Q2 2022 Allegion PLC Earnings Call
Good morning, and welcome to the Collegian Q.
Q2, 2022 earnings conference call at.
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I would now like to turn the conference over to Tom Martineau, Vice President of Investor Relations. Please go ahead.
Yeah.
Okay.
Good morning, everyone. Thank you for joining us for Allegiant second quarter 2022 earnings call with me today are executive Chairman, David Petraeus Pres.
President and Chief Executive Officer, John Stone.
Senior Vice President and Chief Financial Officer, Mike Lagged us.
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 at Allegiant 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 that 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. We will now discuss our second quarter 2022 results, which will be followed by 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 now.
Now I will turn the call over to Dave Thanks, Tom.
Good morning, and thank you for joining us today.
Please go to slide number four.
Yes.
Before we provide our business and financial overview for the quarter I want to start by acknowledging two significant amount announcements from the last few months.
Sure My plans to retire from Allegiant announcing johnstone as the incoming president and CEO of Allegiant.
John is the right leader to take our region into its next chapter.
And I'm happy to say, we didn't have the right talent right strategy and right Foundation to successfully execute this vision.
Seamless access and a safer world under John's leadership.
It's been a privilege getting to know John and learned about his service to our country is a west point graduate Army officer and veteran.
He also has a background in engineering and manufacturing with a track record of leading sustainable profitable growth.
Building from the core business by working on new innovation and technology.
We are protected particularly impressed by Johns experience, leading DRAM companies intelligence solutions group.
John is well versed in connectivity, having guiding the company through the digital transformation for agriculture.
He drove value through digital tools, helping the industry become more productive through innovative technologies like automation artificial intelligence and machine learning.
Delever to the Iot to deliver wireless data sensing technologies as well as the innovator innovative remote service capabilities. All of this enhance the performance and value of traditional mechanical equipment and allowed customers to drive their own operational efficiencies.
Most of all Jonathan experienced at managing complexity.
<unk> company is a complex global business and his leadership opened an important route to precision agriculture during his time there.
In many ways John has already driven growth and success utilizing seamless access strategies, John would you like to say a few words, yes. Thank you Dave and good morning, everyone and thank you for joining our call I'm looking forward to getting to know each of you a lot better over the coming quarters.
Dave I am Super energized to be here highly motivated by our higher purpose of pioneering safety and motivated by our vision of seamless access for a safer world.
I agree with you that our leads and has a very sound Foundation, we've got great brands, great products, a strong teams strong culture and customer relationships that have stood the test of time.
I'm looking forward to visiting more of our sites in the coming weeks getting to know our employees, our investors and our customers and are learning the business at a deeper level right alongside our experts.
It was a really exciting time to be part of <unk>.
Thank you Dave Thank you John .
Leading allegiant has been an honor and one of the most rewarding experiences of my professional career and I'm proud to turn over the reins of this incredible organization to you John Stone.
Please go to slide number five.
In the second quarter, we shared allegiance intent to acquire the access technologies business from Stanley.
I'm happy to announce that a July 5th access technology is now a part of the allegiance family.
The access technologies business bolsters, Allegiant seamless access strategy, where the category market leader.
More than 90 years of history and innovation.
Automatic entrance solutions as a strategic investment that addresses a gap in our portfolio.
We're adding in a high growth service and support network to our North American portfolio, which will position us better as devices become more connected.
Importantly, bringing the asset technology business to Allegiant also provides clear synergy and incremental revenue opportunities.
And we believe we're creating a stronger long term financial profile for a company that will deliver long term value creation for allegiant shareholders.
Simply put with access technology as a part of a Legion. We are now able to offer our customers broader solutions and services and continuing to grow profitably.
At this time I want to go over access technology is expected financial impacts for the second half of 2022.
We expect the business to deliver approximately 9% growth in the full year topline number for the Americas segment.
We are also projecting the business will be dilutive to adjusted EPS by approximately <unk> 10 per share in 2022.
