Q3 2022 Allegion PLC Earnings Call
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Good morning, welcome to the Arlington Q3, 'twenty two earnings conference call.
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Like to turn the conference over to Tom.
<unk>, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you Francesca good morning, everyone. Thank you for joining us for allegiance third quarter 2022 earnings call.
With me today are John Stone, President and Chief Executive Officer, and Mike <unk>, 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 does 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 and are made pursuant to the safe Harbor provisions of Federal Securities Law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward looking statements today.
His presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.
John and Mike will now discuss our third quarter 2022 results, which we 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 John .
Thanks, Tom Good morning, and thank you all for joining us today.
<unk> delivered a very strong third quarter and as we look at the market dynamics, we continue to see strength in the Americas nonresidential sector, leading indicators for that business like the a b I N. AIA consensus are positive and continue to be an expansionary territory, particularly for institutional verticals.
On the Americas residential side, our business grew nicely in the quarter, but we are seeing signs of a slowing market.
Certainly new construction is impacted by rising mortgage rates and retail point of sale for our industry is returning to more normal levels.
Although a leading international was experiencing broader weakness in many of its markets. We continue to see strength in demand for our electronics and software solutions.
Allegiant delivered record revenue during the third quarter. This is due to the hard work and dedication of our team as we've made significant progress on product redesign and other supply chain improvements that are driving strong operational performance across the company.
Top line revenue was also aided by robust price realization in the quarter across the world.
I do want to highlight that while we've made some progress there is still choppiness in the electronic supply chain backlogs and electronics are still elevated as demand for those products has remained strong.
At the beginning of the year, we underscored our commitment to aggressively pursue price across all products in all channels. The result of this effort is evident in the quarterly results.
While we continue to experience inflationary headwinds are price productivity inflation dynamic was positive this quarter, both on a dollar and margin basis.
And we'll continue to assess the need for future price increases.
Lastly, the currency pressures impacting our international businesses persist the reported revenues in the third quarter reflect $26 million of pressure related to foreign exchange rates.
Please go to slide five.
At the beginning of the quarter on July 5th in fact, we officially welcomed the access technologies business ended the Elysian family together, we will deliver long term value for customers shareholders and employees alike, and we're already moving in that direction. The operational performance of the business was in line with the expectations shared with you in the last call.
This earnings call and our teams are getting well aligned on culture vision and strategy.
Just as important our early work together are firms that access technologies and a Legion alright, great combination, we have unique opportunities to accelerate our seamless access strategy with innovation that will create new value around doors and entrances.
This is where I get to say a picture says a thousand words and we now have a well established recurring service business that positions us to meet new customer needs as devices become more connected and technology advances.
And we have an expanded portfolio of products that fills gaps complements our business and take full advantage of our demand generation specification engine than the Americas bottomed.
Bottom line access technologies is a strong business. It's another category market leader for Allegiant, we're off to a great start and excited about the opportunities ahead.
Now, let's turn to slide six and take a look at the quarter performance for more details.
Revenue for the third quarter was $914 million, an increase of 27, 4% compared to last year.
Organic revenue growth was 18.6% attributed to both significant price realization road wide and strong volume growth in the Americas.
The access technologies acquisition contributed approximately 12% of the total growth number and currency impacts remain a significant headwind.
Mike will share more details on our segment reporting in a moment.
Adjusted operating margin and adjusted EBITDA margins increased by 100 basis points each in the third quarter.
The increase was driven by volume leverage in the Americas, as well as price and productivity exceeding inflation.
He has more than offset the margin dilution related access technologies, excluding the access technologies business adjusted operating income margins were up 240 basis points.
Adjusted EPS of $1 64 increased eight cents or approximately 5% versus the prior year robust operational performance more than offset the unfavorable tax rate impact, which is compared against the prior year that had substantial nonrecurring benefits Michael.
Mike will now walk you through the financials and I'll be back later to discuss our 2022 outlook.
Thanks, John and good morning, everyone. Thank you for joining today's call. Please go to slide number seven.
This slide reflects our earnings per share reconciliation for the third quarter for the third quarter of 2021 reported earnings per share was $1 59, and adjusted earnings per share was $1 56.
