Allegion plc

Q4 2022 Earnings Conference Call

2/22/2023

spk11: Good day, and welcome to the Allegiant fourth quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will 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.
spk13: Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegiant's fourth quarter and full year 2022 earnings call. With me today are John Stone, President and Chief Executive Officer, and Mike Wagnus, 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.allegiant.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 description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures Please refer to the reconciliation in the financial tables of our press release for further details. 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 want to express my thanks and appreciation for all of Kevin's support. I'm also pleased to announce the promotion of Joby Coyle to the Director of Investor Relations role. Most recently, Joby has been leading our America's Home Finance Organization. Effective today, Joby is the primary contact for our Investor Relations office. I will continue to lead the Investor Relations function. I would also like to share that Allegiant will be hosting a 2023 Investor and Analyst Day on May 2nd of this year. The event will be at our Carmel, Indiana facility, which is in the North Indianapolis metro area. A webcast option will also be available. 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 re-enter the queue. Now, I'd like to turn the call over to John.
spk00: Thanks, Tom. Let's go to slide four. And first off, congratulations to Kevin and welcome to Joby. Allegian delivered another outstanding quarter of operational performance. As we look at market dynamics, we continue to see strong demand in the America's non-residential segments as well as global electronics. Residential markets continue to be soft, with new construction slowing due to inflation and 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 electronic 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 2022, we made the decision to protect our customers by investing in inventory, which resulted in a short-term increase in working capital. We're also accelerating certain strategic capital investments to deliver future growth. As a result, available 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 9% to 10.5%, with organic growth of 2.5% to 4.5%. 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 revenue growth was 11.4%. The organic growth was driven by strong price realization across the portfolio and favorable volume in the America's non-residential business, offsetting weakness experienced in the America's residential and international businesses. The Access Technologies acquisition contributed approximately 14% to 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 non-residential 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 years. Today, this work continues as we are adding a 350,000 square foot manufacturing facility in central Mexico. This operation will boost in-region production for our America's business with core activities like stamping, plating, die cast, and assembly. Strategically, this new operation will increase our supply chain resiliency in a number of ways. The plant 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.
spk07: 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. Adjusting down 15 cents per share for a non-cash 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 43.2% 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 $0.08 to earnings per share as operational results of $0.12 per share were offset by $0.04 of intangible amortization expense. 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 $0.04, and favorable share count added another $0.03. Interest expense reduced earnings per share by $0.10, primarily driven by increased debt to finance the acquisition of Access Technologies. We continued to invest in the long-term strategy of the business, resulting in a $0.04 earnings per share headwind. This resulted in the fourth quarter 2022 adjusted earnings per share of $1.60. an increase of $0.49 or 44.1% compared to the prior year. Lastly, we have a $0.07 per share reduction from adjusted EPS to arrive at reported EPS. This reduction is primarily attributed to M&A and additional non-cash purchase accounting items related to the acquisition of access technologies. After a given effect to these items, you arrive at a 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-cast nature of those expenses and supports our growth strategy. 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. Volume 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 continue 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 go to slide number nine. Fourth quarter revenues for the America segment was $683.9 million, up 36.9% on a reported basis and up 18% organically. Price realization remains strong in both our residential and non-residential businesses, offsetting ongoing inflationary pressure. In non-residential, we continue to see strong volume growth that, when coupled with price, drove organic growth in the mid-20s percent. Residential was up low single digits with favorable price being offset by lower lines. 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 and results. This business contributed nearly 20% to the America's reported growth number. America's 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, the business drove a 530 basis point improvement in operating margins versus the prior year. Price and productivity in excess of inflation, along with volume leverage on America's non-residential business and positive mix contributed to the margin improvement. Please go to slide number 10. Fourth quarter revenue for our Allegiant international segment was $177.6 million. down 15.3% on a reported basis, and down 4.3% 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 remained stable. Currency headwinds persisted this quarter and reduced reported revenues by 9.9%. International adjusted operating income of $23.3 million decreased 20.7% 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 inconsistencies 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 as supply chains disruptions moderate. Capital expenditures as a percent of revenue also increased as we made strategic investments to drive future growth and improve supply chain resiliency, like our new production facility in central Mexico mentioned earlier. The last chart on the slide shows our net leverage. The net debt to EBITDA ratio increased from 1.7 times in 2021 to 3.3 times following the Access Technologies acquisition. We have quickly delevered post-acquisition and are down to 2.5 times as of 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 a 2023 outlook.
