for 20 years and is highly respected and industry veteran with extensive knowledge of our customers channel partners and vertical markets. We are thrilled to welcome him to the senior leadership team.
Allegiant is equally fortunate to have a strong bench of talented leaders throughout the globe. They are well prepared to execute on our strategy and capitalize on growth opportunities as we emerge from the pandemic and I want to thank our entire team.
Their commitment and dedication.
Last a few remarks for Patrick <unk> Janet.
It has it has been a privilege to work alongside Patrick who has been a partner a friend for me and an outstanding business leader and as a founding member of the leadership team Patrik has been instrumental in refreshing our business strategy building, a world class finance organization and creating a strong.
Foundation that will serve us well in the years ahead.
I speak for all of the employees the Legion when I say that it has been an honor.
And a pleasure to serve with Patrick Shannon.
We will now take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Taking all the questions. Our first question comes from Brett Linzey from Mizuho Securities. Please go ahead.
Hi, good morning, all and congrats to Patrick.
Thank you.
Okay.
His strong outlook overall I'm just curious what level of price are you expecting within within the guide for the full year and any directional color you can give us between how you're thinking about the residential and nonresidential piece within the Americas business for 2022.
Yes.
I would characterize as you look at price again, good sequential improvement in Q4 of 'twenty. One you will see continued improvement as we progress throughout 2022.
Both on the nonresidential and residential side of the business. It is a large component of our overall revenue growth kind of reaching a peak if you will in terms of price realization in Q3, as we realize the full implementation of all the price increases, including both list prices.
And surcharges on certain products, so a big part of the revenue growth and if you kind of look at it relative to non res res.
The non <unk> in terms of our guide full year revenue growth you'd be looking at the high end.
Kind of low double digits.
Residential.
Mid single digit type of growth for 2020.
Okay, Great and then just just to come back to the electronics noted growth year over year.
A full year basis I'm, just curious what's the pacing look like.
The year is it really Q3 until that turns positive again.
Does it happen earlier, just just curious what youre planning processes. It looks like there. We've spent a lot of time looking at electronic chip and component of applications and as you think about our guide.
It will be.
Prove sequentially quarter to quarter in terms of the flow of electronic locks and be strongest in the second half and as we move into 'twenty three.
Okay, Great I'll pass it along thanks. Thank you.
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning.
Thanks for all the help Patrick and wish you all the best.
In terms of.
My question would be around the.
The underperformance of sort of the volumes.
Americas relative to some of its biggest careers.
That's clearly been a point of focus for investors for a few months now.
So just wondered.
So the main factors were behind that.
Shared loss.
On the non resi side.
Simply a difference in kind of procurement and sourcing strategies.
And is there anything else, perhaps going on more on the commercial customer facing products as well.
I think you.
<unk> got a call or second half asset it is number one markets.
Incredibly strong number two our Boston opportunity by the company because of supply chain difficulties.
Our supply chain is tend to be.
In region.
They perform incredibly well, giving high inventory turnover.
High return on invested capital when they're working well.
The pandemic, especially as we move through 'twenty two.
Yes.
Severely impacted by chips.
And the labor shortages that are affected are very complex supply chain within region and when I say complex you've heard me say Julien complexity is our friend at Allegiant, but when you throw that.
Those challenges and supply chain, you're really working.
A variety of issues, which I would say stabilized as we.
Ended December and we will get sequentially better as we go on.
I would also say some of the moves that we've made pre pandemic.
Vertically integrate actually helped us.
And I think.
I am confident.
We will get the mechanical side of the Americas business straightened out it's things like investing investment casting that make the von <unk> exit device what it is.
And as we move through the year.
The pacing item will be electronics.
We built our plan based on.
The allocations that we believe that we will get in I believe in the electronics.
Apply chain disruptions there.
Pulled demand forward and we will benefit in the secondary markets that will help us exceed our plan in 'twenty two if that in fact impact so a lot into that answer.
I hope that gives you some color you Julian I would also just add real quickly.
When you look at kind of the order activity on non res really strong.
What kind of give an indication maybe similar to what we're seeing from our peer set.
Just this inability to be able to ship and realize the revenue. So it's we'll call kind of deferred or delayed revenue it will calm.
