Q4 2022 Allegion PLC Earnings Call
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now.
Like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you Jason Good morning, everyone. Thank you for joining us for allegiance fourth quarter and full year 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 Alicia.
This 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 <unk> Legion Dot Com. This call will be recorded and archived on our website.
Please go to slides two and three.
That's 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.
<unk> presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.
Before I turn the call over to John I have a couple of announcements to share.
Kevin Sawyer, who has been allegiance director of Investor Relations for the past six years has been promoted to the role of finance director of our commercial Americas business. This is a fantastic role for Kevin who will now serve as our senior finance leader for that business.
And I wanted to express my Thanks, and appreciate appreciation for all of Kevin's support.
I'm also pleased to announce the promotion of jumping coil to the director of Investor Relations role. Most recently chumpiest been leading our Americas home Finance organization effective today, Jeremy is the primary contact for Investor Relations Office I will continue to lead the Investor relations function.
I would also like to share that the region will be hosting a 2023 investor and analyst day on May 2nd of this year.
That will be at our Carmel, Indiana facility, which is in the North Indianapolis Metro area and webcast option will also be available well look for more details as we get closer to the event.
John and Mike will now discuss our fourth quarter and full year 2022 results as well as provide an outlook for 2023, which will be followed by a Q&A session for the Q&A, we ask that each caller limit themselves to one question and then reenter the queue now I'd like to turn the call over to John .
Thanks, Tom Let's go to slide four.
And first off congratulations to Kevin and welcome to <unk>.
Allegiant delivered another outstanding quarter of operational performance as we look at the market dynamics, we continue to see strong demand in the Americas nonresidential segments as well as global electronics.
Residential markets continue to be soft with new construction slowing due to inflation higher interest rates International end markets are softening as a result of macroeconomic and geopolitical conditions.
Our engineering Redesigns and alternate supply actions are delivering results and lead times are normalizing on our mechanical products.
We're seeing continued improvement in electronics supply, although it's still short of the very strong market demand, we're seeing for our products.
Price productivity and inflation dynamic was positive again this quarter on both a dollar and a margin basis as we continue to combat inflation with pricing actions across products and channels.
Consistent and efficient available cash flow generation remains a focus for our company in 'twenty 'twenty. Two we made the decision to protect our customers by investing in inventory, which resulted in a short term increase in working capital were also accelerating certain strategic capital investments to deliver future growth as a result.
Favorable cash flow in 2022 was less than expected.
Lastly to our 2023 outlook, which I'll speak to in more detail later in the presentation shows revenue growth of nine to 10, 5% with organic growth of two and a half to four 5%.
Adjusted EPS on a recast basis will be up 5% to 9% Mike will provide details on the recast in a few minutes.
Let's go to slide five.
Revenue for the fourth quarter was $861 5 million, an increase of 21, 5% compared to 2021 organic.
Organic revenue growth was 11, 4% the.
The organic growth was driven by strong price realization across the portfolio and favorable volume in the Americas nonresidential business offsetting weakness experienced in the Americas residential and international businesses.
<unk> technologies acquisition contributed approximately 14% of total growth and currency impacts remain a headwind.
Adjusted operating margin and adjusted EBITDA margins increased by 310 basis points each in the fourth quarter. The increases were attributable to favorable price productivity and inflation dynamic positive business mix, along with volume leverage associated with the Americas nonresidential growth.
These factors more than offset the expected margin dilution related to access technologies.
Excluding the access technologies business adjusted operating income margins were up 430 basis points.
Adjusted EPS of $1 60 increased 49 cents or approximately 44% versus the prior year.
Strong operational performance more than offset the unfavorable impact of higher interest expense and supported continued investments for growth.
Please go to slide six.
Building greater supply chain resiliency remains a focus for allegiant from redesigning our products to dual sourcing we've taken the right actions to strengthen our company and capabilities over the past couple of years.
