Q1 2022 Allegion PLC Earnings Call
Good morning, and welcome to the Allegiant first quarter 2022 earnings call.
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 and now I'd like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you Jason Good morning, everyone. Thank you for joining us for allegiance first quarter 2022 earnings call.
With me today are Dave Petraeus, Chairman, President and Chief Executive Officer, and Mike Wackness, 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.
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 Mike will now discuss our first quarter 2022 results, which will be followed by a Q&A session. Please for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow up and then reenter the queue, we would like to give everyone an opportunity given the time allotted. Please go to slide four and I'll turn the call over to Dave.
Thanks, Tom.
Good morning, and thank you for joining us today.
We had a solid start to 2022.
Overall market demand remains strong and our organic growth and pricing action accelerated.
We also announced on Friday, the acquisition of the Stanley access technologies business, a highly strategic acquisition for Allegiant, which is expected to close in the third quarter of this year.
During Q1, we experienced robust demand on the nonresidential side of the Americas.
As well as strength in Simon's Voss, Interfax and portable security with the international within the International segment.
Residential markets in the Americas remained stable.
We have made progress on our product Redesigns and alternative sourcing similar to the last two quarters.
But we're not able to fully meet the strong demand due to continued supply chain constraints.
We did deliver good revenue growth in the quarter dry driven primarily by price.
The continued strength and demand is encouraging.
With regards to supply chain constraints, we expect electronic component challenges to persist in the latest lockdowns in China are likely going to impact global supply chains, even further.
Looking at price versus cost, we continue to experience high inflationary impacts from material costs labor and freight.
Price realization accelerated in Q1 and was the driver of organic growth in the quarter.
With the recent spike in commodity prices, we have we have already announced additional price increases take effect, starting in Q2 across residential and nonresidential markets.
And we will assess the need for further price increases as inflationary pressures continue.
As we discussed in February we are aggressively pursuing price across all products and in all channels.
To offset an unprecedented inflation and we expect price to exceed inflation further for the year.
We are providing an updated outlook for 2022, we are raising our revenue outlook to reflect higher price offsetting the additional inflation we're experiencing.
We are holding our.
Our prior EPS range and I'll share more detail on the outlook the outlook later in the presentation.
One on the business review I want to further highlight our announcement from last Friday.
We have come to an agreement to acquire access technologies business from Stanley Black <unk> Decker. This is the right asset for Allegiant and are progressing our seamless access strategic focus.
Adding the category leader with expensive service with an expansive service footprint. The business has a strong financial profile and is very complementary to the Allegiant Americas core business and our portfolio.
Closing is.
<unk> paid in Q3.
And we.
We welcome the access technology employees, and we look forward to all of them joining our team.
Now, let's turn to the quarter performance for more details.
Please go to slide five.
Revenue for the first quarter was $724 million, an increase of four 2% compared to last year.
Organic revenue growth was six 4%.
The organic revenue increase in the quarter was driven by significant price realization of 6%.
Elysian International and always in Americas Nonresidential business also saw volume growth driven by robust demand highlighted earlier.
America's residential volumes were down as that business had a tough comparable to last year.
<unk> attributed to the large channel loading during Q1 of 2021.
Mike will share more detail on the business segments in a moment.
Adjusted operating margin decreased by 240 basis points.
In the first quarter.
Continued inflationary pressures productivity challenge and currency headwinds drove most of the decrease.
Incremental investments for future growth caused 60 basis points of the decline.
Yes.
Adjusted earnings per share of $1 seven decreased 13.
Our approximately 11 versus the prior year.
Lower operating income a year over year tax rate increase and reduce other income was partially offset by favorable share count.
Yes.
Year to date available cash flow came in at $12 million, which was down 89% versus Q1 of last year, but is in line with our historical trends.
Last year's high number was driven by lower working capital requirements due to the COVID-19 pandemic.
As I've stated before I firmly believe our vision and strategy and support a seamless access is more relevant than ever.
And the access technology acquisition will add momentum.
We remain bullish on construction and DIY.
<unk> markets for 2022 and continue to expect the trend of electronic adoption to fuel growth for many years.
Mike will now walk you through the financials 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 first quarter for.
For the first quarter of 2021 reporting reported earnings per share was $1 18.
Justin <unk> for charges related to restructuring expenses to 2021 adjusted earnings per share was $1 20.
Favorable share count increased earnings by <unk> <unk> per share and the impact of acquisition and divestitures drove another <unk> <unk> per share.
