Aware Q1 2022 Earnings Call Transcript

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April 26, 2022

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Allegion First Quarter 2022 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasurer.

Operator

Please go ahead.

Speaker 1

Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegion's Q1 2022 earnings call. With me today are Dave Petratis, Chairman, President and Chief Executive Officer and Mike Wagnes, Senior Vice President and Chief Financial Officer of Allegion. 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.

Speaker 1

Allegion .com. This call will be recorded and archived on our website. Please go to Slides 23. 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.

Speaker 1

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. Dave and Mike will now discuss our Q1 2020 We would like to give everyone an opportunity given the time allotted. Please go to Slide 4, and I'll turn the call over to Dave.

Speaker 2

Thanks, Tom. Good morning and thank you for joining us today. We had a solid start to 2022. Overall market demand remains strong and our organic growth and pricing action accelerated. We also announced on Friday the acquisition of the STANLEY Access Technologies Business, a highly strategic acquisition for Allegiant, which is expected to close in the Q3 of this year.

Speaker 2

During Q1, we experienced robust Demand on the non residential side of the Americas as well as strength in SimonsVoss, InterFlex and Portable Security Within the International segment, residential markets in the Americas remain stable. We have made progress on our product redesigns and alternative sourcing similar to the last two quarters, but we're not able to fully meet the strong demand due to continued supply chain constraints. We did deliver good revenue growth in the quarter, driven primarily by price. The continued strength in demand is encouraging. With regard to supply chain constraints, we expect electronic component challenges to persist and the latest Lockdowns in China are likely going to impact global supply chains even further.

Speaker 2

Looking at price versus cost, we continue to experience high inflationary impacts from material cost, labor and freight. Price realization accelerated in Q1 and was the driver of organic growth in the quarter. With the recent spike in commodity prices, We have already announced additional price increases to take effect starting in Q2 across residential and non residential markets, and will assess the need for further price increases as inflationary pressures continue. As we discussed in February, we are aggressively pursuing price across all products and in all channels to offset We are providing an updated outlook for 2022. We are raising our revenue outlook to reflect higher price, offsetting the additional inflation we are experiencing.

Speaker 2

We are holding our prior EPS range, I'll share more detail on the outlook later in the presentation. Last, on the business review, want to further highlight our announcement from last Friday. We have come to an agreement to acquire Access Technologies business from Stanley Black and Decker. This is the right asset for Allegion and it progresses our SeamlessAccess strategic focus, adding a category leader with expensive service With an expansive service footprint, the business has a strong financial profile and is very complementary to the Allegion America's core business We welcome the Aptus Technology employees and we look forward to all of them joining our team. Now let's turn to the quarter performance for more details.

Speaker 2

Please go to slide 5. Revenue for the Q1 was $724,000,000 an increase of 4.2% compared to last year. Organic revenue growth was 6.4%. The organic revenue increase in the quarter was driven by significant price realization of 6%. Allegion International and Allegion America's non residential business also saw volume growth driven by robust demand highlighted earlier.

Speaker 2

Americas residential volumes were down as that business had a tough comparable to last year, attributed to the large Channel load in during Q1 of 2021. Mike will show more detail on the business segments in a moment. Adjusted operating margin decreased by 240 basis points in the 1st quarter. Continued inflationary pressures, productivity challenge and currency headwinds drove most of the decrease. Incremental investments for future growth caused 60 basis points of the decline.

Speaker 2

Adjusted earnings per share of $1.07 decreased $0.13 or approximately $0.11 versus the prior year. Lower operating income, a year over year tax rate increase and reduced other income was partially offset By favorable share count. Year to date available cash flow came in at $12,000,000 which was down 89% versus Q1 of As I've stated before, I firmly believe our vision and strategy in support Seamless Access is more relevant than ever and the Access Technology acquisition will add momentum. We remain bullish on construction and DIY markets for 2022 and continue to expect the trend of electronic adoption to Mike will now walk you through the financials, and I'll be back to discuss our 2022 outlook.

Speaker 3

Thanks, Dave, and good morning, everyone. Thank you for joining today's call. Please go to Slide number 6. This slide reflects our earnings per share reconciliation for the Q1. For the Q1 of 2021, Reported earnings per share was $1.18 Adjusting $0.02 for charges related to restructuring expenses, The 2021 adjusted earnings per share was $1.20 Favorable share count increased earnings by $3 per share and the impact of acquisition and divestitures drove another $0.01 per share.

