Good morning, and welcome to the Allegion First Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. 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. Please go ahead.

Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegion's first quarter 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.allegion.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 Mike will now discuss our first quarter 2022 results, which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up and then reenter the queue. We would like to give everyone an opportunity given the time allotted. Please go to slide four and I'll turn the call over to Dave.

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 Allegion, which is expected to close in the third quarter of this year. 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 were 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 the 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. 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 we'll 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 unprecedented inflation, and we expect price to exceed inflation further for the year. We are providing an updated outlook for 2022. We're raising our revenue outlook to reflect higher price, offsetting…

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 first quarter. For the first quarter 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 $0.03 per share and the impact of acquisition and divestitures drove another $0.01 per share. 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, expand our electronics capabilities, and drive our seamless access strategy. Operational results decreased 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% 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 first quarter 2022 reported earnings per share of $1.05. Please go to slide 7. 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% organic revenue growth in the first quarter, 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…

Thank you, Mike. Please go to slide number 11. Non-residential market demand in 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 under-supply of homes over the last decade will continue to be a factor driving growth in the residential segment. We have been aggressive in pursuing price in all channels and products and saw substantial improvement in price realization in Q1. 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 projecting total inorganic 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 pursuing price aggressively in those markets as well. Currency headwinds will continue to reduce total growth. For Allegion International, we are raising our outlook for 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 to increase 8.5% to 10%. These increases to prior outlook are driven primarily by higher price realization. It's important to note this updated outlook does not include any impacts from the Stanley Access Technology acquisition. Please go to slide number 12. For EPS, we are holding to the ranges provided during our last earnings call. Reported EPS is expected to be $5.50 to $5.70 per…

[Operator Instructions]. Our first question comes from Timothy Wojs from Baird.

Let's jump 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 what you're building in for any risks that maybe the building timelines might elongate just from a construction timeline perspective and maybe shift some revenue into 2023.

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. And 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 macroeconomics, it says, in the commercial, institutional, we're beginning the upcycle, which says we're going to get stronger as we go through the year 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've got to think about res. When I think about res, it probably shows my age a little bit. Residential was extremely difficult in the last decade. And as I think about the under-supply of housing across the nation, I think we're going to continue to bang out 1.2 million to 1.6 million, even with higher interest rates. So, I feel very good about overall demand. I think about that going out four to six quarters and then we'll see.

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

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. First quarter was okay or stronger than maybe the original assumption assumed. And so, it could move a percent or so or two, but it's roughly around that 60% that we gave in the beginning of the year.

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

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 assumed in the beginning of the year. So, if in the beginning of the year, we said roughly 50/50, that's going to be higher by the raise of the guide. So, you're going to be looking at that 60% to 65%.

Our next question comes from John Walsh from Credit Suisse.

Nice quarter. 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 were still tough. You have the China COVID impacts. 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.

John, as you think about our – so 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. 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 first quarter. And so, that does give us confidence that, in the back half of the year, we'll get additional supply from additional suppliers that we can get more volume out.

I'd add to it as well. Versus the second half of last year, labor has improved in its availability, freight has improved modestly. And I say modestly, the rise in COVID in China, the lockdowns will have some implications. We've got some exposure, but it's not major. And I think particular on the mechanical inputs to our business, redesign, qualifying second suppliers has really strengthened our confidence. That leaves the electronics element. 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.

I guess just thinking about some of the moving pieces with the margins, I know before we were thinking Americas should see better than normal just on mix 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?

John, as you think about Q1, sequential improvement versus what you saw in the fourth quarter, 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's 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.

Our next question comes from Julian Mitchell from Barclays.

You have Matthew Shaffer on from Julian Mitchell's team. So, you guys mentioned that pricing is expected to beat inflation in 2022. Can you maybe talk to the cadence of the price cost differential through the remaining quarters?

As you think of the first quarter, we were slightly negative. We provide that information in our 10-Q. So, you'll see it in our 10-Q by region and in total. But, say, $7 million underwater in the first quarter. As you progress throughout the year, think of Q2 being closer to breakeven-ish and then Q3 and Q4 substantial price in excess of that inflation or price and productivity in excess of the inflation. So, gets better as the year progresses and then significantly positive in the back half.

Just a follow-up for me. Electronics was up low-single digits in Americas Q1 after being pretty weak in 2021. Just curious the expectation is for 2022 growth for electronics.

We don't provide individual growth rates, electronics versus mechanical. But if you think about our performance in the first quarter, 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 consider our total guide for revenue, understanding that it's better than what you saw in the fourth quarter. And in the back half, we do comp against those easier comparables that we had in the back half of last year.

Our next question comes from David MacGregor from Longbow Research.

This is Joe Nolan on for David MacGregor. 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.

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 second quarter. So, we expect to see better price realization in the second quarter and onward through 2022.

Can 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?

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 order activity is good, and I think reflects the strength we're seeing in our incoming bookings.

Our next question comes from Brian Rutenberg from Imperial Capital.

Great quarter. So I'd like to break things down a little bit on gross versus operating margins. So, gross margins were down from fourth quarter and obviously down year-over-year. Do you expect gross margins to increase from first quarter to second quarter and then progress couple hundred basis points per quarter? Is that what you're saying?

Yeah, I would say, if you think about the gross margin, that's 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. So, we should see both the gross and the operating improve as we move throughout 2022.

So, on the operating basis, we'll also see improvement sequentially with that because there's going to be lower SG&A or just increased leverage from the top line and more gross profit.

As you get significant growth in the back half of the year, Q2, Q3, Q4, you leverage that SG&A base. So, that does help also the operating margins.

Volume is a very beautiful thing in this business. And as we go through the second half, the business leverage quite nicely.

The next question comes from Andrew Obin from Bank of America.

You have Sabrina Abrams [ph] on from Andrew Obin's team. I understand that you mentioned you're sort of expecting them, but in the past month, have you been seeing worsening supply chain impacts from the COVID-related China shutdowns and from the Russia-Ukraine conflict?

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 to be able to work through that. We're not totally immune, but are in geographic production capabilities position us well.

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 inflation in the remainder of the year?

As we think about where we are today, we just completed the first quarter. We've got three quarters to go. Feel good that we got out to a nice start to the year. As 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.

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

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 that macroeconomic events in China could delay in the improvement of some of the global supply chains. It's not unique to Allegion, but it does affect us. Pressure in electronic components is expected to persist. Inflation continues. We are aggressively producing price in all channels and products and we'll get the price cost equation back to positive this year. 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.

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