Breaking down that impact further the access technologies business is expected to deliver 20 per share of operational earnings offset by noncash intangible asset amortization.
<unk> 13 per share and increased interest expense related to financing. The deal is expected to drive a negative 17 cents per share impact.
I want to reiterate that the Allegiant team is proud to welcome the access technologies dedicated employees, who bring him his talent and expertise in safety security and service to our Americas segment as well as our global organization. We're excited to have you here. Please go to slide number six.
Yes.
As we look at business conditions American nonresidential market demand remains very strong and we expect that to continue leading indicators are showing expansionary readings.
On the flip side, we are beginning to see some softening in the Allegiant International segment and Americas residential markets from previous robust levels.
In international we are seeing the impacts of Geo political instability and.
<unk> zero tolerance COVID-19 policies in China that have nature.
Really impacted volume.
We continue to make progress on our supply chain actions.
Which have resulted in improving component availability for mechanical products.
Electronic components challenges continue however, the product Redesigns and alternative sourcing actions, we have taken set us up better for the remainder of the year and 2023.
Looking at price versus cost, we delivered strong price in the quarter across the entire portfolio.
Price realization accelerated again in Q2 and was the driver of organic growth in the quarter.
<unk> exceeded inflation in the quarter and we expect that to continue for the remainder of the year.
Our Legion will assess the need for future price increases, we remain vigilant to increase to ensure that price and productivity exceeds inflation.
Lastly, our Allegiant international business is experiencing significant currency pressure as the dollar strengthened in the second quarter reported revenue revenues reflect $22 million of currency pressure related to foreign exchange rates.
And as noted in our press release currency headwinds are driving the reduction in our full year EPS outlook to the effect of <unk> <unk> per share.
Now, let's turn to the quarterly performance for more details. Please go to slide seven.
Revenue for the second quarter was $773 million, an increase of three 5% compared to last year.
Organic revenue growth was six 4%.
The organic revenue increase in the quarter was driven by significant price realization of eight 4%.
The negative volume was driven by the mirror Allegiant Americas residential business, which was comparing against a robust Q2 2021 growth rate associated with prior year catch up on covered related backlog.
It was also impacted by the current year electronic parts shortages.
Allegiant International delivered organic growth driven by price, but faced volume declines that were driven by COVID-19, Lockdowns in China and softening European markets.
Mike will share more detail on the business segments in a moment.
Adjusted operating margin and adjusted EBIT margins increased by 40 basis points, and 30 basis points, respectively in the second quarter.
The increase was driven by price productivity exceeding inflation, which include favorable corporate cost and favorable business mix.
Which more than offset the negative impacts of volume deleverage and incremental investments.
Adjusted earnings per share of $1 37 increased five.
Or approximately 4% versus the prior year.
<unk> operational performance and favorable share count more than offset unfavorable impact from FX invest.
Investments other income and tax rate.
Mike will now walk you through the financials and our updated 22 outlook.
Thanks, Dave and good morning, everyone I want to Echo Dave's comments and welcoming John as our new President and CEO and in welcoming access technology employees to Allegiant.
Please go to slide number eight.
This slide reflects our earnings per share reconciliation for the second quarter.
For the second quarter of 2021 reported earnings per share was $1 31, adjusting <unk> for charges related related to restructuring and acquisition expenses in 2021 adjusted earnings per share was $1 32.
Strong operational results increased earnings per share by <unk> 13.
Net of <unk> <unk> per share pressure related to FX. The performance was driven by significant price, which exceeded inflation and business mix driven by the strength of the Americas nonresidential business.
Favorable share count increased earnings per share by <unk>, <unk> and the impact of acquisition and divestitures drove another <unk> <unk> per share.
A higher year over year tax rate reduced earnings by <unk> <unk> per share and the combination of interest and other income drove another five cent reduction.
Investment spending had a <unk> <unk> per share drag on earnings as we continue to invest in the business to fuel long term growth expand our electronic capabilities and drive our seamless access strategy.