Speaker 3

Higher year over year tax rate reduced earnings by $0.02 per share and the combination of interest and other income drove another $0.03 reduction. Investment spending had a $0.04 per share drag on earnings as we continue to invest in the business to fuel long term growth, Earnings per share by $0.08 driven by significant inflation, productivity challenges associated with supply chain pressures And unfavorable currency, which more than offset the favorable impacts of price. This results in adjusted first Quarter 2022 earnings per share of $1.07 a decrease of $0.13 or 10.8 percent compared to the prior year. Lastly, we have a $0.02 per share reduction for the net of a non operating gain and charges related to restructuring and acquisition costs. After giving effect to these items, you arrive at the Q1 2022 reported earnings per share of 1.05 Please go to Slide 7.

Speaker 3

This slide depicts the components of our revenue performance for the quarter. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, We had 6.4 percent organic revenue growth in the Q1, driven by improved price realization. Although the company's volume was essentially flat, we did see strength in Allegion International and the Allegion Americas non residential business. Currency headwind in divestitures more than offset the impact of acquisitions, bringing the total reported growth to 4.2% in the Q1.

Speaker 3

Please go to slide number 8. 1st quarter revenue for the Americas segment was $528,200,000 up 5.9% on both the reported and an organic basis. The segment delivered significant price realization. Non residential price was strong and residential business experienced improved price realization. The price helped the non residential business grow low double digits.

Speaker 3

Residential was down mid single digit against tough comparable from last year's channel load in, which drove Q1 of 2021 to be up low 20s percent. Electronics revenue was up low single digits as component shortages continued to dampen our growth. Americas adjusted operating income of $123,900,000 decreased 8.6% versus the prior year period And adjusted operating margin for the quarter was down 3 70 basis points. The Q1 margin performance Was a sequential improvement for the Americas as we expect to see further improvements as we progress through the year. The decrease in margin was driven by continued inflationary pressures, productivity challenges associated with supply chain shortages and volume deleverage.

Speaker 3

Incremental investments had a 60 basis point impact on margins as well. Please go to Slide 9. 1st quarter revenue for our International segment was $195,400,000 flat last year and up 7.6% on an organic basis. The organic growth was driven by strength in SimonsVoss, Interflex and Global Portable This segment also saw solid price realization contributing to the organic growth. The strong organic growth was offset by unfavorable currency and divestitures.

Speaker 3

International adjusted operating income of $20,400,000 increased 13.3% versus the prior year period. Adjusted operating margins for the quarter increased by 120 basis points to 10.4%. The margin increase was primarily driven by price and productivity exceeding inflation as well as solid volume leverage, which was more than offset I'm sorry, which more than offset currency and the 50 basis point headwind due to investment spending. Please go to Slide 10. Year to date available cash flow for the Q1 of 2022 came in at $11,800,000 which is a decrease of more than $93,000,000 compared to the prior year period.

Speaker 3

The $11,800,000 is more in line with historical trends as the business tends to have modest cash flows in the Q1 of a typical year. Last year's spike in cash flow was driven primarily by lower working capital needs due to COVID. The business continues to generate strong cash flow and we remain committed to efficient and effective use of working capital. The amount of available cash generated in the Q1 was as expected and the balance sheet continues to be in a healthy position. We expect to use excess cash generated during the remainder of the year to pay down short term debt taken on to complete the acquisition of the STANLEY Access Technologies Business.

Speaker 3

I will now hand it back over to Dave for an update on our full year 2022 outlook.

Speaker 2

Thank you, Mike. Please go to slide number 11. Non residential market demand in the Americas continues to be robust. All leading indicators are positive and the level of institutional specifications continues to be strong. The residential business is stable and the undersupply of homes over the last decade will continue to be a We have been aggressive in pursuing price in all channels and products and Substantial improvement in price realization in Q1.

Speaker 2

We have announced additional price increases to go in effect starting in Q2. Given the continued supply chain challenges, we still expect the revenue performance To be better in the second half than in the first half. With these parameters in place, we are raising the outlook and are now projected Total and organic revenue in the Americas to be up 10% to 11.5% in 2022. In Allegion International, markets have remained solid led by our Germanic and Global Portable Security Business. The International segment also experienced sequential improvement in price realization as we are presuming price aggressively in those markets Currency headwinds will continue to reduce total growth.

Speaker 2

For Allegion International, we are raising our outlook total revenue growth to 0.5% to 2% with organic growth of 5% to 6.5%. All in for total Allegion, we're raising the total revenue growth outlook to a range of 7.5% to 9% And organic revenue increased 8.5% to 10%. These increases to prior outlook are driven primarily by higher price realization. It's important to note this update outlook does not include any impacts from the STANLEY Access Technology acquisition. Please go to Slide number 12.