spk00: 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%. 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. Non-residential 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 and 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 continue to soften, driven by macroeconomic and geopolitical factors. We project total revenue for international to be in the minus 1% 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 9% and 10.5%, organic revenue growth of 2.5% to 4.5%. 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 1 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 $0.24 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 and other income is expected to be around a 5-cent headwind. The outlook assumes approximately 20 cents per share for costs related to restructuring an M&A and amortization expense related to acquired backlog. In addition, it excludes approximately 40 cents 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 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 America's non-residential market demand is solid. We're well positioned for 2023. We're excited about a full year with access technologies and love 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.
spk11: We will now begin our question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. 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 re-enter the queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Joe Odia from Wells Fargo. Please go ahead.
spk10: Hi, good morning. Thanks for taking my questions. Hi, Jill. Hi. Just wanted to start on sort of America's 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 know, seeing sort of ABI sub-50 for four months. Looks like Dodge momentum remains pretty strong. I think we're hearing about some mix toward bigger projects. So just kind of what you're seeing, kind of institutional side, commercial side, with visibility into 2023.
spk00: Yeah, that's a right question, Joe. Thank you very much. This is John. What I would say is probably, you know, we're seeing the same trends on ABI as you are. And, you know, 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, 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's 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 there's a lot of project business out there, and we feel very well positioned to capture it.
spk10: That's helpful. Thank you. And then just wanted to touch on growth investments in 2023, just from a capability and end market perspective, where some of those growth investments are focused.
spk00: Yep. So really good question. We'll take an organic angle at it first. And I would say, you know, we feel like we're a leader in electromechanical products. So continuing to invest on the R&D side in those products and those capabilities, continue to build that portfolio. You saw, I hope you saw, 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 that's definitely something we're interested in. Pipeline feels pretty good. But of course, these things are rather episodic in nature. So we take it as the right asset comes available at the right price. I would take you back to in the deck The facility that we're building in central Mexico, that's essentially insourcing and nearshoring previously sourced product. And that facility has a lot of expansion capability to it. So as we ramp up production there, we'll have a better cost position on some of our mechanical products. And then future products to be built there are yet to be seen, but I think we're quite excited about that from an organic growth perspective as well.
spk11: Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.
spk05: Good morning. This is Vivek Srivastava on for Joe Ritchie. Thank you for the 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?
spk07: Yeah, 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 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.
spk05: That's great to hear. And maybe just to follow up there, uh, especially on the, any D stock risk on the residential side, uh, any has any of the D stock happened already, or do you expect some in 2023?
spk00: So I, I think, um, this is, this is John, um, kind of two, two things going on there in that channel. Uh, I, I think on the mechanical side, again, you, you heard earlier in the call, our, 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's no doubt. On the electronic side, again, demand is very strong. 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, again, electronics will continue to be a growth driver for the company in all segments.
spk11: Our next question comes from Brett Lindsey from Mizuho Americas. Please go ahead. Hey, good morning, all.
spk07: Good morning, Brett.
spk08: I just wanted to come back to the pricing discussion. Mike, I think you touched on pricing expectations 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 are you thinking for price realization this year?
spk07: You know, Brad, 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 made good momentum in 22, and we're set up nicely for 23. such that we have a net positive of those four characteristics or those four items.
spk08: Okay, got it. And just wanted to follow up on the Mexico facility, you know, for stamping, plating, et cetera. You know, in terms of, you know, identifiable paybacks, you know, how are you thinking about the potential cost savings as you, you know, look into 24 and 25 or what that payback might look like?
spk00: Yeah, it's the right question. Payback's going to be pretty quick. I mean, these are high volume products and the 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's substantial. And we see, you know, because of that, a favorable impact on margins and a favorable impact on market share in those segments. We're quite excited about getting this facility ramped up.
spk07: Hey, Brett, 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 24-25 benefit. If you think about 23, think of, you know, there is some investment and 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.
spk11: Our next question comes from David McGregor from Longbow Research. Please go ahead.
spk09: Yes. Good morning, everyone. I just wanted to continue on the pricing. And in response to the last couple of questions, you made it very clear that you're pushing much harder on pricing. But can we just talk about that in terms of price-cost expectations and what you've got reflected in your full-year guidance? Can you maybe just talk about how that should phase over the four quarters?