Today. This work continues as we were adding a 350000 square foot manufacturing facility in Central Mexico. This operation will boost in region production for our Americas business with core activities like stamping plating die cast and assembly.
Strategically this new operation will increase our supply chain resiliency and a number of ways.
That will be vertically integrated as we will now build components and products in house that were previously sourced at the same time, we're driving more efficiency in our supply chain, increasing manufacturing capacity and improving our future cost position.
Production is expected to get started later this year and we could not be more excited about this strategic investment.
Mike will now walk you through the financial results and I'll be back to discuss our 2023 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 fourth quarter.
For the fourth quarter of 2021 reported earnings per share was $1 26 adjusted.
Adjusting down 15 cents per share for a noncash gain on an investment remeasurement offset by charges related to restructuring M&A and debt refinancing costs. The 2021 adjusted earnings per share was $1 11.
Operational results were very strong in the current quarter, adding 48 cents per share, reflecting 43 43, 2% growth.
This was driven by double digit organic growth favorable operating leverage and positive business mix, which more than offset currency headwinds.
Access technologies delivered eight cents to earnings per share as operational results of <unk> 12 per share were offset by four cents of intangible amortization expense we.
We are pleased with the performance of access technologies in the first six months as the business results were in line with our expectations.
A lower year over year tax rate increased earnings by <unk> and favorable share count added another three.
Interest expense reduced earnings per share by <unk> 10 cents, primarily driven by increased debt to finance the acquisition of access technologies.
We continue to invest in the long term strategy of the business, resulting in a four cent earnings per share headwind.
This resulted in the fourth quarter 2022, adjusted earnings per share of $1 60, an increase of 49 or 44, 1% compared to the prior year.
Lastly, we have a seven cent per share reduction from adjusted EPS to arrive at reported EPS. This reduction is primarily attributed to M&A and additional noncash purchase accounting items related to the acquisition of access technologies.
After giving effect to these items you arrive at fourth quarter 2022 reported earnings per share of $1 53.
Of note starting in 2023, we are making a change to our adjusted operating income earnings and EPS to exclude amortization expense related to acquired intangible assets.
This change is based on the non cash nature of those expenses and supports our growth strategy. Please.
Please go to slide number eight.
This slide depicts our components of our revenue growth for the fourth quarter as well as the full year.
As indicated we experienced 11.4% organic revenue growth in the fourth quarter driven by price across all segments.
<unk> growth in the Americas, mostly offset declines in the international region.
Net acquisitions and divestitures delivered 13, 4% growth driven by access technologies.
Currency pressures continued to be a headwind primarily impacting our allegiant International segment, bringing the total reported growth to 21, 5% in the quarter.
For the full year you can see the total revenue was up 14, 1% with organic revenue growth of 10, 7%.
Both segments grew organically for the year led by Allegiant Americas, which grew 14, 4%. Please.
Please go to slide number nine.
Fourth quarter revenues for the Americas segment was $683 9 million up 36, 9% on a reported basis and up 18% organically.
Price realization remained strong in both our residential and nonresidential businesses offsetting ongoing inflationary pressure.
And nonresidential, we continued to see strong volume growth that when coupled with price drove organic growth in the mid 20%.
Residential was up low single digits with favorable price being offset by lower volumes.
Yeah.
Electronics revenue was up approximately 50% for the quarter as we compare against supply chain headwinds in the prior year full year electronics growth was approximately 20% as our engineering and supply chain actions are yielding good results.
We are pleased with the ongoing access technologies integration our results. This business contributed nearly 20% to the Americas reported growth number.
Americas adjusted operating income of $164 4 million increased 55, 8% versus the prior year period, while adjusted operating margins and adjusted EBITDA margins for the quarter were up 290, and 320 basis points respectively.
Excluding access technologies business drove a 530 basis point improvement in operating margins versus the prior year pricing.
Price and productivity in excess of inflation, along with volume leverage on Americas, nonresidential business and positive mix contributed to the margin improvement.
