S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
North Carolina medical marijuana sales begin at Cherokee store
Ukrainian and Western leaders laud US aid package while the Kremlin warns of 'further ruin'
Biden sees a $35 price cap for insulin as a pivotal campaign issue. It’s not that clear-cut
'Civil War’ continues box-office campaign at No. 1
Hawaii lawmakers take aim at vacation rentals after Lahaina wildfire amplifies Maui housing crisis
Conservative Brazilians laud Elon Musk at rally in support of ex-president Bolsonaro
Tens of thousands of Colombians protest against the leftist president's reform agenda

Allegion Q1 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Tom Martineau
    Vice President of Investor Relations and Treasurer
  • David Petratis
    Chairman, President, and Chief Executive Officer
  • Michael Wagnes
    Senior Vice President and Chief Financial Officer
  • Unidentified Speaker

Presentation

Operator

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

Tom Martineau
Vice President of Investor Relations and Treasurer at Allegion

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 2 and 3. 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. 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. [Operator Instructions]

Please go to Slide 4, and I'll turn the call over to Dave.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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 nonresidential side of the Americas as well as strength in SimonsVoss, Interflex, and Portable Security with the international -- within the International segment. Residential markets in the Americas remained 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.

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 are raising our revenue outlook to reflect higher price, offsetting the additional inflation we are experiencing. We are holding our prior EPS range, and I'll share more detail on the outlook later in the presentation.

Last, on the business review, I want to further highlight our announcement from last Friday. We have come to an agreement to acquire Access Technologies business from Stanley Black & Decker. This is the right asset for Allegion, and it progresses our seamless access strategic focus, adding a category leader with expansive service -- with an expansive service footprint. The business has a strong financial profile and is very complementary to the Allegion Americas core business and our portfolio. Closing is anticipated in Q3, and we welcome the Access Technology employees, and we look forward to all of them joining our team.

Now let's turn to the quarter performance for more details. Please go to Slide 5. Revenue for the first quarter was $724 million, 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 Americas nonresidential business also saw volume growth driven by robust demand highlighted earlier. 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 share more detail on the business segments in a moment.

Adjusted operating margin decreased by 240 basis points in the first quarter, continued inflationary pressures, productivity challenge and currency headwinds drove most of the decrease. Incremental investments for future growth cost 60 basis points of the decline. 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 million, which was down 89% versus Q1 of last year, but is in line with our historical trends. Last year's high number was driven by lower working capital requirements due to the COVID-19 pandemic. As I've stated before, I firmly believe our vision and strategy in support of 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 consumption to fuel growth for many years.

Mike will now walk you through the financials, and I'll be back to discuss our 2022 outlook.

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

Thanks, Dave, and good morning, everyone. Thank you for joining today's call. Please go to Slide #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 nonoperating 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 nonresidential business. Currency headwind and divestitures more than offset the impact of acquisitions, bringing the total reported growth to 4.2% in the first quarter.

Please go to Slide #8. First quarter revenue for the Americas segment was $528.2 million, up 5.9% on both a reported and an organic basis. The segment delivered significant price realization. Nonresidential price was strong and residential business experienced improved price realization. The price helped the nonresidential business grew low double digits. Residential was down mid-single digit against a 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 $123.9 million decreased 8.6% versus the prior year period, and adjusted operating margin for the quarter was down 370 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. Incremental investments had a 60 basis point impact on margins as well.

Please go to Slide 9. First quarter revenue for our International segment was $195.4 million, flat to last year and up 7.6% on an organic basis. The organic growth was driven by strength in SimonsVoss, Interflex and Global Portable Securities businesses. This segment also saw solid price realization contributing to the organic growth. The strong organic growth was offset by unfavorable currency and divestitures.

International adjusted operating income of $20.4 million 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 first quarter of 2022 came in at $11.8 million, which is a decrease of more than $93 million compared to the prior year period. The $11.8 million is more in line with historical trends as the business tends to have modest cash flows in the first quarter 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 first quarter 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.

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

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

Thank you, Mike. Please go to Slide Number 11. Nonresidential 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 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 our 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 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 update 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 share with an adjusted EPS range of $5.55 to $5.75 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 to approximately 88.5 million.

A favorable impact of the higher share count assumption is offset by operational improvements, leading us to hold the prior EPS outlook. Our outlook for available cash flow is being raised and is now projected to be $470 million to $490 million.