Higher year over year tax rate reduced earnings by <unk> <unk> per share and the combination of interest and other income drove another three cent reduction.
Investment spending had a four cent per share drag on earnings as we continue to invest in the business to fuel long term growth expand our electronics capabilities and drive our seamless access strategy.
Operational results decreased earnings per share by <unk> <unk>.
Driven by significant inflation productivity challenges associated with supply chain pressures and unfavorable currency, which more than offset the favorable impacts of price.
This results in adjusted first quarter 2022 earnings per share of $1 seven a decrease of 13 or 10, 8% compared to the prior year.
Lastly, we have a <unk> <unk> per share reduction for the net of a non operating gain and charges related to restructuring and acquisition costs.
After giving effect to these items you arrive at the first quarter 2022 reported earnings per share of $1 five.
Please go to slide seven.
This slide depicts the components of our revenue performance for the quarter.
I'll focus on the total Legion results and cover the regions on their respective slides.
As indicated we had six 4% organic revenue growth in the first quarter driven by improved price realization.
Although the company's volume was essentially flat, we did see strength in the Legion International and the Allegiant Americas Nonresidential business.
Currency headwind and divestitures more than offset the impact of acquisitions, bringing the total reported growth to four 2% in the first quarter.
Please go to slide number eight.
First quarter revenue for the Americas segment was $528 2 million up five 9% on both a reported and an organic basis.
The segment delivered significant price realization nonresidential price was strong and residential business experienced improved price realization.
The price helped the nonresidential business grow low double digits residential was down mid single digits against the tough comparable from last year's channel load in.
Which drove Q1 of 2021 to be up low 20%.
Electronics revenue was up low single digits as component shortages continued to dampen our growth.
Americas adjusted operating income of $123 9 million decreased eight 6% versus the prior year period, and adjusted operating margin for the quarter was down 370 basis points.
The Q1 margin performance was a sequential improvement for the Americas as we expect to see further improvements as we progressed through the year.
The decrease in margin was driven by continued inflationary pressures productivity challenges associated with supply chain shortages and volume deleverage.
Incremental investments had a 60 basis point impact on margins as well.
Please go to slide nine.
First quarter revenue for our international segment was $195 4 million flat to last year and up seven 6% on an organic basis.
The organic growth was driven by strength in Simon's Voss and reflects and global portable securities businesses.
This segment also saw solid price realization contributing to the organic growth.
The strong organic growth was offset by unfavorable currency and divestitures.
International adjusted operating income of $20 4 million increased 13, 3% versus the prior year period, adjusted operating margins for the quarter increased by 120 basis points to 10, 4%.
The margin increase was primarily driven by price and productivity exceeding inflation as well as solid volume leverage which was more than offset.
Sorry, which more than offset currency and a 50 basis point headwind due to investment spending.
Please go to slide 10.
Year to date available cash flow for the first quarter of 2022 came in at $11 8 million, which is a decrease of more than $93 million compared to the prior year period.
The $11 8 million is more in line with historical trends as the business tends to have modest cash flows in the first quarter of a typical year.
Last year's.
Last year's spiking cash flow was driven primarily by lower working capital needs due to COVID-19 .
The business continues to generate strong cash flow and we remain committed to efficient and effective use of working capital.
The amount of available cash generated in the first quarter was as expected and the balance sheet continues to be in a healthy position.
We expect to use excess cash generated during the remainder of the year to pay down short term debt taken on to complete the acquisition of the Stanley.
Access technologies business.
I will now hand, it back over to Dave for an update on our full year 2022 outlook.
Thank you Mike.
Please go to slide number 11.
Nonresidential market demand in the Americas continues to be robust.
All leading indicators are positive and the level of institutional specifications continues to be strong.
The residential business is stable and the under supply of homes over the last decade will continue to be a factor driving growth in the residential segment.
We have been aggressive in pursuing price in all channels and products and saw substantial improvement in price realization in Q1.
We have announced additional price increases to go into effect starting in Q2.
Given the continued supply chain challenges, we still expect the revenue performance to be better in the second half than in the first half.
With these parameters in place we are raising the outlook.
Are now projected.
Total and organic revenue in the Americas to be up 10 to 11, 5% in 2022.
And a leader in the international markets have remained solid led by our dramatic and global portable security business the <unk>.
International segment also experienced sequential improvement in price realization.
As we are presuming price aggressively in those markets as well.
Currency headwinds will continue to reduce total growth.