Please go to slide number 10.
Okay.
Fourth quarter revenue for our Allegiant International segment was $177 6 million down 15, 3% on a reported basis and down four 3% organically.
In the quarter strong price realization was more than offset by lower volumes attributed to softening end markets.
Notably the demand for our electronic and software solutions remains stable.
Currency headwinds persisted this quarter and reduced reported revenues by nine 9%.
International adjusted operating income of $23 3 million decreased 27% versus the prior year period.
Compared to 2021, adjusted operating margins and adjusted EBITDA margins decreased 90 basis points each.
The margin decline was driven by reduced volumes and FX pressure, which more than offset the favorable impact of the combination of price productivity and inflation.
Please go to slide number 11.
Available cash flow for 2022 came in at $395 5 million down $47 7 million versus the prior year.
This reduction is driven by higher capital expenditures as well as increases in working capital.
Given the inconsistency in the supply chain and component availability, we increased inventory to protect our customers in 2022.
When combined with the added working capital of the access technologies acquisition. There is an increase in working capital as a percent of revenue. We expect this to improve in 2023, a supply change disruptions moderate.
Capital expenditures as a percent of revenue also increased as we made strategic investments to drive future growth and improved supply chain resiliency like our new production facility in Central Mexico mentioned earlier.
The last chart on this slide shows our net leverage and net debt to EBITDA ratio increased from one seven times in 2021 to three three times. Following the access technologies acquisition, we have quickly Delever post acquisition and are down to two five times as at the end of the year.
The business continues to generate strong cash flow, providing the opportunity for capital deployment with a focus on organic investment and acquisitions.
Previously our board declared a dividend increase of approximately 10% in the dividend payable in March I will now hand, it back over to John for 2023 outlook.
Thanks, Mike, Let's go to slide 12, and take a look at full year 2023 outlook.
In the Americas, we expect to see total growth in the low to mid teens with organic growth being approximately 4% to 6% electron.
Electronics growth is expected to be strong as we've made significant progress working through supply chain challenges and demand and our backlogs remain robust.
We do however, expect some choppiness of component supply to continue throughout 2023.
Nonresidential market demand in the Americas continues to be strong heading into the year, we expect growth in the mid to high teens for our non res business inclusive of our access technologies acquisition in high single digits organically.
Given the strength we saw in the second half of 2022 we expect stronger growth in the first half with moderated growth in the second half up against tougher comps.
As communicated last quarter residential markets have softened, we expect our residential business to be down slightly driven by the slowdown of single family New construction.
In the International segment, we expect relatively flat revenue as end markets continued to soften driven by macroeconomic and geopolitical factors.
We project total revenue for international to be in the minus one to plus 1% range with organic revenue between minus 2% and flat.
All in for the company, we are projecting total revenue to be up between nine and 10, 5% organic revenue growth of two and a half to four 5%.
Our 2023 outlook for adjusted earnings per share is expected to be between $6 30, and $6 50.
This is inclusive of the reporting change effective January one of this year to exclude all acquisition related amortization.
Adjusted operational earnings are expected to increase 9% to 12% driven by volume leverage and price and productivity exceeding inflation and investments.
Interest is expected to be around a 24 cents per share headwind, reflecting a full year of acquisition related borrowings and increases to variable interest rates.
Tax is expected to be a 20 cent headwind in other income is expected to be around a five cent headwind.
The outlook assumes approximately 20 cents per share for costs related to restructuring and M&A and amortization expense related to acquired backlog.
In addition, it excludes approximately <unk> 40 per share for acquired intangible asset amortization as a result reported EPS is projected to be between $5 70 and $5 90.
Lastly, we're expecting available cash flow for 2023 to be in the $470 million to $490 million range.
Let's go to slide 13.
So in summary, we delivered significant growth in the fourth quarter and we expect to see continued growth into 2023, our electronic solutions are well received in the market. We continue to see very strong demand and we expect this to be a long term growth driver for our company.