spk07: Yeah. As you think about it for next year, definitely positives. Obviously, price costs will be better in the first half because of 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, right, in 2021. 22, you know, we caught up. We made some positive traction at the end of the year, and now we're set up nicely moving forward and expect this dynamic to continue to be positive.
spk09: Good. Just as a follow-up, I guess maybe talk about access technologies and maybe the progress to date, and how are you reflecting that acquisition in your 2023 growth and margin guidance?
spk07: 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 non-residential number John mentioned earlier in the prepared remarks. So it's a combination of both. The first half is that inorganic growth.
spk00: Yes, strategically, David, it's a great fit. We've retained the key talent. We've retained the key customers. We're working very, very hard on getting these automatic doors into this very powerful Allegiant spec engine. That team is super excited to be here. We're super excited to have them. And again, you've got a very robust recurring service business as a part of that acquisition that we're really excited about.
spk11: Our next question comes from Jeff Sprague from Vertical Research. Please go ahead.
spk02: Hey, thank you. Good morning, everyone. Hey, Jeff. Good morning. Hey, just a couple from me, if I could. Just first, back to price cost, and everybody's asked the question a couple times, but I just want to be clear, really, on your volume expectations for the year. It would seem we could get two are pretty close to your organic revenue growth just on carryover price. And the fact that I would think you've also got some positive mixed effects on revenue as electronics ramps up. So perhaps you could just give us a little bit more color on what you're expecting for volumes for the year.
spk07: Yeah, Jeff, if you think of the non-residential business in the Americas, still going to see volume growth, good end markets, If you think about international and residential, they're a little softer. So think of any form of growth coming more from the price there. All in weighted more towards pricing, like you suggested, than volume. But the non-res side in electronics, that's where the volume growth will be driven.
spk02: Great. And then I actually just wanted to ask a little bit of a philosophical question about going to exam work and i agree it's the right thing to do ultimately particularly given a lot of other folks do it but uh you know the main premise of it is right that amortization is not cash so when i go to adjusted eps my earnings and my cash flow are then in fact similar right and the eps is kind of an economic number um you're only going to convert it about 85 percent free cash flow to adjusted net income this year according to your guide do you You know, and it's certainly understandable supply chain inventory is elevated and the like. But do you see those numbers converging over time and, you know, getting the organization to, I don't know, 95% to 100% conversion to adjusted net income?
spk07: Yeah. So, Jeff, historically when we looked at it at reported net income, that was in the low 90s. Based on the current guide on the reported net income, it's mid-90s. I would say longer term, we do expect it to be better. 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 2.5% 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 of 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 non-cash charge.
spk11: The next question comes from Chris Snyder from UBS. Please go ahead.
spk12: Thank you. I want to follow up on the previous question around the America's Organic Growth Guide of 4% to 6%. Can you just, I guess, specifically talk about the split between volume and price within that? Because, you know, my math is kind of similar to Jeff. It feels like America's could get there on just wraparound price alone, and it sounds like there's scope for incremental price as well.
spk07: Yeah, so when you think about 2023 and pricing. Clearly, we have 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 is going to be 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.
spk12: Thank you. I appreciate that. And then maybe for my follow-up, just around the cadence of America's 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 price comps. But can you just provide some more color on that trajectory? And does the guidance imply that Q4 will be negative organic for the Americas? Thank you.
spk07: Yeah, so if you look at our history, we're not going to guide quarters. I would say this, 2022, very back-end 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'll 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.
spk11: The next question comes from Tim Weiss from Baird. Please go ahead.
spk01: Hey, guys. Good morning. Nice job. Maybe just on backlog, just maybe if you can give us a little bit of flavor for where backlog is, maybe versus a year ago. And I know there's some noise in there just from the supply chain kind of constraints, but just maybe any color on the trajectory of that backlog through the year would be helpful.
spk07: Yeah, so, Tim, we ended last year very elevated backlogs, especially in electronics and mechanical. That's 2021 backlogs. If you think about 22, we burnt through the 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 the health of a business. If you think of electronics, electronics does have elevated backlogs at the end of 2022, which is 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 tailwinds for both 23 and, frankly, 24. This is a long-term trend moving for us.
spk01: Okay. Okay, so it sounds like you burnt off most of the kind of buildup from 21, and now it's just stronger demand. On the mechanical side, yes, right. Yeah, okay. Okay, gotcha. And then, John, maybe just bigger picture. I mean, you've been CEO now for six to nine months, and Now that you've gotten maybe a little bit more settled into role, just maybe some color on any potential kind of strategic changes or tweaks that you think you might make with the business going forward.