Operational results were very strong in the quarter, adding 49 cents per share, reflecting 31, 4% growth.
This was driven by strong pricing volume and operational execution, which more than offset.
Thinking inflationary and currency pressures.
Access technologies delivered six cents to earnings per share as operational results or <unk> 10 per share offset four cents of intangible amortization.
The operational results were as expected and amortization was favorable.
A year over year tax rate.
Reduced earnings by 28 per share. This decline was driven by tax benefits in 2021 that were nonrecurring.
As anticipated interest expense was <unk> 12 per share drag on earnings primarily driven by increased debt to finance the acquisition of access technologies.
Yeah.
Other income was an eight cents per share reduction as the prior year had some favorable items that did not repeat in 2022.
Favorable share count offset the impact of the investment spending in the quarter.
This results in adjusted third quarter 2022 earnings per share of $1 64, an increase of eight or five 1% compared to the prior year.
Lastly, we have a 34 cents per share reduction from adjusted EPS to arrive that reported EPS.
This reduction is attributable to M&A and additional non purchase accounting items related to access technologies.
Along with the loss on the divestiture of our military business in South Korea.
After giving effect to these items you arrive at third quarter 2022 reported earnings per share of $1 30.
Please go to slide number eight.
This slide depicts the components of our revenue performance for the quarter.
I'll focus on total Elysium results and cover the regions on their respective slides.
As indicated we experienced a robust 18, 6% organic revenue growth in the third quarter, driven by both price and volume strength in the region Americas, both nonresidential and residential led the volume growth.
Net acquisition and divestitures delivered 12, 4% growth driven by access technologies.
Currency pressures continued to be a significant headwind primarily impacting our international segment, bringing the total reported growth to 27, 4% in the quarter.
Please go to slide number nine.
Third quarter revenues for the Americas segment was $747 2 million up 42, 5% on a reported basis and up 25, 8% organically.
The segment delivered significant price realization in both the nonresidential and residential businesses as we remain committed to addressing inflation.
Aided by substantial price and strong volume nonresidential grew approximately 30% in the quarter.
<unk> was up mid teens also driven by both price and volume a portion of our growth was fueled by backlog reductions as the actions our team undertook helped us improved component availability and shipments in the quarter.
Electronics revenue was up approximately 30% and was a significant improvement from the growth rates experienced in the past few quarters.
This was supported by continued strength in demand and the timing of component availability.
While it is important to note that electronic component supply chains remain choppy, our reengineering and alternate supply efforts are providing improved flexibility to our supply capabilities.
Access technologies contributed mid teens percent to the Americas reported number reported growth numbers.
Americas, adjusted operating margins and adjusted EBITDA margins for the quarter were up 50 basis points and 80 basis points respectively.
This includes access technologies, which we previously stated would be dilutive to margins.
Excluding access technologies business drove a 300 basis point improvement in operating margins versus the prior year.
<unk> leverage contributed to the margin increase and for the quarter.
Productivity inflation dynamic was positive both on dollars and margins. Please go to slide number 10.
Third quarter revenue for our Allegiant International segment was $166 5 million.
Down 13, 6% on a reported basis and down eight tenths of a percent organically.
In the quarter strong price realization, mostly offset lower volumes.
Lower volumes are attributable to end market softening, however, demand for our electronics and software solutions remains stable.
Currency headwinds persisted this quarter and reduced reported revenue by 12, 8%.
Third quarter International adjusted.
Third quarter International adjusted operating margin decreased 180 basis points compared to last year and adjusted EBITDA margins were down 160 basis points.
The margin decline was driven by reduced volume and FX pressures, which more than offset favorable impacts of the combined combination of price productivity and inflation.
Please go to slide number 11.
Year to date available cash flow is $225 6 million, which is a decrease of more than $102 million compared to the prior year period.
This year's available cash flow continues to be in line with pre pandemic levels.
We continue to operate with a strong debt structure with 80% of our debt having fixed interest rates. We currently have 199 million outstanding on our revolving borrowings concerning.