As a late cycle business, the Allegiant Americas nonresidential market demand is solid we're well positioned for 2023, we're excited about a full year with access technologies and loved the recurring service aspect of that business.
Operating margins have been improving and we expect that trend to continue into 2023.
We are accelerating investments in new product development software capabilities and supply chain resiliency, all of which support the health of our business and the creation of long term shareholder value.
Overall, the entire team at Allegiant, along with our distribution partners had a great finish to 2022, and we're headed into 2023 with the right velocity and momentum.
With that we're happy to turn to Q&A.
We will now begin our question and answer session. SaaS. 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 if you'd like to ask further questions you may reenter the queue.
Hugh.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Joe Odea from Wells Fargo. Please go ahead.
Hi, good morning, Thanks for taking my questions.
They don't want it to.
Hi, just wanted to just start on sort of Americas, non res end markets trends, you've seen sort of into year end and beginning of this year. If you could talk about you know color across verticals. I think you are seeing sort of a b I sub 50 for four months.
It looks like Dodge momentum remains pretty strong I think we're hearing about some some mixed toward bigger projects.
So just kind of what you're seeing kind of institutional side commercial side with visibility into 2023.
It's it's it's the right question Bill. Thank you very much this is John .
What I would say is probably you know where were seeing the same trends on a b I as you are and you know that that would tend to.
Telegraph, what the market's doing nine to 12 months from now so we're watching that of course very carefully I would say the present situation right. Now is there is a lot of construction activity going on and and you know we're pretty heavy institutional.
And so what we see is if you look at things like the association of building contractors construction backlog, while it is sequentially down just a little bit it's still looking at historical trends quite elevated which means there's a lot of activity.
And that index I would tell you is quite consistent with what we hear from our distribution partners. It's what we're hearing from our folks out in the regional sales offices that Theres a lot of project business out there and we feel very well positioned to capture it.
Okay.
That's helpful. Thank you.
And then just wanted to touch on growth investments in 2023, just from a from a capability an end market perspective, where some of those growth investments are focused yes. So really good question well take taken organic angle at it first and I would say we feel like.
We're a leader and an electromechanical products, so continuing to invest on the R&D side and those products and those capabilities are.
Continue to build that portfolio you saw I hope you saw that in January we did close on our acquisition of Plano in Germany kind of building more of our software as a service business. There in the international segment and I think you can continue to expect us to be.
More acquisitive in the future I think thats.
Definitely something we're interested in.
The pipeline feels pretty good but of course these things are rather episodic in nature. So we.
We take it as the right asset comes available at the right price.
I would take you back to in the deck.
Facility that we're building in central Mexico, that's essentially.
Essentially in sourcing and near shoring previously sourced product and that facility has a lot of expansion capability to it. So as we ramp up production there will have a better cost position on some of our mechanical products.
And then future products to be built there yet to be seen but I think we're quite excited about that from an organic growth perspective as well.
Yeah.
Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.
Good morning.
So on for Joe Ritchie. Thank you for that question.
My first question is on the residential pricing it looks like this quarter pricing was basically offset by volume. If you can provide some color on how the realized pricing is progressing, especially on the big box side of the business and how should we think about 2023 here as we think about pricing yes. Thanks.
Thanks for the question.
As you think about our residential business historically say before 2022.
We've struggled to get price in residential and we made it a focus area to drive pricing due to all the inflationary pressures. We had we had the strongest price realization I can recall in my my decade, plus here in residential in 2022, and we expect to see price realization.
Next year as well so as we deal with inflationary pressures look for us to combat that with pricing and we've had significant progress in that area across the entire portfolio.
In 2022 moving into 2023, we expect that to continue.
That's great to hear and maybe just to follow up there, especially on the <unk>.
Any destock risk on the residential side.
Any has any of the destock happened already or do you expect something like 2023.
So I think this is this is John .