Affinitive orders were not seeing any cancellations and Thats why were going to anticipate 2022 to have accelerated revenue as we progress throughout the course of the year.
With the resolution of some of these supply chain difficulties. The other thing is on the residential side Keith.
Keep in mind, we've got a large channel load last year, that's impacting negatively the comparisons year over year. So that has kind of the distortion I mean, if you look at it on a two year stack basis.
Not as pronounced as what you saw perhaps in Q4 of.
'twenty one so just kind of keep those things in mind, if you would.
Thanks, a lot that's very helpful. And then just one very quick follow up.
Just want to put a finer point on the sort of price volume split within the organic sales guide for total company 2022.
Is he sort of rough assumption that the organic sales growth is split sort of 50 50 price and volume.
Yes, I would say.
Pretty much in the ballpark.
Sure.
Again, we're going to push the price lever and because right now as the numbers would indicate underwater relative to the inflation, we've seen but I think thats.
Decent assumption.
Great. Thank you.
The next question comes from Joe O'dea from Wells Fargo. Please go ahead.
Hi, good morning.
First just a cadence question you gave some helpful details in terms of how youre thinking about the back half of the year, but I think with the fluidity of the current environment. Just anything that you are able to talk about in terms of the first half.
First quarter EPS tends to be maybe at a high teens percentage of the full year.
Just trying to understand based on the visibility you have on supply chain and what kind of progression, we should be thinking about kind of as we go first quarter in the second quarter, if you're able to talk about that.
I think we.
Gave you a nugget there are 60% of the EPS will be in the second half of the year.
Second you think about the labor ramp up debt.
Pink happening across the nation.
People.
Coming back to work back into the factories that momentum.
Important for us to.
Drive the supply chain to meet this.
And in the backlog that we've got a direct through the second would be chip suppliers sequentially, they'll get better quarter to quarter.
Leads to that back half being stronger.
I would just add seasonally Q1 normally our weakest quarter.
From a revenue perspective and earnings.
The year over year decline in margin not as pronounced obviously as what you saw in Q4.
But yet margin.
Down relative to Q4, just from a seasonal perspective, that's kind of normal course of business, but as we progress throughout the course of the year.
The price cost dynamic.
We will see continuous improvement beginning in Q1 relative to Q4 and that will progress throughout the course of the year.
As we get more price realization in our assumption is on inflation.
That we've kind of plateaued, where we are and actually steel is.
Kind of look at it on a cold rolled per ton basis has come down a little bit maybe a little opportunity there but.
Margin expansion really.
Backend loaded where that price cost dynamic becomes very favorable and obviously, we have easier comps.
Back half of this year compared to 21, so that's kind of how how we see it playing.
Playing out sequentially.
I appreciate that and then I wanted to ask about some of the commentary in 'twenty two but also constructive on 'twenty three in terms of the conversations that you're having with customers I mean the amount of.
Backlog, that's even scheduled for 'twenty three but you can just expand on that a little bit in terms of kind of what youre seeing to help kind of build what would be kind of at a two year constructive outlook on improving demand.
So we.
We certainly filter through the macroeconomic indicators, which we feel all positive all levels I think as you travel around the country.
The strength in construction markets, you've got stimulus coming from the top you also are working through.
Backlog of work.
That was.
Disrupted by the pandemic so.
As I think about K through 12 hospitals.
Multifamily.
The overall <unk>, which drives expansion I feel very good about the next.
Couple of years.
I would also add.
We've talked about this record backlog both on the mechanical electronics will have an opportunity to work through a lot of the mechanical backlog in 2022, there is still going to be an overhang, if you will or excess elevated backlog associated with electronic products going into 2023.
So with that backdrop and the continued strength in market demand would expect 'twenty three to be have a pretty robust organic revenue growth as well for the Americas region of non res.
Really good electronics growth year over year, so would expect that to kind of continue on compared to 2022.
Thank you.
The next question comes from David Macgregor from Longbow. Please go ahead.
Yes, good morning, everyone.
I guess, just a couple of quick ones.
Maybe Dave you could talk about the backlogs than in the past you've indicated a disinclination to want to put through pricing on backlogs as you protect.