During the third quarter, we repaid approximately $140 million from the initial draw used to help fund the acquisition of access technologies.
We have a strong leverage profile with our net debt to EBITDA ratio at two nine times at the end of the quarter.
We still plan to use the excess cash generated during the remainder of the year to pay down the revolver.
This would be after paying expected dividends, which are subject to board approval and other debt payments.
For 2022 full year available cash flow outlook is unchanged from our prior outlook remaining at a range of $420 million to $440 million.
I will now hand, it back to John for an update on our full year 2022 outlook.
Thanks, Mike.
So please go to slide 12.
And looking at our full year 2022 outlook and to reiterate a few things said earlier in the call we see nonresidential market demand in the Americas as remaining strong leading indicators remain favorable.
Further while demand for electronics products remains strong residential markets in the Americas R&D softening.
As you've heard the Allegiant team has made significant progress on supply chain challenges our electronics growth was strong this quarter and we continue to navigate the choppiness of component supply.
Long term, we expect electronics adoption to remain a growth driver for Allegiant.
Given this backdrop, we are raising the outlook for Americas and are now projecting total growth to be between 22, and a half and 23, 5% with organic revenue to be up 13, five to 14, 5% for the year.
Elisa and international experienced another quarter of solid price realization and stable demand for our electronics and software solutions.
We see the broader markets continue to soften driven by macroeconomic and geopolitical factors and currency pressures are anticipated to remain.
For the Allegiant International segment, we're revising our outlook for total revenue to be down 10, and a half to 11, 5% with approximately flat organic growth.
All in for total Legion, we expect revenue growth to be in the 13% to 14% range with organic revenues, increasing nine five to 10, 5%.
Please go to slide 13.
We are expecting reported EPS to come in at a range of $4 90 to $5 per share and adjusted EPS to be between $5 40 to $5 50.
The adjusted EPS increase from the prior outlook is driven by lower access technologies intangible amortization.
The revised amortization takes the outlook for the acquisition impact of negative <unk> <unk> per share versus negative <unk> 10 per share.
Communicated last quarter.
Our updated outlook assumes incremental investments of approximately <unk> 17 per share and as a reminder, the incremental investment spend is predominantly related to R&D and technology investments to further accelerate our growth and support our seamless access strategy.
Yeah.
The <unk> 20 per share increase in reported to non-GAAP adjustments from the previous outlook is driven by the loss on the mill rate divestiture and noncash purchase accounting adjustments, which were primarily recorded in this quarter.
Please go to slide 14, and let's wrap this up here.
Here's the main themes I hope you heard today Allegiant had a very strong third quarter. Our operational performance was exceptional the entire allegiant team deserves a lot of credit for this.
The access technologies acquisition is off to a great start and performing as expected. We're excited to have this business and the people as a part of the Allegiant family and to have automated entrance solutions in our portfolio.
We've made significant progress on supply chain challenges, although choppiness in electronics components persist.
Americas Nonresidential demand is still strong leading indicators are still positive and we continue to see strength and demand for our global electronics products.
To reiterate we see electronics design led electronics adoption as a long term growth driver for Allegiant.
I'm very proud of the dedication and resiliency of our entire team and the results. We've delivered this quarter with that Mike and I would be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on telecom keep it if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we can we ask participants to limit to one question and one follow up.
Yeah.
This question comes from Josh Okay, Winski with Morgan Stanley . Please go ahead.
Hey, good morning, guys.
Can you hear me on the call.
Just wanted to dig into a little bit on the kind of non desi backlog phenomenon.
It's not really I'm not sure. If you guys talked about as much but you know with the growth in the quarter clearly supply chain improve you're able to get some product out the door can you maybe contextualize.
How much of the excess backlog you worked off and how should we think about maybe kind of a normalized margin because I would imagine the mix on that and influencing things a lot.
Once we once we get past that you know that backlog period.
Yes, Josh as you know we had.
Built backlog starting the end of last year.
And most of that driven by some supply chain as well as really strong demand as you look at the third quarter, we have a better component availability as we talked about on the call that help drive more revenue in in the Americas non res at 30%.