This results in an adjusted second quarter 2022 earnings per share of $1 37, an increase of five or three 8% compared to the prior year.
Lastly, we had a <unk> <unk> per share reduction from the net of non operating gains and charges related to restructuring acquisitions and debt financing costs.
After giving effect to these items you arrive at the second quarter 2022 reported earnings per share of $1 30.
Please go to slide number nine.
This slide depicts the components of our revenue performance for the quarter I'll focus on total Allegiant results and cover the regions on their respective slides.
As indicated we experienced six 4% organic revenue growth in the second quarter driven by strong price realization.
Although the total company volume was down we did see significant strength in our Americas non residential business, which is starting to benefit from our supply chain actions over the last year.
As mentioned previously currency headwinds were significant in the quarter and reduce reported revenue by 3%.
There was a small impact from acquisitions, bringing the total reported growth to three 5% for Q2.
Please go to slide number 10.
Second quarter revenue for the Americas segment was $592 3 million up seven 8% on a reported basis and up 8% organically.
The segment delivered significant price realization coming in at nine 4% in the quarter.
Both the nonresidential and residential businesses delivered strong pricing.
Pricing helped the nonresidential bid pricing up the nonresidential business grow high teens, when combined with volume growth.
Residential was down mid teens, driven by a prior year catch up on Covid related backlogs and continued pressure in electronic components availability.
Electronics revenue was down low single digits, driven primarily by electronic component shortages that limit our ability to fully meet demand.
Americas, adjusted operating margin and adjusted EBITDA margins for the quarter were down 150.
Basis points, and 160 basis points, respectively. The Q2 margin performance with the sequential improvement from Q1.
For the quarter price exceeded inflation and productivity headwinds on a dollar basis, but were dilutive to operating margins. Please.
Please go to slide number 11.
Second quarter revenue for our Legion International segment was $180 8 million down eight 5% on a reported basis and up one 9% organically.
The organic growth was driven by solid price realization, which more than offset the volume declines experienced as a result of COVID-19 shutdowns in China and geopolitical pressures in Europe.
The negative impact related to currency headwinds reduced reported revenues by 10, 9% as the U S. Dollar has strengthened substantially against other foreign currencies.
Second quarter International adjusted operating margins decreased 100 basis points compared to last year and adjusted EBITDA margins were down 60 basis points.
The margin decline was driven by unfavorable impacts from volume and mix FX and incremental investments that more than offset the favorable impact of price and productivity exceeding inflation. Please.
Please go to slide number 12.
Year to date available cash flow for the first half of 'twenty. Two came in at $84 5 million, which is a decrease of more than $165 million compared to the prior year.
Yeah.
The $84 5 million is more in line with historical levels last year's cash flow was driven primarily by lower working capital due to the pandemic.
We are now projecting that 2022 full year available cash flow to be between 420 and $440 million.
The reduction in ACF from the prior outlook is primarily related to investing in inventory to create supply chain resiliency and to better serve our customers.
This will position us.
To manage backlogs, which are expected to be elevated entering 2023 due to strong nonresidential demand.
The revised cash flow outlook includes the impact of the access technologies business inclusive of the operational cash flows offset by acquisition and integration costs related to the transaction.
As discussed earlier.
We closed on the acquisition of access technologies business on July 5th the transaction was funded by issuing senior notes and utilization of our revolver.
As mentioned when we announced the acquisition, we expect to use excess cash generated during the remainder of the year to pay down short term debt taken on to complete the transaction.
This would be after paying expected dividends, which are subject to board approval.
Please go to slide number 13.
We now we now turn our attention to the revised revenue outlook.
Nonresidential markets in the Americas continues to be robust, leading indicators remain positive and the level of specifications continues to be strong.
Consistent with the broader macro industry, we're beginning to see signs of residential softening from robust COVID-19 level peaks.
However, we remain positive on the long term growth opportunity in residential due to the under supply of homes to meet demand in the long term trend of electronic adoption.