Some of the spec business that you'd book I'm, just wondering if thats changing now as you think about becoming more aggressive on pricing.
2022, and then obviously great results from Europe under some pretty difficult circumstances, there as well clearly Tim and his team are executing well there can you just talk about.
What are the biggest pieces of the 'twenty two 'twenty three margin progression opportunities in Europe . Thank you.
So.
<unk>.
Let's talk about international first.
I think Tina Tan, our Allegiant home Europe , Simon <unk> Center flocks, the Australia business.
Great focus of.
Execution in 'twenty, one in the face of the pandemic.
The consolidation that we drove a year ago and announced and combining that did a couple of things one simplified our structure, we cleaned up some bits of the portfolio.
Tim's knowledge of the capabilities of America accelerated capabilities that we have here into those markets is things like diligence, it's things like our.
Our electronic software platforms, and a belief that some of the product platforms that we're having.
Having advanced development could be.
Extended and help US compete so I think when I think about Allegiant international.
That we pulled that off in a pandemic here is a salute to some work that's been going on at Allegiant for a couple of years.
It came to ahead I think our best days are ahead of us I think.
In terms of margin expansion.
I think <unk>.
Long term goal would be to be at.
Our margin equal or better.
Asa and the competitive markets, we're not apples to apples in terms of how we compete extremely strong and the electronics and then you get more into.
The regional market forces and what those markets allow where we're competing.
The second part of the question was yes, so David on the on the pricing associated with the backlog.
Keep in mind.
Industry standard normally too when you give a quote.
On a project based job <unk>.
<unk> you have an order in house.
Prior to the price going into effect kind of honor that so normally there's a time lag.
Tween when you announce a price increase in the realization and that could be we'll call. It on average 90 to 120 days type of timeframe.
So that's why relative to the price increases we've already implemented and are executing.
You don't get to a full run rate realization that we'll call. It Q3.
But normally you don't go back and reprice.
<unk> and backlog, Okay, and Thats a consistency.
Our industry now we have looked at.
Other parts of the business and in doing that but predominantly.
It's protected.
Is there any way you can update that $80 million to $100 million of backlog number that you gave us last quarter.
Where do you think that is today.
So it exceeded our increased compared to Q3.
Just kind of given the surge in order activity now some of that and it's difficult to characterize would be a pull forward from 2022 activity. When customers are just trying to get the orders in and get in line for the products.
But increased and I would say.
If youre kind of looking at the full year.
Revenue impact on Allegiant north of $100 million.
Would be how to think about it.
Thanks, very much gentlemen, thank you.
The next question comes from Andrew <unk> from Bank of America. Please go ahead.
Yes, good morning.
Hey, guys I was just trying to understand how much overlap is there between your supply chain and the supply chain of your competitors I E.
Sort of ability to compensate for the fact that it sounds you underestimated the strength of the demand and sort of catch up when the competitors already have sort of thoughts on the line or is that not an issue.
I don't believe there is.
There is little overlap.
If you think.
Look it up on Dupont exit devices and looked at.
<unk> whatever brand they go to market with significant differences on the mechanical side different schlake came out of San Francisco.
There's just differences I think there's also advantages disadvantages.
Also have scale.
Something we're not shy of.
A bigger electronic Spence with May give them. Some advantage I think when I look at the performance of assets in 'twenty, one I am humbled and I would say it is a strong reflection of the opportunity out there in the marketplace for our products.
Yes, we can pick it up and I was thinking more on the electronics side, but that makes a lot of sense and.
Another question sort of look you guys have been fairly conservative with the balance sheet usage, particularly on the technology side.
You have a lot of sort of things incubating inside but you know.
The valuations out there are a lot more favorable than they were a year ago. How do you think about strategic opportunities post the sell off and I would imagine there are more sort of desperate buyers sellers than they were a year ago, how does that look for you. So.
So I'd say number one on the App.
The software electronics seamless access side of this.
Our software stacks that support expanding access capabilities to customers have never been stronger we've invested through the pandemic and our ability to to.
To bring in visitor management in schools or capacity.
Through a building or <unk>.
Solving problems in verticals, whether it's multifamily K through 12 hospitals those software stacks are critical and I believe we're in a leadership position.