Not all of that obviously is demand. So we did reduce backlog levels, we don't disclose the exact amounts, but we did have a very strong.
Volume growth, which we provided and that's driven by both demand being strong as well as backlog reductions with.
With respect to margins the key thing about margins for US is we're driving that price realization to offset the inflationary pressures that we've been seeing this quarter. We finally turned the corner on the margin percent.
Last quarter it was.
Offsetting on dollar so we've made significant progress here as we progressed over the last few quarters on that that element. So it's those key items I think that have led to the margin expansion you saw Josh. This is John I would just add one thing that probably every manufacturer has dealt with.
When we talk about choppiness in the supply chain.
Without a doubt that injects this or the other inefficiency into the factory. So that's there's been some cost inefficiencies over time that we've been working through and certainly that's.
On the way towards improvement as well, but just just one other one other nuance there to your question, but that's a good one thank you.
Got it thanks, and then just a quick follow up on the pricing dynamic I know you guys in the industry in general honors existing quotes out there so price kind of layers in over time, what inning are we in in terms of being caught up on price versus having these outstanding older price quotes.
Yes, we've been raising price pretty consistently over the last year.
Year as we've had such challenges in the inflationary environment.
I would say.
The dynamic of price productivity and inflation will be positive moving forward. So I wouldn't expect a situation where we turned the other way we've kept the dynamic positive and expect it to be positive moving forward.
Perfect. Appreciate the color thanks, guys best of luck.
The next question is from Julian Mitchell with Barclays. Please go ahead.
Hi, This is Kieran battelle Connor on for Julian Mitchell.
So I just wanted to ask on a residential so it looks like residential growth in the Americas.
Inflected positively and I just wanted to get a sense of is this more of a is it a function of supply chains easy easing versus underlying demand and to what extent do you see this growth as sustainable.
Going forward given what we're seeing in the housing market.
Yes. Thanks for the question. This is John I would say going back to our comments.
Certainly the Americas residential market is softening.
We're reading the same headlines that you are higher mortgage rates is certainly going to have an impact there I would say you know our performance in the quarter is without a doubt due to strong demand for our products. We have good products people like them, we get good reviews.
Our electronics growth you saw was very strong which is quite quite prevalent in the residential sector.
But the broader market is softening without a doubt I think electronics remains a tailwind for us.
And yeah, so what what more to say there I think that's a broader market softening a little bit.
<unk> is favorable that's a tailwind and.
So we're still.
Chugging along.
That's helpful. Thanks, and then my follow up is.
Just kind of what you're seeing in the channel you know based on your results today. It doesn't seem as if youre seeing any signs of destocking.
What we're seeing in some other industrial markets.
So can you give us a color of what you're seeing.
And then channel from an inventory perspective, and and what underlying demand is looking like relative to that thanks, Jeff Yeah. You bet very very relevant question. Thanks for that I'd say, we'd like in it to more.
Normal levels I wouldn't necessarily say destocking restocking, just just more normal our point of sale pull through based on a retail demand.
And I think that's that's the environment, we're getting back to as lead times normalized to more of what the industry is used to retail demand pull through is what's going on.
Drive the stocking levels.
I appreciate it thank you.
The next question is from Ryan Merkel with William Blair. Please go ahead.
Hey, good morning, and thanks for taking the questions.
First question is on <unk> for Q, it looks like guidance implies a little bit of a cut there can you unpack any changes you've made versus prior expectations.
Yeah, Ryan if you look at the lesion, we always guide for the full year.
In July we put a guide out there and essentially we reiterated the guide this quarter.
For the full year, because where our full year guiding company with respect to Q4, you can back into some math see strength in the Americas Americas Top line guide implied in the high teens.
We are seeing obviously some weakness in that guide internationally, right, which we called out so overall.
Our business is seeing strength in Americas led by obviously, non res, which we talked about and seeing some softening internationally full year in line with what we said July so I don't think there's major changes from what we told you previously, but you do have some mix between the two.
Two the two regions.
Got it that's helpful. And then for my follow up you mentioned progress on supply chain, but still some choppiness where are there still issues and when do you expect to fully catch up.
[laughter] Yeah said, that's that's the question of the year I think on fully catch up but I would I would.