Kind of two things going on there and in that channel I think on the mechanical side again, you heard earlier in the call. Our lead times are essentially back to normal so book and ship business retail point of sale pull through.
Certainly on a volume basis, particularly on the mechanical side, it's a little softer there there's no doubt I'm on the electronics side again demand is very strong our backlogs are still elevated and in all honesty, we still have by historical.
Values, we still have shelf space to fill with electronic products, both on the commercial side and the residential side. So I think there's a again electronics will continue to be a growth driver for the company in all segments.
Our next question comes from Brett Linzey from Mizuho Americas. Please go ahead.
Hey, good morning, all good morning, good morning, Brian .
Yes, just wanted to come back to the pricing discussion I, Mike I think you touched on pricing expectations for for residential but thinking more broadly about the portfolio and actions into 2023, how are you thinking about additional pricing for this year and then specifically within the whole framework what do you what do you think it for.
Price realization this year.
Brett as we've talked over time.
We're committed to fight that inflationary pressure we see.
We expect price realization substantial price realization in 2023.
Such that that price productivity inflation and investment dynamic is a net positive you've heard me talk about this for at least six months now we've given we've made good momentum in 'twenty, two and we're set up nicely for 'twenty three such that we are a net positive of those four characteristics are those.
Four items.
Okay got it and just wanted to follow up on the Mexico facility for stamping plating et cetera.
In terms of identifiable paybacks, you know how are you thinking about the potential cost savings as you look into 'twenty, four and 'twenty five or what that payback might might look like.
Yeah, It's it's the right question and I think.
Payback is going to be pretty quick I mean, these are high volume products in a cost reduction that we're looking at is substantial.
I'm not going to give you the exact down to the penny number but.
It is substantial and we see because of that a favorable impact on margins in a favorable impact on market share in those segments. It's.
We're quite excited about getting this this facility ramped up hey, Brad just to add if you think about 2023, because the facility is going to come online later in the year that margin benefit and that cost benefit that's more of a 2425 benefit if you think about 'twenty three.
Think of.
There is some investment in startup cost as you bring a new facility up and running during the year, but this is a great long term investment like John mentioned, so just wanted to add that color.
Our next question comes from David Macgregor from Longbow Research. Please go ahead.
Yes. Good morning, everyone. Just wanted to continue on the pricing in response to the last couple of questions. You've made it very clear that you're pushing much harder on pricing, but can you just talk about that in terms of price cost expectations of what you've got reflected in your full year guidance.
Can you talk about how that should phase over the four quarters yeah.
As you think about it for next year definitely positives obviously.
Price cost will be.
Better in the first half because in the prior year comparable.
And then if you think about quarters, we try not to guide quarters, but think of it as price cost inflation and investments. This is a net positive for us moving forward, we fell behind last year.
In 2021 22, we caught up we made some positive traction at the end of the year and now were setup nicely moving forward and expect this dynamic to continue to be positive.
Good.
Just as a follow up I guess, maybe talk about access technologies and the progress to date and how are you reflecting that acquisition in your 2023 gross margin guidance.
So if you look at the first half of the year that would be considered inorganic growth and so on the slide in the presentation. We show a delta between reported and organic for the Americas that inorganic would be access tech the back half of the year. It will be part of organic growth and is included in that.
Nonresidential number John mentioned earlier in the prepared remarks, so it's a combination of both the first half is that inorganic growth.
Yes strategically David it's a great fit we've retained the key talent, we have retained the key customers.
We're working very very hard on that are the getting these automatic doors into this very powerful allegiance back engine.
That team is super excited to be here, we're super excited to have them and again you've.
<unk> got a very robust recurring service business as a part of that acquisition that we're really excited about.
Our next question comes from Jeff Sprague from vertical research. Please go ahead.
Hey, Thank you good morning, everyone, Hey, Jeff Jeff.
Good morning, Hey, just a couple for me if I could.