For Allegiant International we are raising our outlook for total revenue growth to 0.5% to 2% with organic growth of five to six 5%.
All in for total lesion.
We're raising the total revenue growth outlook to a range of seven 5% to 9%.
And organic revenue increased eight 5% to 10%.
These increases to prior outlook are driven primarily by higher price realization.
It is important to note. This updated outlook does not include any impacts from the Stanley access technology acquisition.
Please go to slide number 12.
For EPS, we're holding to the ranges provided during our last earnings call reported EPS is expected to be $5 50 to $5.70 per share with an adjusted EPS range of $5 55.
To $5 75.
As the increased revenue from the additional price realization is offset by higher inflationary costs.
The outlook continues to assume a full year adjusted tax rate of approximately 13%.
And the share count assumption has been updated to approximately $88 5 million.
The unfavorable impact of the higher share count assumption is offset by operational improvements leading us to hold the prior EPS outlook.
Our outlook for available cash flow is being raised and is now projected to be $470 million to $490 million.
Please go to slide 14.
Before we go to Q&A I want to talk a bit more about our acquisition of the access technologies business.
For those of you have who have missed Friday's conference call invite you to visit our website and listen to the archived webcast.
I want to repeat the benefits we saw in this acquisition.
It's a highly strategic combination expands our presence in security markets and unlocks greater value for our employees customers distributors and shareholders.
We will bolster our geographic leadership in the region Americas through complementary verticals and further penetrate our markets with complementary products and service offerings.
Cross selling opportunities to re create more room for mutual growth and we will enhance and expand a service business that drives customer value and automatic entrance solutions, providing ongoing and consistent revenue streams.
Our Legion will significantly expand its breadth of access egress and access control solutions.
In return the access technology business will gain specification and institutional market expertise strong new end user and architectural relationships and distribution networks as well as additional resources from Allegiant.
Along with the leads and a strong balance sheet significant cash flow and disciplined capital allocation. We believe it will create a stronger financial profile, a stronger value proposition and new opportunities that enhance shareholder value.
Please go to slide 15.
As we look at this acquisition. We believe there are many ways that delivers on our process promise to create value for our leading shareholders.
We're creating value with a more comprehensive portfolio of solutions, adding a category leader in addressing a current portfolio gap in allegiance core businesses.
We're also adding north American service capabilities to grow seamless access and a connected world.
The acquisition of <unk>.
Access technologies business is the right opportunity for us it expands our innovation and electronic capabilities brings a strong business with good market fundamentals and complements the core markets and specification expertise of our Allegiant Americas segment.
We believe the acquisition will strengthen our financial profile.
It provides clear synergy and incremental revenue opportunities.
A balanced and disciplined capital allocation strategy will continue to be a top priority for allegiant.
And having a strong balance sheet and cash flow to maintain financial flexibility that's important though.
Ultimately, we believe the automatic entrant solution, a service business or a strategic investment that supports seamless access.
And the access technology acquisition will create value for our shareholders.
We're excited to welcome the business and its people to the Allegiant family.
With that Mike and I will be happy to take your questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
Further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Timothy <unk> from Baird. Please go ahead.
Good morning, Tim.
Okay.
Hold on one second here.
Yeah.
Jason just confirming there is just a technology challenge.
There is a technology challenge just give me one second.
Okay.
Yes.
Alright, Alright Timothy.
Your Mike is now open.
Can you guys hear me.
Brewers baseball game too.
The box right now.
But I guess, maybe just nice job on the quarter, maybe just talk a little bit about.
You know, what you're seeing from an order and kind of a backlog perspective.
How are you kind of thinking about the revenue cadence as you kind of think through the year.
I'm, just trying to kind of understand the visibility that you've got to the back half of the year and kind of what you're building in for any risk that maybe the building timelines, Mike long gauges from a construction timeline perspective, and maybe shifts that revenue into 'twenty three.
I think as we think about the path forward in terms of order activity.
Incoming orders, especially.
In the commercial business institutional business extremely robust.
Kevin as I've been traveling around the last few weeks do you also get that feel that construction activity across the country extremely robust as we look at our macroeconomics.
Yes.
And the commercial institutional we're beginning the up cycle.
<unk>.
We're going to get stronger as we go through the year in terms of you know.
Product out the door.
I would say supply chains.
We remain under pressure, but have improved from the second half of last year.
And then I think you've got to think about Russ and this you know when I think about raise it probably shows my age a little bit.
It was extremely residential was an extremely difficult in the last decade, and as I think about the under supply of housing across the nation.