We have been aggressively pursuing price in all channels and products and as a result expect to deliver solid price realization for the remainder of the year that were more than offset substantial inflationary headwinds.
As noted previously we expect the newly acquired access technologies business to deliver approximately 9% growth for the full year reported Americas revenue.
With these parameters in place we are now projecting total growth for the Americas to be up 21% to 22%.
And organic revenue to be up 12% to 13%.
The increase in the Americas organic revenue outlook is primarily driven by price to offset the ongoing inflationary pressures.
Allegiant internationally experienced sequential improvement in price realization. However, we are beginning to see market soften and currency pressures are anticipated to continue.
For Allegiant International we are revising our outlook for total revenue to be down 7% to 8% with organic growth coming in at 2% to 3%.
All in for total Legion, we expect revenue growth to be in the 13% to 14% range with organic revenue, increasing 9% to 10%.
Please go to slide 14.
For our EPS outlook, we are expecting reported EPS to coming to a range of $5 five to $5 15 per share and adjusted EPS to be between $5 35 to $5 45.
These ranges include the approximately negative 10% impact related to access technologies acquisition as discussed earlier.
The updated outlook also includes a <unk> <unk> per share reduction from the prior outlook related to currency pressure.
This outlook assumes incremental investments of approximately <unk> 20 per share as a reminder, the incremental investment spend is predominantly related to R&D and technology investments to accelerate future growth and support our seamless access strategy.
Also included in the revised outlook is a slight increase in interest expense driven by an increase in variable interest rates on the base business.
This does not include the access technologies acquisition, which will have a <unk> 17 per share negative impact related to financing we secured to close the transaction that impact is included in the overall <unk> <unk> per share dilution from the acquisition I will now hand, it back to Dave for some closing remarks.
Thank you Mike. Please go to slide number 15.
To wrap up the main things you heard today Allegiant is excited to welcome John Stone as President and CEO . He brings a wealth of knowledge and expertise that will help a legion honest seamless access journey.
We are also excited to welcome access technologies to Allegiant.
This is a category market leader with a strategic investment that expands our core business.
Globally, our Legion is driving significant price realization and has turned the price productivity inflation dynamic positive.
The supply chain actions, we have taken will help efficiency and productivity in our manufacturing locations.
And along with ongoing price realization will continue to drive pricing and productivity to see exceed inflation.
Nonresidential markets in the Americas continue to be robust.
Leading indicators have been positive for over a year and given the late cycle nature of that business. This bodes well for the near term future.
Plus we are still sitting on healthy backlog levels that should fuel future growth as supply chains normalized.
With that Mike and I would now be happy to take your questions.
Okay.
Thank you.
We will now begin the question and answer session.
Philosophy question human fresh dog and one on your telephone keypad.
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Any other questions. Please press Star then two.
At this time, we will pause momentarily.
Our staff also please limit yourself to one question and one follow up.
First question is from the line of Julian Michelle.
With Barclays. Please go ahead.
Hi, good morning, Thanks very much.
Wish.
Dave all the best and thanks for the help and look forward to working with you.
Joan.
In terms of.
I guess, the first question would probably be around.
The residential business.
I understand you've had sort of several quarters of very tough comps and a sort of a destock that had to happen maybe help us understand on residential today.
They're all you on the inventories in the channel.
Should get easier in the second half year on year, but the broad U S. Resi demand backdrop is probably worse than you had sort of a few months ago. So maybe help us understand kind of what slope of residential revenue growth, we should get in the second half of the year and the assumptions behind it.
Alright, thank you.
So thank you for your comments Julien for your questions and support over the years when I figured out the residential market.
As we move through this whipped through the supply chain, which has been pretty dramatic over the last 24 36 months.
I continue to be positive on residential.
We still have some some noise, but there's an under supply of housing we will see some softening in the R&R, but.
We have maybe been hit harder in Russia, because of the lack of electronic chips will build momentum back over the second half and into 'twenty three.
Think the nation's got to build between 800001 million single family home. So I think that's net opportunity.
We look at the change.