Speaker 2

For EPS, we are holding to the ranges provided during our last earnings call. Reported EPS is expected to $5.50 to $5.70 per share with an adjusted EPS range of $5.55 to 5.7 $5 as the increased revenue from the additional price realization is offset by higher inflationary costs. The outlook continues to assume a full year adjusted tax rate of approximately 13% and the share count assumption has been updated Our outlook for available cash flow is being raised And is now projected to be $470,000,000 to $490,000,000 Please go to slide 14. Before we go to Q and A, I want to talk a bit more about our acquisition of the Access Technologies business. For those of you who have missed Friday's conference call, I invite you to visit our website and listen to the archived webcast.

Speaker 2

I want to repeat the benefits we saw in this acquisition. It's a highly strategic combination that expands our presence in We will bolster our geographic leadership in Allegion Americas through complementary verticals and further penetrate our markets with complementary Products and service offerings cross selling opportunities will create more room for mutual growth and we will enhance and expand a service business that drives customer value in automatic entrance solutions, providing ongoing and consistent revenue streams. Allegion will significantly expand its breadth of access, egress and access control solutions. In return, the Access Technology business will gain specification and institutional market expertise, Strong new end user and architectural relationships and distribution networks as well as additional resources from Allegion. Along with Allegion's strong balance sheet, significant cash flow and disciplined capital allocation, we believe it will create a stronger Financial profile, a stronger value proposition and new opportunities that enhance shareholder value.

Speaker 2

Please go to slide 15. As we look at this acquisition, we believe there are many ways it delivers on our promise to create value for Allegiant shareholders. We're creating value with a more comprehensive portfolio of solutions, adding a category leader and addressing a current portfolio gap in Allegion's core businesses. We're also adding North American service capabilities to grow seamless access in a connected world. The acquisition of Access Technologies business is the right opportunity for us.

Speaker 2

It expands our innovation in electronic capabilities, We believe the acquisition will strengthen our financial profile. It provides clear synergy and incremental revenue opportunities. A balanced and disciplined capital allocation strategy will continue to be a top priority for Allegion. Solutions and Service Business are a strategic investment that supports seamless access and the access technology acquisition will create value for our shareholders. We're excited to welcome the business and its people to the Allegion family.

Speaker 2

With that, Mike and I will be happy to take your questions.

Operator

We will now begin the question and answer session. Our first question comes from Timothy Weiss from Baird. Please go ahead.

Speaker 2

Good morning,

Operator

Tim. Hold on one second here.

Speaker 1

Jason, just confirming there's Just a technology challenge?

Operator

Yes, it is a technology challenge. Just give me one second. All right, Timothy, your mic is now open. Sorry for

Speaker 4

the Can you guys hear me?

Speaker 2

I thought you're still watching that brewers baseball game too.

Speaker 4

It's the bucks right now. But I guess, yes, maybe just next up on the quarter, maybe just To talk a little bit about what you're seeing from an order and kind of a backlog perspective, how are you kind of thinking about the revenue cadence As you kind of think through the year, I'm just trying to kind of understand the visibility that you've got to the back half of the year and Kind of what you're building in for any risk that maybe the building timelines might elongate just from a construction timeline perspective and maybe shift some revenue into 2023?

Speaker 2

I think as we think about the path forward in terms of order activity, incoming orders, especially In the commercial business, institutional business, extremely robust. Tim, as I've been traveling around the last few weeks, You also get that feel that construction activity across the country extremely robust. As we look at our macroeconomic set, it says in the commercial institutional, we're beginning the up cycle, which says we're going to get stronger as we go through the year in In terms of product out the door, I would say supply chains remain under pressure, but have improved from the second half of last year. And then I think you got to think about res and this when I think about res, it Probably shows my age a little bit. It was extremely residential was extremely difficult in the last decade.

Speaker 2

And as I think about the undersupply of housing across the nation, I think we're going to continue to bang out $1,200,000 to $1,600,000 even with higher So I feel very good about overall demand. I think about that going out 4 to 6 quarters and then we'll

Speaker 4

Okay. Okay, good. And then I think just I think in the prior guidance just on the EPS cadence, Mike, I think it was 60% weighted to the back half. Is there any difference to that today just given kind of where you were in the Q1 or is that kind of similar?