We're going to continue to Bang out a million two 1 million six even with higher interest rates. So I feel very good about about overall demand I think about that going out four to six quarters and then we will see.
Okay. Okay. Good.
And then I think it's I think in the prior guidance just on the EPS cadence, Mike I think it was kind of 60% weighted to the back half is that is there any difference to that today, just given kind of where you were in the first quarter or is that kind of tomorrow.
Tim as you think about it we got off to a decent start right I would say it doesn't move materially from that 60% that we said.
At the beginning of the year first quarter was.
Okay are stronger than maybe the original assumption assumed.
So that could move it a percent or so or two but it's a roughly around that 60% that we gave in the beginning of the.
The year.
And then is there any change to kind of the price cost.
Assumptions on a dollar basis for the year.
Yes, I would say as you look at our guide we raised our guide.
On the topline deaton raised the guide on the EPS, because daddy's price realization that is fighting the inflationary pressures.
So there will be a higher percentage going to price than we assumed in the beginning of the year. So up in the beginning of the year. We said roughly 50 50, that's going to be higher by the raise of the guide so youre going to be looking at that 60% to 65%.
Okay sounds good.
Guys. Good luck on Thursday.
Thank you.
Our next question comes from John Walsh from Credit Suisse. Please go ahead.
Good morning, and nice quarter.
Thank you Tom.
Just kind of wanted to understand.
The change in the sales guidance, so it sounds like it's being driven by price, but what.
What kind of gave you the confidence to take it higher given that supply chains are still tough do you have the China COVID-19 .
Impact just I understand that demand is really robust and you have the strong backlog, but kind of what gave you the confidence that you'll be able to get the parts you need to kind of hit a higher top line.
Yeah, John as you think about our obviously the price we feel really strong we've announced those increases already so they are in the marketplace.
With respect to the overall market demand.
Even stronger than when we exited Q4, so Q1 real strong market demand in nonresidential and then lastly, we've taken actions to qualify additional suppliers and to work on.
Bringing in new supply base those activities have gained traction in the first quarter and so that probably give or that does give us confidence that in the.
The back half of the year, we will get additional supply from additional suppliers that we can get more volume out.
I'd add to it as well versus the second half of last year.
Labor has improved through its availability freight has improved modestly and I say modestly.
Yeah.
The the ryzen covered in China of the Lockdowns will have some implications we've got some exposure, but it's not major.
And I think particularly on the mechanical inputs to our business.
Redesign quad.
Quantifying sector suppliers has really strengthened our confidence.
That leaves the electronics element as we think about going forward and our guide that's based on allocations.
Chip availability gets better across the board will be even stronger.
Great. Thanks for that answer and then.
Just thinking about some of the moving pieces with the margins I know before we were thinking America should see better than normal just on mix.
And volume recovery, obviously, we have the higher inflation, that's getting passed through but could you just maybe help calibrate either total allegiant level or within Americas kind of what youre thinking the incremental margins will be for the year or however, you'd like to talk to it.
Yes, so John as you think about Q1 sequential improvement versus what you saw in the fourth quarter, we'll expect to see improvements each quarter sequentially such that the back half you start to really see that margin expansion.
Hi.
Versus the prior year, so sequential improvement and then expansion in the back half and then when you model. It just take into account that there is substantial inflationary pressures, we're driving price to offset it from a dollar amount, but that raises the denominator in the margin calc without <unk>.
And the numerator from the profit because it offsets it.
Makes sense I'll pass the baton thanks for taking the questions. Thank you.
Our next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, How's it going guys, you've Matthew Shafer on for Julian Mitchell's team Hey, Matthew.
Gallons. So you guys mentioned that pricing as expected you could see depletion in 2022 can you maybe talk to the cadence of the price cost differential through the remaining quarters.
Yes, as you think of the first quarter, we were slightly negative.
We do.
We provide that information in our 10-Q, so youll see it in our 10-Q by region and in total, let's say $7 million under water in the first quarter as you progress into throughout the year thinking Q2 being closer to breakeven ish.
And then Q3 and Q4 are substantial.
Price in excess of that inflation with price and productivity in excess of the inflation, so gets better as the year progresses.
<unk>.
And then significantly positive in the back half.
Okay, Great and then just a follow up from me electronics was up low single digits in America from Q1 after being pretty weak in 2021.
Curious what your expectation is for 2022 growth for electronics.
We don't provide individual growth rates electronics versus mechanical.
Do you think about our performance in the first quarter substantial improvement from what you saw Q4 as you mentioned.