Think of it like this you know if three or four quarters ago, we had.
Mike 50 suppliers on severely delinquent list today that would be seven or eight just to kind of quantify it for you I think the choppiness still exists primarily in semiconductors microprocessors now the redesign work that Allegiant did is obviously having.
Benefits, we're seeing strong electronics growth some of those suppliers are performing quite well some are still having a lot of issues.
And you know it comes up.
Both in terms of quantity that we need to fully meet retail demand, but then also linearity that we need to really have a productive manufacturing operation. So that's that's kind of if we double click into what we mean by by Choppiness.
I'd say this is definitely continuing on into 2023.
But we're making progress and we feel good about the progress we've made we feel good about the improving flexibility and resiliency of our supply base and I think you know the improvement trend will continue.
Thank you.
Your next question comes from Brett Linzey with Mizuho.
With that please go ahead.
Hi, good morning, all.
Good morning, good morning.
Congrats on a great quarter, just back to the price and productivity and specifically within the Americas business.
Step up nicely from what $6 million in Q2 to 24 here in the third quarter should.
Should we see that continue to move higher into Q4, and then given the wraparound price you should be able to.
Get next year, I mean should we think of <unk>.
$25 million in Q1, and Q2 of next year at a minimum.
Yes, Brad with respect to next year, we will give an outlook when we come back and SAB I'm certainly not on the third quarter call going to get that specific of price productivity inflation power.
However, in general think of this dynamic as progressively improving to this point right we were weaker last year negative.
Got back to positive this quarter on a substantial way obviously volume drives more.
More ability to get that price because you have more revenue.
But in general we're going to fight that inflation and have that dynamic positive moving forward.
Got it.
Just back to the backlog question, so you're obviously working here to.
Cork that specifically on the electronics side as these supplier additions are ramping here should we think of the electronics growth nor.
Normalizing back to that double digit plus level that allegiant has really observed pretty consistently for several years before the pandemic.
So going forward kind of double digit net.
In that territory, yes, especially long term this is a great growth driver for us and that.
A double digit growth business for us as you think about the long term, we've talked about choppiness right, but long term. This is a double digit growth opportunity for us.
And just a quick follow ups and when do you think you have enough availability to kind of sustain that into into Q4 here.
Yes, im not going to guide a specific quarter, but as you looked at our results for the Americas in particular, we have a pretty healthy topline guide in Q4. So you can draw your conclusions to that particular item, but we still see strength in Q4 as indicated in our guidance.
Appreciate the color.
Thank you.
The next question.
One is from Joe O'dea with Wells Fargo. Please go ahead.
Hi, good morning.
I wanted to start on the operational and FX piece of the guide and if you could just sort of bridge from prior guide to revised guide I mean, the numbers didn't change, but what some of the moving parts are and given the strength we saw in the third quarter.
Would have expected to see that that that could have moved up but.
But if you could just talk to kind of the Americas piece the international piece. The FX piece in terms of what moved from from last guide to this one.
So.
Joe If you think about FX, we actually took down our guidance in July when we reported Q2 results for currency.
No.
A good chunk of the currency pressure you've seen with the dollar strengthening we anticipated and put in the guidance that we put out in July .
Currency rates have gotten a little worse since that period of time, but a good chunk of the FX pressure, we called out previously.
And then with respect to operations, we're right online with what we said in July for the for the year, obviously like I mentioned earlier, a little more strength in Americas as we took up the revenue outlook, there and a little more pressure from the a markets internationally.
Okay.
And then I wanted to ask on the Americas margin excluding access tech.
Clearly some nice progress that we saw sequentially, but when we go back to where kind of pre pandemic margins, where theres still appears to be some good opportunity. There. So again kind of bridging to that I mean, what what are the keys to sort of get back to those kinds of margins pretty good volume this quarter I'm not sure sort of mixed.
Are things still from a price productivity inflation, there's there's room to go and you have visibility into that it's kind of a timeline to getting back to you know where your margins were.
Yeah, if you think about the margin profile in Americas.
The strong contribution margin those businesses have as we grow we should get margin expansion.