To us.
<unk>.
The valuations are softening.
We will be opportunistic on both you've got to have one leg in the mechanical world and one you know.
At least in the seamless access world and.
We're ready to deploy capital in both debt and areas that extend our value proposition and advance our position in seamless access around K through 12 multifamily and <unk>.
Hospitals and we've.
We've never been in a better position to do it Andrew.
Great and congratulations to Patrick Thanks, a lot.
The next question comes from Jeff Sprague from vertical research. Please go ahead.
Thank you good morning, everyone. Good morning.
I'm, just going to come back to price cost and also.
Dave your comment about kind of glide back to prior peak.
When youre talking about recovering inflation fully in 2022 is is that kind of the cumulative inflation burden that you've taken through this entire episode or are we just speaking about 2022, specifically and really the nature of my question ties back to the glide path comment you are rare.
The news here.
2022 look like there'll be 12 or 13% above 2020.
And the margins are 100 bps below 2020 to 100 bps below 2019.
So maybe you could just kind of bridge us little bit more back to where you think youre ultimately heading here yes.
Yes so.
On the price cost dynamic.
Commentary relative to 2022.
Is margin accretive obviously pricing exceeding.
Inflation cost and then when you add in productivity.
In the positive territory, they're margin accretive if you look at it over a two year basis.
Net positive.
Okay, but but down on margin and you understand obviously the math on this you.
You can offset inflation, but it's not enough to kind of cover your normal margin profile. So pressure there when I look forward to 2023 <unk>.
<unk> got continued growth in the business. So you would have volume leverage there assuming inflation is normalized carryover of price.
Improvement, there plus any incremental pricing improvements would be additive.
And then you just have the normal leverage on the business and plus business mix.
It should be favorable as well so kind of looking forward past 2022, glidepath to peak margin performance from an overall a lead Gen perspective, you heard Dave talk about the improvement in international segment, leveraging corporate spend et cetera, I think it puts Legion and.
A good position to be at peak margin performance and hopefully by the end of 'twenty, three and going into 'twenty four I'd add one other as I think about pricing.
Versus pre pandemic, we are increasing at product pricing R&R residential products and we will make sure that we true that element of our portfolio as well.
And could you just.
Two I mean, obviously, everyone is dealing with supply chain issues, but.
The key competitor does seem to be faring, a little bit better.
Are there any.
Kind of just slippage in kind of distribution posture.
With key distributors are in retail.
Where you are kind of like.
A better term I guess stocking out and kind of losing shelf space.
I would say Mike.
My reaction is no.
Not losing shelf space.
I think.
One is when I think about asaf.
They would run with significantly more inventory allegiant versus also differ.
Different model.
But if we would typically run with four or $500 million, where the inventory. They are four to five times bigger than that so you've got a bigger mass they have to drive that on a global basis.
I think theyre electronics position, particularly driven by HIV is an advantage there.
With that said we've worked extremely hard.
Adapt our supply chain again I've talked about.
The velocity, we get through that supply chain in a normal time.
We were hit by the electronics investment casting some extrusion the mechanical side easier for us to.
Go in and fix the electronics as we think about.
Our guy.
Allocations equal to the guide.
Electronics improved which I see some breaks we're going to sell more electronic locks, which will be good for our region as I think about lack of cell shelf space, Jeff you know as well as I do.
If your installer needs. It today and you can't provide that it goes to the competition and I'm confident we have faced some of that I'm confident that we will regain whatever we want.
Great and maybe just one housekeeping question too.
Wages came up a couple of times can you just give us a sense of.
Kind of labor direct labor as a percent of Cogs or however, you want to frame it for US just to have the perspective on that.
So if you look at it relative to the gross profit.
It's a low piece of the overall.
Product manufacturing cost.
Wage rates have increased here, we're competitive in the marketplace and so what youre seeing across the board we would participate in that relative to the increases to ensure we're competitive in attracting and retaining good talent.
I would just add.
Especially in the major sites our goal.
Allegiant.
Shiny manufacturing on the hill, great benefits, great wages, great opportunity to develop.
One of the safest workforces in the world and a place where people can engage in growth.