The demand is there the demand will be limited by the ability to get the supply. So I would just say take it into account when you consider our total guide for revenue.
Understanding that it's better than what you saw in the fourth quarter and in the back half, we do comp against those easier comparables that we have in the back half of last year.
Great. Thank you guys so much.
Thank you.
Our next question comes from David Macgregor from Longbow Research. Please go ahead.
Good morning. This is Joe Nolan on for David Mcgregor, Good morning, Joe Joe.
So on the residential business you mentioned revenues were down mid single digits are you able to talk about what units did in that business.
Then I'm aware, it's always been a difficult channel to get pricing in.
So if you could just talk about.
How the recent price increase is trending in terms of.
How that's gone into the channel.
Yes. So if you look at our <unk> business, we mentioned earlier that it had.
Positive price realization for the quarter not as strong as non res.
On a unit perspective, then you can see that units would be a little less than the total growth because we did have the positive price realization.
More importantly, moving forward, we've taken actions in residential to drive price that has been announced to the marketplace and goes into effect in the second quarter. So we expect to see better price realization in the second quarter and onward through 2022.
Got it thanks.
Then can you just give an update on trends in spec writing activity just the size of projects Youre content order size timing and that sort of stuff.
I would say spec writing activity continues to be robust you can look at the Abi I think.
The March Abi was like a 58.
I'd say.
Hey, good range of projects with strength.
The medical and hospital.
Areas, which is good for our Legion.
Can't really get into the size of these but the over activity is good and I think reflects.
The strength, we're seeing in our incoming bookings.
Great. Thanks, I'll pass it on.
You.
Our next question comes from Brian Rotenberg from Imperial Capital. Please go ahead.
Yes, thanks, very much great quarter.
I'd like to break things down a little bit on growth versus operating margins.
So gross margins were down from fourth quarter, and obviously down year over year do you expect.
Gross margins to increase from.
First quarter to second quarter, and then progressed.
A couple of hundred basis points per quarter is that what youre, saying.
Yes, I would say if you think about the gross margin that's that inflation in excess of pricing that we've talked about in the 10-Q as you think about margins in general they'll improve as we get throughout the year. So we should see both the gross and the operating improve as we move throughout.
2022.
Okay. So we will see on the operating basis will also see improvement sequentially was that because theres going to be lower SG&A.
Or just the increased leverage from the top line and more gross profit.
As you get.
Significant growth in the back half of the year Q2, three four you leverage that SG&A base. So that that does help also the operating margins.
Volume beautiful thing in this business as we go through the second half the business leverage quite nicely.
Great. Thank you very much.
The next question comes from Andrew <unk> from Bank of America. Please go ahead.
Hi, you have Sabrina Aram.
Thanks, Jim.
Good morning.
Good morning.
I understand that you mentioned, you're sort of expecting Dan right in the past month have you been.
Seeing worsening supply chain impacts from the Covid related China set down and from the Russia, Ukraine conflict.
I would say.
We have very little exposure to Russia.
I'd say the bigger factor has been pricing of raw materials.
And we will adapt to that with price as we think about China.
It's certainly serious.
We have.
Exposure there, but it has not affected us in April .
I think we've got the adaptability to be able to drive through that.
We're not totally immune.
Our in geographic production capabilities.
Position as well.
Great. Thank you.
Now that I understand.
And that you are raising the revenue guide and maintain the EPS range on inflation, but I.
I guess I'm curious you guys had a slight EPS beat in <unk> and are maintaining that guide are there any other headwinds we should be thinking about besides inflation in the remainder of the year.
As we think about where we are today, we've just completed the first quarter got three quarters to go.
Good that we got off to a nice start to the year.
You see a as we started the year, we had a very back half loaded plan getting off to a good start makes us feel even better about us hitting our EPS range.
Okay. Thanks, I'll pass it on.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to David Petraeus for any closing remarks to wrap up our main themes you heard today the Legion got off to a solid start in 2022 demand remains robust and leading indicators.
We're positive.
We continue to work through supply chain challenges.
But macroeconomic events in China could delay in the improvement of some of the global supply chain is not unique to allegiant, but does affect us press.
Pressure on electronic components is expected to persist.
Inflation continues we are aggressively producing price in all channels and products and we will get the price cost equation back to positive this year.
And last we are excited to welcome Stanley's access technology business to the Legion family and portfolio of products.
Thank you and have a safe day.
Yes.
The question excuse me. The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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Yes.
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