Just first back to price cost and then everybody's asked the question a couple of times, but it.
I just want to be clear really on your volume expectations for the year. It would seem we could get to we're pretty close to your organic revenue growth just on carryover price and the fact that I would think you've also got some positive mix effects on revenue as electronics ramps up so perhaps you could just give.
It is a little bit more color on.
What youre expecting for volumes for the year.
Jeff If you think of the nonresidential business in the Americas still going to see volume growth good end markets.
About international residential they are a little softer so think of any form of growth coming more from the price theyre all in weighted more towards pricing like you suggested then volume, but the non res side and electronics, that's where the volume growth will be driven.
Great and then just.
Wanted to ask you a little bit of a philosophical question about going to that Sam Ward and I agree. It's the right thing to do ultimately, particularly given a lot of other folks do it but.
The main premise of that is right that amortization is not cash so when I go to adjusted EPS.
Earnings in my cash flow are done in fact, similar right and the EPS is kind of an economic number.
You're always going to converted about 85%.
Free cash flow to adjusted net income this year. According to your guide do you.
It's certainly understandable supply chain inventories elevated and the like but do you see those numbers converging over time.
Getting the organization to I don't know, 95% to 100% conversion to adjusted net income, yes. So Geoff historically when we looked at it at reported net income that was in the low nineties based on the current guide on the reported net income.
Mid nineties.
I would say longer term, we do expect it to be better we.
We do have an increase in capital expenditures. This year. So if you think of depreciation versus Capex Capex is elevated think of it as a two 5% plus of revenue.
We're building a new facility that's not something we do every single day. So it is a little lighter because a higher level of capex.
But longer term think of us as focusing on especially as we make M&A. The cash returns of these acquisitions, we've been talking about access tech for almost a year now and it's the ability to drive cash earnings from those acquisitions, rather than a noncash charge.
Yeah.
The next question comes from Chris Snyder from UBS. Please go ahead.
Thank you I wanted to follow up on the previous question around the Americas organic growth guide of 4% to 6% on peers I guess, specifically talk about the split between volume and price within that because you know my math kind of similar to Jeff It feels like Americas could get there on just wrap around.
Price alone and it sounds like there is scope for incremental price as well.
Yes, so when you think about 2023 and pricing clearly we had good momentum coming into the year.
We have more pricing than volume growth residential is when you build your models don't forget starts have been down considerably there in the residential space So residential volume.
He is going to be.
More more challenged right. So overall the volume growth coming from non res and the total segment I don't want to give sub segment.
Targets for volume versus price, but I would just say the total segment is more pricing than volume when you build your models.
Thank you I appreciate that and then maybe for my follow up just around the cadence of Americas organic growth as the year goes on so it certainly feels like organic growth in the first half of the year will be stronger in the back half just on the easier comps, but can you just provide some more color.
That <unk> and does the guidance imply that Q4 will.
We will will be negative organic for the Americas. Thank you, yes. So if you look at our.
Our history, we're not going to guide quarters, I would say this 2022 very backend loaded.
Our historical norms for the Americas is probably more indicative of what you think 2023 would look like from a percent of the total.
As a result, you will see more revenue growth in the first half than the second half, but we do expect to see growth in the back half of the year.
The next question comes from Tim Weiss from Baird. Please go ahead.
Hey, guys good morning.
Maybe just.
On backlog.
Just maybe if you could give us a little bit of a flavor for where backlog is maybe maybe versus a year ago and I know there's some noise.
In there just from a supply chain constraints, but just maybe any color on the trajectory of that backlog would be would be helpful. Yes. So Tim we ended last year very elevated backlogs, especially in electronics and mechanical that's 2021, if you think about 'twenty two we burn through the mechanics.
Excess mechanical backlog such that lead times are normal demand is good lead times are normal so it's where we want to be from a health of the business. If you think of electronics.
<unk> does have elevated backlogs at the end of.
2022, which is.
