Allegion plc

Good day and welcome to the Allegiant fourth quarter 2021 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'd now like to turn the conference over to Tom Martineau. Please go ahead.

Thank you, Jason. Good morning, everyone. Welcome and thank you for joining us for Allegiant's fourth quarter and full year 2021 earnings call. With me today are Dave Petratis, Chairman, President, and Chief Executive Officer, and Patrick Shannon, 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. Dave and Patrick will now discuss our fourth quarter and full year 2021 results and provide an outlook for 2022, which will be followed by a Q&A session. For the Q&A, we would like to ask each caller to limit themselves to one question and then re-enter the queue. We would like to give everyone an opportunity given the time allotted. Now I'd like to turn the call over to Dave.

Thanks, Tom. Good morning, and thank you for joining us today. Please go to slide number four. Q4 was tough for Allegiant, and although we achieved the expected results we discussed last quarter, I was disappointed that we were unable to fully meet the market opportunity presented. The strength in demand, particularly in America's non-residential end markets, continued. And as I said last quarter, this trend began softly in Q1, accelerated in Q2, and continued throughout the back half of the year. Leading indicators like specs written for Allegiant Americas, ABI, and Dodge New Construction Indices, retail point of sales, and macroeconomic indicators in our Allegiant International segment all remain positive. These indicators suggest continued strength in all end markets for the foreseeable future. However, with supply chain challenges, we continue to experience difficulty converting that demand into revenue. Typically, we'd be able to gear up our supply base in short fashion, but the accelerated increase in demand occurred during an unprecedented time when suppliers were experiencing labor, raw material, transportation, and electronic component shortages, creating tremendous global disruption. What we typically resolve in a quarter is now taking much longer. We are making good progress on product redesigns and alternative sourcing, which should alleviate some of the supply chain pressure. But we do expect revenue to continue to be constrained in the near term. Even with the supply chain improvements we are making, it's important to note that the pressures and electronic components are expected to continue throughout 2022. Looking at price versus cost, we continue to experience high inflationary impacts from material costs, labor, and freight. The pricing that we put in place last year is currently lagging inflation. That, coupled with productivity challenges, is a major contributor to margin declines in Q4. We implemented additional price increases during the fourth quarter and have already announced another price increase for Q1 2022 that goes into effect this month. We are aggressively pursuing price across all products and in all channels to offset unprecedented inflation and expect price to exceed inflation in 2022. I do want to highlight our Allegiant International business, which had another good quarter and closed out a strong year. The segment delivered robust organic revenue growth and solid margin expansion in 2021. Looking forward, the increased demand and supply chain shortages have led to record backlogs in our American non-residential business. And coupled with the progress we are making on redesigns and alternative sourcing, we expect solid revenue growth in 2022 and into 2023. As supply chain pressures ease, operational efficiencies will improve, which along with accelerated pricing, will allow us to expand margins in 2022 and exit the year on a glide path back to peak performance. Now let's turn to the quarter performance for more details. Please go to slide five. Revenue for the fourth quarter was $709 million, a decrease of 2.5 percent compared to last year. Organic revenue declined 1.4 percent. The organic revenue decline in the quarter was driven by Allegiant Americas, which experienced continued supply chain pressures that led to electronic and other component shortages. Also embedded in the decline is a tough comparable to last year. During the fourth quarter of 2020, we had a large residential channel load-in that was necessary to catch up from the shutdowns experienced earlier that year. The Americas volume declines more than the sequential improvements in price realization and the growth that the Allegiant International segment delivered. Patrick will share more details on the business segments in a moment. Adjusted operating margin decreased by 610 basis points in the fourth quarter. Continued inflationary pressures, productivity challenges, and volume deleverage drove most of the decrease. Incremental investments for future growth caused 80 basis points of the decline. Adjusted earnings per share of $1.11 decreased 38 cents or approximately 26% versus the prior year. Lower operating income was partially offset by favorable share count, year-over-year tax rate reduction, and other income. Available cash flow for the year came in at $443 million, which was flat to 2020. Slightly lower adjusted earnings were offset by slightly lower capital expenditures. The cash flow impact of working capital was nearly neutral as well, with increased inventory offset by other components of working capital. As I think about the road ahead, I firmly believe our vision, strategy, and support of our seamless access is more relevant than ever. I also believe we have the right team and an engaged workforce that will respond to the challenges we face today. We are bullish on construction and DIY markets for 2022 and continue to expect the IoT trend of electronic adoption and smart buildings to fuel growth for many years. Allegiant's future is bright and we will return to the peak performance and profitability that you expect. Patrick will now walk you through the financial results, and I'll be back to discuss our 2022 outlook.