Speaker 3

Yes. You know, Tim, as you think about it, we got off to a decent start, right? I would say it doesn't move materially from that 60% that we said At the beginning of the year, Q1 was okay or stronger than maybe the original assumption assumed. And so it could move it 1% or so or 2%, but it's roughly around that 60% that we gave in the beginning of

Speaker 5

Okay.

Speaker 4

And is there any change to kind of the price cost assumptions on a dollar basis for the year?

Speaker 3

Yes, I would say as you look at our guide, we raised our guide on the top line, didn't raise the guide on the EPS because That is price realization that is fighting the inflationary pressures. And so there will be a higher percentage going to price than we In the beginning of the year, so from the beginning of the year, we said roughly fifty-fifty, that's going to be higher by the So you're going to be looking at that 60% to 65%. Okay.

Speaker 4

Sounds good. Appreciate your time, guys.

Speaker 6

Good luck

Speaker 3

on the

Speaker 4

rest of the year.

Speaker 2

Thank

Operator

you. Our next question comes from John Walsh from Credit Suisse. Please go ahead.

Speaker 7

Hi. Good morning and nice quarter.

Speaker 2

Thank you, John.

Speaker 7

Just kind of wanted to understand the change in the sales guidance. So sounds like it's being driven by price, but what kind of gave you the confidence To take it higher given that supply chains are still tough, you have the China COVID Impacts, just I understand that demand is really robust and you have the strong backlog, but kind of What gave you the confidence that you'll be able to get the parts you need to kind of hit a higher top line?

Speaker 3

Yes, John, as you think about our Obviously, the price we feel really strong. We've announced those increases already. So they're in the marketplace. With respect to the overall market demand, even stronger than when we exited Q4. So Q1 real strong market demand in non residential.

Speaker 3

And then lastly, we've taken actions to qualify additional Suppliers and to work on bringing in new supply base, those activities have gained traction in the Q1. So that probably gives or that does give us confidence that in the back half of the year, we'll get additional supply from additional

Speaker 2

I'd add to it as well, versus the second half of last year, Labor has improved through its availability. Freight has improved modestly, and I say modestly, The rising COVID in China, the lockdowns will have some implications. We've got some exposure, but it's not major. And I think particularly on the mechanical inputs to our business, Redesign qualifying second suppliers has really strengthened our confidence. That leaves the electronics element.

Speaker 2

As we think about going forward and our guide, that's based on allocations. If chip availability gets better across the board, We'll be even stronger.

Speaker 7

Great. Thanks for that answer. And then, I guess, just thinking about some of the moving And volume recovery, obviously, we have the higher inflation that's getting passed through. But could you just Maybe help calibrate either total Allegion level or within Americas kind of what you're thinking the incremental margins will be for the year or however you'd like to talk to it.

Speaker 3

Yes. So John, as you think about Q1 sequential improvement versus What you saw in the Q4, we'll expect to see improvements each quarter sequentially, Such that the back half, you start to really see that margin expansion versus the prior year. So sequential improvement and then expansion in the back half. And then when you model it, just take into account that there Substantial inflationary pressures, we're driving price to offset it from a dollar amount, but that raises the denominator in the margin calc without raising the numerator from the profit because it offsets it.

Speaker 7

Makes sense. I'll pass the baton. Thanks for taking the questions.

Speaker 2

Thank you.

Operator

Our next question comes from Julian Mitchell from Barclays. Please go ahead.

Speaker 8

Hi. How's it going guys? You have Matthew Schafer on from Julian Mitchell's team.

Speaker 2

Hey, Matthew.

Speaker 8

Hey, how's it going? So you guys mentioned that pricing is expected to exceed inflation in 2022. Can you maybe talk to the cadence of the

Speaker 3

Yes. As you think of the Q1, we were slightly negative. We do We provide that information in our 10 Q, so you'll see it in our 10 Q by region and in total, Let's say $7,000,000 underwater in the Q1. As you progress into throughout the year, think of Q2 being closer to breakevenish and then Q3 and Q4 substantial price In excess of that inflation or price and productivity in excess of the inflation. So it gets better as the year progresses And then significantly positive in the back half.

Speaker 8

Okay, great. And then just a follow-up for me. Electronics was up low single digits in Americas in Q1 after being pretty weak in 2021. Just curious what the expectation is for 2022 growth for Electronics?

Speaker 3

We don't provide individual growth rates, electronics versus mechanical. But if you think about our performance In the Q1, substantial improvement from what you saw Q4, as you mentioned. The demand is there. The demand will be limited by the ability to get the supply. So I would just say take it into account when you Our total guide for revenue, understanding that it's better than what you saw in the Q4 and in the back half we do Comp against those easier comparables that we had in the back half of last year.