<unk> attributable to both supply challenges, but as well as really strong demand and so we do have elevated backlogs in electronics, which will give us tailwind for both 23 and frankly 24. This is a long term trend moving for us.
Okay. Okay. So it sounds like you've bumped off most of the kind of build up from 'twenty, one and now it's just a movement on the mechanical side, yes right. Okay.
Okay Gotcha, and then John maybe just just bigger picture I mean, you've been CEO now for six to nine months and now that you've got maybe a little bit more settle into the role just maybe some color on any potential strategic changes or tweaks that you think you might make at the business going forward Yeah, absolutely I think these last two quarters. It's.
Really been a pleasure being here working with the Allegiant team and working with these these distribution partners out there I think what you should see is a lot of the things that are built the legions reputation.
Since spin.
Outstanding operational execution.
Year over year, expanding margins those kinds of things will continue.
What we're looking to do.
Has continued to Orient the company towards growth and allocate capital towards growth that means driving organic growth that means continued to look for us and expect us to be acquisitive and really leading with our technology Allegiant Scott.
A fabulous electromechanical portfolio.
Extremely talented engineers, we feel like we're a leader in that space and we'll continue to be a leader in that space.
So organic growth inorganic growth through M&A I think that's that's what you need to expect us to layer on top of the operational excellence that you're used to from a Legion and this year on your ability to drive.
Above market growth and continue to expand margins.
Our next question comes from Josh Poker Winski from Morgan Stanley . Please go ahead.
Hey, good morning, guys. Good morning, good morning, Josh.
So John you talked a few times about the the visibility in the non res business, particularly on electronics with the elevated backlog just wondering if you could give us sort of any any view on where backlog level stand or how you think about conversion or something like book to bill in the framework this year.
Yes, so I think again on the mechanical side of the portfolio.
You've put air quotes around it back to what you would expect a book and ship business, So very efficient very lean book and ship business.
Electronics demand is still very very strong and that's globally.
And so.
Supply limited is still where we are we've gotten and I think quarter to quarter or month to month made continuous progress on that and that's why you see the kind of year over year growth numbers that you've seen in Q3 Q4 of 'twenty two.
We're very bullish on that portfolio, and we're continuing to invest and refresh the products.
So we do expect demand to continue to remain strong we do expect.
Conversion and adoption to continue to grow.
That being said of course, there are parts of a building there are parts of allegiance portfolio that will never be electrified. So it doesn't just go from some state to 100% electric but electronics will continue to be a double digit growth driver for the company and that gives us a pretty interesting.
Avenue to continue to build out.
Software as a service like you see with our <unk> and our Plano acquisition.
So I'd say again look for us to continue to be acquisitive and build on this advantage that we feel we've got with the electronic products.
Got it that's helpful.
Forward to hearing more about that at the Investor day as well.
On the margin guide in the Americas, where I guess implicit in the guide overall.
How do we think about sort of what's an easy comp and timing elements around things like either a price cost or missed shipments productivity versus just kind of volume leverage is there any way you guys would sort of break down those buckets of what just comes from kind of the absence of the bad guys versus you know some of this.
This healthy mix price cost some of the other things you're talking about yes, Josh clearly first half, we're going to see more and more margin expansion due to the easier comp.
Look for us, though for all quarters to be driving pricing and productivity in excess of that inflation and investment number on a dollar basis and when you think about expansion Americas margin expansion will be more front half loaded.
Year year over year.
Okay.
The next question comes from Ryan Merkel from William Blair. Please go ahead.
Good morning, Thanks for taking the question I wanted to pick up on the electronics demand can you just talk about some of the key drivers is the strength in both revenue commercial and then what are the features and benefits that are really resonating with customers.
Yes, it's a great question, maybe start with residential you know I think the rise of the Mega Techs Smart home ecosystems.
The two most popular products that you find connected to those systems would be thermostats and locks.
People might do other things, but those two fundamental elements seem like the most popular.