We've done a much better job this year driving the price realization to offset the inflation we've been talking about this all year on these calls we.
We expect that to continue so we think that there is.
Margin runway for the Americas, and we will continue to drive that pricing to offset inflation with an understanding that this has been the most significant inflationary environment I've ever personally experience and we're going to have to just come back with the pricing actions.
And Joe This is John I'd add that again, Theres, an electronics angle to this as well.
Electrified and connected products.
Our are delivering.
Substantially higher value to the end customer, which then should also be.
Not just organic growth.
The top line, but also margin expansion opportunity to as electronics adoption continues so that's an element as well that we're really keen to continue to grow and deliver more value to the customer.
Just related to that do you think you're capturing that value proposition today or do you think there are opportunities to sort of better better capture that margin opportunity on the electronic side I think both I think we're doing very well today and I think there's continued opportunity that's that's a tailwind for Legion.
Got it thank you.
The next question is from David Macgregor with Longbow Research. Please go ahead.
Hey, Good morning. This is Joe Nolan on for David Macgregor.
Joe first.
First I just wanted to ask within the Americas Group can you talk about volume versus price trends for both the non res and residential businesses.
Yes, historically, we don't disclose those individual components, what we did share for the quarter was they were both up pricing.
Pricing and volume for each segment, but the individual numbers historically, we have not and don't anticipate disclosing that level of detail.
Okay got it.
And then just on the access technologies business I realize it's still early from an integration standpoint, but can you just give any update about how that's going in terms of the integration.
Yes, I appreciate that question I think as we've said in the prepared comments.
Off to a great start our teams are gelling very well.
There, there's this or the other small project win here and there so and I think the.
The early work on some of the heavy lift in terms of systems and things like this will continue for the next many months, but off to a very good start cultural fit is very good strategic fit is very good.
The automatic doors as a as an excellent complementary portfolio to the rest of Allegiant.
And just really excited for that team.
And really excited for the services business that comes along with that and we're quite bullish on the future there.
Alright, great. Thanks for answering my questions.
Your next question is from Brian <unk> with Imperial capital. Please go ahead.
Yes. Thank you very much for taking my questions.
Can we talk a little bit about the competitive landscape right now what youre seeing.
Given the Asa Arblay HII spectrum transaction that appears to be at least held up some with the Doj D. O J excuse me can you talk about the opportunity that you see out there.
With a legion and the competitive environment are you gaining market share or losing market share because of this transaction are it doesn't impact you at all.
Yeah, its certainly not appropriate for us to comment on that particular situation.
I would say we feel good about our product portfolio about our brands about our competitive position in the market I think our third quarter results reflect that that as we made the supply chain improvements. We've continued to talk about we generate good results, we've been saying for several quarters now.
We were supply constrained versus demand constrained.
And I think that continued to prove itself out.
And so yes, we will we will continue to compete vigorously in the segments, where we compete and I think allegiance best days are still ahead.
Okay as a follow up I'll go in a different direction.
Dan.
Can we talk about.
You addressed it a little bit but price increases going forward are you starting to see a pushback on the nonresidential market yet.
In the Americas on price increases.
And that kind of tells you when you're done and I just wanted to get kind of an indication from you. What you see in terms of price indication price increases going forward. If you feel like you can push more through our you feel like that you are at the top end of that that that market.
We've put a number of increases in I would say it all depends on what the future inflationary environment is.
But as we sit here today, we would always communicate future price increases to the channel before an earnings call but.
But expect us if inflation persists expect us to pass along pricing.
To mitigate that but it all depends on the inflationary environment moving forward.
Alright, thank you.
This concludes our Q&A session I would like to turn the conference call out to John's point for any closing remarks.
Thanks, very much and thanks, everyone for attending today I would just like to again reiterate we feel like we delivered an outstanding performance this quarter the entire allegiant team and our distribution partners deserve credit for that.
Access technologies Awesome acquisition off to a great start we are making the supply chain improvements that we've been promising for a while and you see that reflected in our results and we see continued strength in the Americas nonresidential end markets and global electronics demand allegiance best days are still ahead, thanks very much.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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