Great. Thanks, Patrick Congratulations enjoy retirement, Mike Congrats.
And just a reminder, if we could just have one question and a very short follow up if possible just to make.
Shall we get everybody in.
The next question comes from John Walsh from Credit Suisse. Please go ahead.
Hi, good morning, and congrats to Patrick and Mike both.
I guess just for my one question here as we think about the margins for.
The two segments and I appreciate we're not going to get.
Quarterly details here, but would you expect both of them to kind of lever at a normal type incremental back half of the year.
Is there any kind of divergence between the two of them as we think about the margin growth opportunity for both segments in 2022. Thank you.
Yes, I would say the international segment would be on a more normalized basis, and obviously you didn't see the pressure that the Americas region did in 'twenty one.
So your question specific to the back half of the year.
<unk>.
Americas would lever more than what you would normally see again because of the price cost dynamic becoming much more positive there and the efficiencies from a manufacturing perspective as we work through some of these supply chain constraints now they will have much better leverage because productivity will.
B a lot better and then kind of leveraging on the SG&A cost base, so higher incrementals.
Incrementals in the back half of the year and you would expect that just kind of given the dynamics of where we are today.
Great I'll just leave it at the one question there I appreciate it.
The next question comes from Josh Chan from Baird. Please go ahead.
Hey, Good morning, Dave Patrick Tom Best wishes Patrick in your apartment.
Thanks, Josh Josh.
My I guess my one question.
Based on your comments about raw materials, and steel may be coming down a little bit.
You are kind of hard cost flow through your P&L. When do you expect to sort of hit peak raw material costs. If you will prior to.
The steel may be benefiting a bit later on.
So we're currently at peak cost right now.
We'll kind of carryforward into into Q1 Q2.
It starts to level off relative to prior year comparison.
But just a quick reminder, even with the market costs being lower today than what it was we'll say in early Q4.
We don't see the benefit of that roll into our numbers, maybe three to six months later, just kind of a basis of how we manage our supply chain and.
Entering into contracts.
Average prices in those type of things so.
Kind of like the pricing dynamic there was always a lag relative to market and so.
I would expect if a retained here.
Of that to flow through will call. It in Q3.
Great well I appreciate the color and good luck in that.
Thank you.
The next question comes from Josh Polka Winski from Morgan Stanley . Please go ahead.
Hi, Good morning, guys and congrats to Patrick and Mike both.
Just maybe first question on the.
The supply chain side, you guys talked about a lot about chip shortage, but I guess, maybe just kind of zooming out.
The bulk of the portfolio really isn't mechanical versus electrified like any other pieces of supply chain that are still kind of jump balls for 'twenty. Two that we should think about or well a lot of that throttling really be determined by chips.
We have.
What I would describe as more control over that mechanical supply chain have been able to move faster.
And to develop alternative sources wherever that could come from the world again, I would say a lot of our U S. Mechanical supply chain is based in the region and.
Again.
The mitigating moves that we've made I think.
Are substantially more excellent operational execution will then.
Yes.
Chip side of it.
Got it and then just a quick follow up do you want to make sure I heard you right Patrick.
Returned to prior peak margin that was at an exit rate for <unk> on a full year comment I know, it's sort of silly like sitting here in early 'twenty, two but just making sure I understood you right.
So first of all what I did mention as exit rate 'twenty to kind of be kind of go back to.
We'll call it more of a normalized margin profile Q4. This year 22 is going to look pretty good.
So feel good about that as we progress throughout 2003.
We could be back as a total company and lead Gen.
Peak margin again, a lot of inputs, there and factors kind of playing into that.
And things could change but.
So feel we're on a good trajectory for 'twenty three for peak margin for the full year.
Americas will still have some wood to chop kind of get back to peak margins, but.
We're working on.
I'd make one more comment.
To make sure I am clear on the electronics side of this the team our engineering resources have done a great job.
Adapting.
In developing second sources for electronic chips.
Particularly around some of our newest locks.
Those chips are in high demand and the external market. So.
Things like our exit devices those chips maybe more.
Options on the market than some of the things like the input costs that are right on the cutting edge.
Appreciate it guys. Thanks.
The next question comes from Chris Snyder from UBS. Please go ahead.