The functionality you get with a phone connected to your smart excuse me a phone connected to your lack the visibility of the state of that lock.
The peace of mind aspect that that gives you I think that's quite attractive to a lot of folks.
On the non res side. It's I mean this this is this is a b to b environments. So here, you're talking about like real economic value.
You add for the end user so think about a multifamily residential settings an apartment complex.
Rather than the landlord are managing and swapping out metal keys.
You can do this all digitally now with digital credentials mobile credentials.
It just there's there's operating cost savings there that will continue to drive adoption in spaces like that so you know on the.
On the non res side. This is real economic benefits that are delivered over time residential side peace of mind visibility higher tech connected to my smart home et cetera. Those trends are I think still in the early stages of a traditional S curve of adoption and a nice long.
Runway ahead of us.
That's helpful. Thanks, and then on supply chain, just where are the pinch points in electronics do you have any visibility to when that improves in the investment working capital is that primarily in electronics.
So.
The supply chain the way I described it last quarter.
Same way I would describe it this quarter if a year ago, we had 50 suppliers on the delinquent list that was shutting our assembly lines down on any given day.
Today that number is down to a handful three or four.
So that's the order of magnitude of improvement.
Yes.
Constraint is the are the semiconductors themselves.
Microprocessors in particular, and it's just been a matter of the industrial Internet of things that space has had extremely strong demand, while you've probably seen news headlines and other things about some foundries or chip manufacturers seeing.
Softening demand that's from things like consumer goods and mobile phones. These these are much smaller much more advanced much more expensive chips.
But these these chips that hit the sweet spot of cost and power and performance for the industrial Iot, which is what we use in our products.
That demand is still outstrips supply and capacity all the way back to the foundries.
We've been working very closely to do a couple of things one would be expand the quantity of supply.
That's been improving the other thing is also improve the visibility and the linearity of deliveries. So then our factories can run a bit more efficiently and we can bring our lead times down.
So it goes all the way back to the semiconductor itself and that's the value chain, we're trying to work through and continue to make improvements and we're happy with the improvement so far, but we're still supply constrained versus very strong demand.
The next question comes from Brian Rittenberg from Imperial capital. Please I'm, sorry, Brian Rotenberg from Imperial capital. Please go ahead.
Okay. Thank you very much. So one other question on the residential side in 2023, it looks like it's going to be driven by pricing can.
Can you talk a little bit about you say, primarily driven by pricing will volumes actually be down.
And could they be down 2% to 345% and you still hit that your goals are.
For 2023 on the residential side, yes.
Yes, Brian I really don't want to give the sub components for res non res, but.
Do you think about it.
I would say you are.
Approximating a reasonable outlook for Reg in that it's going to be price driven and that volume will be challenged but I don't want to give individual components between resin non res.
Okay, and then along those same lines have you experienced on the residential side or even the international side any deep booking in the fourth quarter. We've just heard about some deep booking.
In the residential side and I didn't want that kind.
Kind of get your color on that if there's been a booking and you've seen a recovery post fourth quarter.
Think about our residential business electronics, clearly there is shelf space to be filled as John talked about on the mechanical side, what we have seen is slowing there.
It came to the to the overall numbers, we talked about residential.
Far as deep bookings, we have not seen a lot of cancellations from customers more think of it think of it as slowing down in the consumer making purchases there.
Sure.
This concludes our question and answer session I would like to turn the conference back over to John Stone for any closing remarks, thanks, very much so to wrap up what you heard today Allegiant Americas nonresidential demand remains robust.
Global electronics demand remains very strong our supply chains are improving and our products are very well received in the market.
Access technologies acquisition is continuing to perform very well.
We along with our distribution partners had a great finish to 2022 and feel that we are favorably positioned for 2023.
Thank you very much for joining the call and have a great day.
Okay.
[music].
Okay.
[music].
Yeah.
Yes.
[music].
Okay.
[music].
Yeah.
Okay.
[music].