And Julian if you think about guides, we don't guide the residential business, we do give outlooks for Americas in total.
Just I'll just agree with you we had that prior year comp in the second quarter that went up against last year. The second half for next for this year is much much easier comps versus last year.
That's helpful. Thank you and then.
Just one second question would be around the sort of the price cost dynamics.
Any updated thoughts around how that plays out in terms of margin impacts in the back half and I suppose based on the recent declines in spot commodity prices.
When do you see those perhaps rolling into your gross margins.
In terms of the timing of those lower costs starting to help the gross margin and do you think you can retain those savings when they come through where they might have to be passed back to the customer.
Yes so.
Julian as you think about price cost we struggled at the end of last year, we got slightly behind and we put efforts to raise prices to get that price productivity inflation positive we had improvement in Q1.
In Q2, we are now positive like we said we would be as we look to the back half that continues to be positive for both quarters in the in the back half will be positive for the full year and price productivity inflation, we do have substantial inflationary pressures in the back half.
And we've taken additional pricing actions to mitigate that.
As a result, you'll see that price productivity inflation positive as well as margin expansion in the back half.
If you think about commodity prices are those spot prices are coming down as you see from the public markets. They are still elevated versus let's say historic norms.
Any decrease in commodity prices is not something 2022, we'd feel because we've been putting in those purchase orders to ensure that we had adequate parts in inventory to meet that demand that we have so as you think about price productivity inflation think of it as a net plus in the back half.
<unk> full year, and we're back to expanding margins.
Yeah.
Great. Thank you.
Yeah.
Yes.
Okay.
Thank you.
Next question is from the line of.
David Macgregor.
With Longbow Research. Please go ahead.
Hi, This is Joe Nolan on for David Congrats on a nice quarter guys.
Hi, Joe.
So I was just wondering within the Americas non residential business can you just talk about how distributor inventories look.
And also just wondering are you seeing any increase in order cancellations or saying that distributors may be getting more cautious about holding inventory in a slowing macro environment.
I would say.
As we think about distributor inventory in wholesale pull through.
I would say its normalized remember there was a big.
<unk>.
Pull back 15 months ago, as we entered covered I would say its normalized.
Our wholesalers typically play the price increase game intelligently.
They'll bring in those orders earlier ahead of a price increase.
Create a margin opportunity for themselves, but I would say they are solid.
There are some deficiencies within our portfolio, which would be electronics, which will improve over the second half of the year I would say second half of the question.
Cancellations, yes, I would say that the if you think of our business. We've had such supply chain challenges last year. So as we move forward to this year. Our distribution base is looking for product. So we are we have very healthy backlogs demand is very strong <unk>.
<unk> backlog so as we move forward, we feel very confident about the nonresidential business I would also say touch base with our teams on cancellations not seen there is a a.
Demand for product flow there is a.
Very strong construction backlog right at nine months.
And the indicators would suggest.
And for a good 12 to 18 months of nonresidential activity.
Got it okay. Thank you.
And then just as a quick follow up on the access technologies business can you just talk about what this acquisition adds revenue wise here.
Aftermarket business and whether it would be accretive or dilutive to margins on the existing business yes.
Yes, if you think about access technologies, when we announced it in April we talked about that 38% of the business was serviced service revenue.
Our business today, we don't have service revenue.
Two a substantial level, especially in the Americas, we have some out in international but in the Americas. We don't have that service capability. So this is a great asset to add to our existing portfolio as we leverage their strengths with our Legion.
Erika strengths I would add that in our vision of seamless access and smart connected edge devices on the doors the service component becomes.
Required by our customers and the ability to grow recurring revenues through services, we like the opportunity.
Yeah.
And I. Thank you all right.
Margins when you think about access technologies, we gained some.
Some guidance in the April call, how that business is think of it as a mid teen EBIT margin.
Got it okay. Thank you very much I'll pass it along.
Thank you.
Next question is from the line of Brett Linzey with Mizuho. Please go ahead.
Yes.