Speaker 8

Great. Thank you guys so much.

Speaker 2

Thank you.

Operator

Our next question comes from David MacGregor from Longbow Research. Please go ahead.

Speaker 5

Good morning. This is Joe Nolan on for David MacGregor.

Speaker 2

Good morning, Joe.

Speaker 5

So on the residential business, you mentioned revenues were down mid single digits. Are you able to talk about what units did in that business? And then I'm aware it's always been a difficult channel to get pricing in. So if you could just talk about How the recent price increase is trending in terms of how that's gone into the channel? Thanks.

Speaker 3

Yes. So if you look at our resi business, we mentioned earlier that it had positive price realization for the quarter, Not as strong as non res. From a unit perspective, then you can see that units would be a little less than the total growth because We did have the positive price realization. More importantly, moving forward, we've taken actions in residential to drive Price that has been announced to the marketplace and goes into effect in the Q2. So we expect to see better price realization in the second

Speaker 5

And then could you just give an update on trends in spec writing activity, just the size of projects, your content, order size, timing, that sort of stuff?

Speaker 2

I would say spec writing activity continues to be robust. You can look at the ABI. I think The March ABI was at like a 58. I'd say a good range of projects With strength in the medical and hospital areas, which is good for Allegion, Can't really get into the size of these, but the overall activity is good and I think reflects The strength we're seeing in our incoming bookings.

Speaker 5

Great. Thanks. I'll pass it on.

Speaker 2

Thank you.

Operator

Our next question comes from Brian Ruttenberger from Imperial Capital. Please go ahead.

Speaker 4

Yes. Thanks very much. Great quarter. So I'd like to break things down a little bit on gross versus operating margins. So gross margins were down from 4th quarter And obviously down year over year, do you expect gross margins to increase from 1st quarter to 2nd quarter and then progress couple of 100 basis points per quarter, is that what you're seeing?

Speaker 3

Yes, I would say if you think about the gross margin, that's that inflation in excess of pricing that we talked about in the 10 Q. As you think about margins in general, they'll improve as we get throughout the year, right. So we should see both the Gross and the operating improve as we move throughout

Speaker 4

We'll also see improvement sequentially. Was that because there's going to be lower SG and A or just Increased leverage from the top line and more gross profit?

Speaker 3

As you get significant growth in the back half of the year Q2, 3, 4, you leverage that SG and A base. So that does help also the operating margins.

Speaker 4

Volume is a

Speaker 2

very beautiful thing in this business. And as we go through the second half, the business leverages quite nicely.

Speaker 4

Great. Thank you very much.

Operator

The next question comes from Andrew Obin from Bank of America. Please go ahead.

Speaker 6

Hi. You have Sabrina Abrams on from Andrew Obin's team.

Speaker 2

Good morning, Sabrina.

Speaker 6

Good morning. I understand that you mentioned you're sort of expecting them, In the past month, have you been seeing worsening supply chain impacts from the COVID related China shutdown and from the Russia Ukraine conflict?

Speaker 2

I'd say, we have very little exposure to Russia. I'd say the bigger effect there has been Pricing of raw materials, and we'll adapt to that with price. As we think about China, it's certainly serious. We have exposure there, but it Has not affected us in April, and I think we've got the adaptability

Speaker 6

Great. Thank you. And I know that I understand that you're raising the revenue guide and maintaining the EPS range on inflation. But I guess I'm curious, you guys had a strong EPS beat in 1Q and are maintaining that guide. Are there any other headwinds we should be thinking about besides

Speaker 3

As we think about where we are today, we just completed the Q1, got 3 quarters to go. Feel good that we got off to a nice start to the year. You see We started the year, we had a very back half loaded plan. Getting off to a good start makes us feel even better about us hitting our EPS range.

Speaker 6

Great. Thanks. I'll pass it on.

Operator

There are no more questions in the queue. This concludes our question and answer session. Would like to turn the conference back over to David Petratis for any closing remarks.

Speaker 2

To wrap up our main themes you heard today, Allegion got off to a solid start in 2022. Demand remains robust and leading indicators are positive. We continue to work through supply chain challenges, but macroeconomic events in China could delay In the improvement of some of the global supply chains, it's not unique to Allegiant, but does affect us. Pressure in electronic components is expected to persist. Inflation continues.

Speaker 2

We are aggressively producing price And last, we're excited to welcome Stanley's Access Technology business to the Allegion family and portfolio of products. Thank you, and have a safe day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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