Okay. Thank you actually just wanted to follow up on those prior comments around chip procurement can you maybe talk where the company is in terms of sourcing alternative suppliers.
This point is the chip constraint more of a revenue headwind in that you cannot get get the chips or is it more of a margin headwind in that the chips you can get from alternative suppliers are running at a higher cost.
I would say.
The chip constraints are a revenue headwind.
If we could get more we could sell more.
I would encourage you to take a look at our new input cost. It's the first touch to tap lock on the market.
Its constraint, it's got some of the newest chip technologies.
Battery savings or.
Murray energy savings, you'll like it but it's construed.
The second part of your question.
I think that answered I guess my follow up question was actually it would be around pricing methodology, obviously in the current market where availability matters more than price you can push pretty hard, but how do you guys determine how do you gauge what's the sustainable level, how much can we put in Q1.
To that that could sustain through 'twenty, two because it sounds like the assumptions that availability across the supply chain improves throughout the year okay.
Yes.
The bid spec quote market.
We're testing that market, we're tasking that pricing every day.
Two price increases in 'twenty, one and the commercial institutional another coming out.
Some were raising list prices, we're making sure we're capturing our freight.
In the.
Bid.
Quote bid order procurement phase of that.
Tested every day by the marketplace are you winning or losing.
Sure.
Whether it's.
Bit of an auction market, but we're living that every day on the residential side.
We're going to be strong and stand up for the inflationary forces that are impacting our products and.
Not give away some of the finest products on the client in terms of residential securities.
And Chris I'll, just add your question on the product redesign and alternative sourcing strategy, making really good progress.
It impacts a lot of products throughout our product portfolio the.
The expectation is in the.
The majority of it will be completed and executed by the end of the second quarter.
It's kind of phased in throughout a little bit this quarter.
Most of it Q2.
Which will help us alleviate.
And start getting more product into the channel, our customers et cetera, and higher growth rates organically and so and to start working down the backlog.
I appreciate all the color. Thank you.
The next question comes from Brian Ruttenberg from Imperial Capital. Please go ahead.
Yes, just real quick I had a number of questions. So I'm going to hit you with maybe the easiest one the total price increases that you had in 2021 can you give us a range with it.
On the LOE of 5% up to 'twenty, you can give us a range on where prices went in 2021, and where you anticipate those to go in 2022 overall in terms of the <unk>.
Ranges of price increases you had on your products.
I would say characterize it as a wide range different product segments get different.
Price increases residential nonresidential is different even within nonresidential, our hollow metal door business. For example has surcharges attached to it which would be higher that is specific to steel, but list price increases maybe is what youre more asking for.
I'd say, we're competitive with the market.
Relative to the increases, we we've already announced and implemented in the market.
And then another increase this month as well.
Pretty sizable but remember its list price and Theres always discounts off of list price of the key item here is what do you end up realizing.
And that number will continue to accelerate reaching a peak in Q3 of this year.
Okay.
A follow up to clarify that since you didnt mention any specific numbers the market as I hear it is around 15% increases is that the right market that I'm hearing that youre talking about.
I would say.
Again, it depends what youre talking about that to me sounds like Theres, a lot of surcharges baked into that number.
That is not an aggregate kind of the list price on your traditional mechanical electronic business.
So let me.
Specifically with hollow metal steel doors, you could easily be in that Zip code or more.
But there is a wide range of Skus here.
Yes.
Sure.
We're in a.
A lot of it's been spec where were competing everyday prices are up.
Thank you.
This concludes our question and answer session.
Like to turn the conference back over to Dave <unk> for any closing remarks.
To wrap up the main themes you heard today demand remains robust and leading indicators are positive.
We're working through the supply chain challenges, which are expected to improve but we still see some pressure on electronics.
We will get the price cost equation back to positive this year and we expect to deliver organic growth of seven to eight 5% adjusted EPS of 7% to 11% and high cash conversion in 2022.
The long term fundamentals of Allegiant remained strong and we are well positioned to capitalize on the opportunities and we will return to peak performance as conditions normalize. Thank you and have a great day.
The conference has now concluded thank you for attending today's presentation.
May now disconnect.
[music].