spk00: 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 distribution partners out there. I think what you should see is a lot of the things that built Allegiant's reputation since then, of outstanding operational execution, year-over-year expanding margins, those kind of things will continue. What we're looking to do is continue to orient the company towards growth and allocate capital towards growth. That means driving organic growth. That means continue to look for us and expect us to be acquisitive. and really leading with our technology. Allegiant's got a fabulous electromechanical portfolio. We've got 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 what you need to expect us to layer on top of. The operational excellence that you're used to from Allegiant, and this year-on-year ability to drive above market growth and continue to expand margins.
spk11: Our next question comes from Josh Pokerwinski from Morgan Stanley. Please go ahead. Hey, good morning, guys.
spk14: Morning. Good morning, Josh. So, John, you talked a few times about the visibility in the non-res business, particularly on electronics with the elevated backlog. Just wondering if you could give us sort of any view on where backlog levels stand or how you think about conversion or something like book-to-bill in the framework this year?
spk00: Yeah, so I think, again, on the mechanical side of the portfolio, you 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 supply limited is still where we are. We've gotten, and I think quarter to quarter, 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 22. 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 Allegiant's 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 Interflex 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.
spk14: Got it. That's helpful. Looking forward to hearing more about that at the Investor Day as well. On the margin guide in the Americas, or 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 price cost or miss 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 some of this healthy mix, price cost, some of the other things you're talking about?
spk07: Yeah, Josh, clearly first half we're going to see 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 the dollar basis. And when you think about expansion, America's margin expansion will be more front half loaded year over year.
spk11: The next question comes from Ryan Merkel from William Blair. Please go ahead.
spk03: 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 resident and commercial? And then what are the features and benefits that are really resonating with your customers?
spk00: Yeah, it's a great question. Maybe start with residential. You know, I think the rise of the mega tech 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 lock, 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, this is a B2B environment. Here you're talking about real economic value add for the end user. Think about a multifamily residential setting, an apartment complex. rather than the landlord managing and swapping out metal keys. You can do this all digitally now with digital credentials, mobile credentials. There's operating cost savings there that will continue to drive adoption in spaces like that. So 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.
spk03: 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 and the investment working capital? Is that primarily in electronics?
spk00: So the supply chain, the way I described it last quarter, same way I'll 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. The constraint is the semiconductors themselves. uh, microprocessors in particular. And it's just been a matter of, uh, the industrial internet of things that space has had extremely strong demand. Uh, while, you know, you've probably seen, uh, news headlines and other things about, you know, some foundries or chip manufacturers seeing softening demand that's from things like consumer goods and mobile phones, these, these, uh, much smaller, much more advanced, much more expensive chips. But these chips that hit the sweet spot of cost and power and performance for the industrial IoT, which is like what we use in our products, that demand has still outstripped supply and capacity all the way back to the foundries. We've been working very closely to do a couple 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 delivery. 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 improvements so far, but we're still supply constrained versus very strong demand.
spk11: The next question comes from Brian Rittenberg from Imperial Capital. Please, I'm sorry, Brian Rittenberg from Imperial Capital. Please go ahead.
spk04: 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 you talk a little bit about, you say it's primarily driven by pricing. Will volumes actually be down? Uh, and could they be down two to three, four or 5% and you still hit that though your goals, uh, for 2023 on the residential side?
spk07: Yeah, Brian, I really don't want to give the sub components for res non-res, but, uh, if you think about it, uh, I would say you're, you're, uh, approximating a reasonable outlook for res 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 res and non-res.
spk04: Okay. And then along those same lines, have you experienced on the residential side or even the international side any de-booking in the fourth quarter? We've just heard about some de-booking in the residential side, and I didn't want to kind of get your color on that, if there's been any de-booking and you've seen a recovery post-fourth quarter.
spk07: If you think about our residential business, electronics, clearly there's shelf space to be filled, as John talked about. On the mechanical side, what we have seen is slowing there, akin to the overall numbers we talked about residential. As far as deep bookings, we have not seen a lot of cancellations from customers. More think of it as slowing down in the consumer making purchases there.
spk11: This concludes our question and answer session. I would like to turn the conference back over to John Stone for any closing remarks.
spk00: Thanks very much. So to wrap up what you heard today, Allegiant, America's non-residential 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're favorably positioned for 2023. Thank you very much for joining the call and have a great day.
spk11: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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