Hi, good morning, and congrats to Dave Best of luck and welcome welcome to John .
Thank you.
Just wanted to come back to the electronics activity still continues to show just kind of an uneven performance here with the chip constraints I guess as you.
Got it.
Closer to the Redesigns.
And some of these new suppliers coming.
Wrapping up here I mean should we see the electronic growth snap back here in the second second half.
Do you expect this to be.
Phil uneven for the next few quarters as you kind of works worked through some of those.
New product designs.
Brad as you think about revenue growth so much of it has to do with the prior year comparable.
Electronics growth should be better in the back half from a growth percentage as you think about <unk>.
Prior year.
In addition.
We are seeing signs of improvement related to the activity we've been driving on the product redesign. So both of those both those areas should lead to better second half growth than what we experienced in the first half.
Okay got it and just.
Coming back to the reporting convention and thinking about the guidance framework and now rolling out access technologies.
<unk> considered ever moving to ex amortization I mean, it is a.
A big number so that's question one and just the follow up would be when.
This new framework are there.
The one time items related to integration or anything that we should be thinking about that maybe don't repeat.
And sort of the second half.
The year ownership.
Yes. So if you think about the one timers, we backed that out of reported EPS to get to our adjusted EPS right. So if you look at our guide we have that at the bottom of the schedule.
With respect to amortization expense, we started the year, obviously with our guide we are using the same presentation that we have when we started the year, but clearly identifying that amortization drag because it is significant for access technologies.
We're going to get through 2022 using this presentation.
With respect to the future we can tackle that in the future, but when you think about 2022, we're going to have that amortization in the adjusted EPS, what we're going to clearly show it to you and provided to you. So you can.
Have all those details.
Okay, Great I will pass it along thanks.
Yes.
Yeah.
Thank you next question is from the line of Brian <unk> with Imperial capital. Please go ahead.
Yes. Thank you very much a couple of quick questions in your guidance for 'twenty two.
Do you assume the supply chain will do will it get better worse. The same just wanted to know what your assumptions are around the supply chain.
Yeah as you look at our guide for the back half of 'twenty two.
We are seeing improvement, especially in the mechanical space in the nonresidential business. This is attributable to all of this sourcing actions we've taken over the last year. So as we think about that non res growth rate that high teens that we had.
Part of that is attributable to a better supply chain due to our activity.
Our back half is taking into account what we've known we've done and chips that are partners has committed to get to us are provided us.
Chips are always fragile as you know that can move but this is not seeing a sea change of improvement that we don't have line of sight too. So if you think about back half think of it as the activity. We've driven is helping provide better confidence in our ability to meet our customers' needs.
<unk>.
I would add to that if you look at some of the macro numbers Institute of supply management deliveries across the board to all industrial players have improved.
I'd say number two.
The system of all manufacturers remain fragile.
The port strike.
Covid surge.
Puts a level of uncertainty that we've grown to navigate but it remains fragile and I'd say the extensive work our region has done on the mechanical and electronic positions us nicely for the second half we factor that in.
I think we're not alone the electronic flows for chips and other components.
Improving and that will benefit a legion in 'twenty two.
And nicely steps up in 'twenty three.
Alright, thank you.
Thank you.
This concludes our question and answer session.
Now I'd like to turn the conference back to our X.
Chairman Dave.
As for any closing remarks.
Thank you.
This concludes my 56th earnings call as the CEO .
The balance here at Allegiant this will likely be my last call.
I want to thank our shareholders and the financial community for their support over the years.
I also want to thank Nelson, Peltz, and Michael and Mark for the opportunity to create and lead Allegiant.
I want to thank Curt hatch again, and the Allegiant Board Kirk has been with me since day one.
Kirk and the Allegiant Board has helped create this company and guide us to where we are today.
<unk> a heartfelt. Thank you to the people of Allegiant worldwide do you have a great new leader and John Stone, we have done some great work together.
Region. Your best days are ahead of you be safe be healthy and thanks for all your contributions have a great day.
Thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.