Please go to Slide 14. Before we go to Q&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. I want to repeat the benefits we saw in this acquisition. It's a highly strategic combination that expands our presence in security markets and unlocks greater values for our employees, customers, distributors and shareholders.

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 to recreate 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.

Please go to Slide 15. As we look at this acquisition, we believe there are many ways that delivers on our promise to create value for Allegion shareholders. We're creating value with a more comprehensive portfolio of solutions, adding a category leader and addressing a current portfolio gap in Allegiant'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. It expands our innovation and electronic capabilities, brings a strong business with good market fundamentals and complements the core markets and specification expertise of our Allegion Americas segment. We believe the acquisition will strengthen our financial profile that provides clear synergy and incremental revenue opportunities.

A balanced and disciplined capital allocation strategy will continue to be a top priority for Allegion. And having a strong balance sheet and cash flow to maintain financial flexibility that support [Indecipherable]. Ultimately, we believe the automatic entrant solution 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.

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

Questions and Answers

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timothy Wojs from Baird. Please go ahead.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

Good morning, Tim.

Operator

Hold on one second here.

Unidentified Speaker
at Allegion

[Indecipherable] confirming there is just a technology challenge.

Operator

Yes. There is a technology challenge. Just give me one sec. All right. Timothy, your mic is now open.

Timothy Wojs
Analyst at Robert W. Baird

[Indecipherable] Can you guys hear me?

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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

Timothy Wojs
Analyst at Robert W. Baird

The Bucks right now. But I guess, yes, maybe just [Indecipherable]. 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 time lines might elongate just from a construction time line perspective and maybe shift some revenue into '23?

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

I think as we think about the path forward in terms of order activity, incoming orders, especially in the commercial business, institutional business is extremely robust. Tim, I've been traveling around the last few weeks. You also get that feel that construction activity across the country is extremely robust. As we look at our macroeconomics, 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 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 when I think about res, it probably shows my age a little bit. It was extremely -- residential was extremely difficult in the last decade. And as I think about the undersupply 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 4 to 6 quarters, and then we'll see.

Timothy Wojs
Analyst at Robert W. Baird

Okay. Okay. Good. And then 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 that -- is there any difference to that today, just given kind of where you were in the first quarter? Or is that kind of similar?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

Yes. 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 it 1% or so or 2%, but it's roughly around that 60% that we gave in the beginning of the year.

Timothy Wojs
Analyst at Robert W. Baird

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

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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 assumed in the beginning of the year. So at 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%.

Timothy Wojs
Analyst at Robert W. Baird

Okay. Sounds good. Appreciate the time guys. Good luck on the rest of the year.

Operator

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

John Walsh
Analyst at Credit Suisse Group

Hi, good morning. Nice quarter. Thank you. Just kind of wanted to understand the change in the sales guidance. So it 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. 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?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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 nonresidential. 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 probably gives -- or 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.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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 but 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 particularly 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 ship availability gets better across the board, we'll be even stronger.

John Walsh
Analyst at Credit Suisse Group

Great. Thanks for that answer. And then 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?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

Yes. So 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 is substantial inflationary pressures. We're driving price to offset it from a dollar amount, but that raises the denominator in the margin cal without raising the numerator from the profit because it offsets it.

John Walsh
Analyst at Credit Suisse Group

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

Operator

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

Matthew Shaffer
Analyst at Barclays

Hi. How is it going, guys? You've Matthew Shaffer on from Julian Mitchell's team.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

Hey, Matthew.

Matthew Shaffer
Analyst at Barclays

Hey, how is it going? So you guys mentioned that pricing is expected to see inflation in 2022. Can you maybe talk to the cadence of the price cost differential through the remaining quarters?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

Yes. As you think of the first quarter, 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. But say $7 million underwater in the first quarter. As you progress into -- throughout the year, think of Q2 being closer to breakeven-ish. And then Q3 and Q4, a 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.

Matthew Shaffer
Analyst at Barclays

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 is the expectation is for 2022 growth for electronics.

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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.

Matthew Shaffer
Analyst at Barclays

Great. Thank you, guys, so much.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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

Joseph Nolan
Analyst at Longbow Research

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

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

Good morning, Joe. [Indecipherable].

Joseph Nolan
Analyst at Longbow Research

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.

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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 nonres. 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.

Joseph Nolan
Analyst at Longbow Research

Got it. Thanks. And then could you just give an update on trends in spec rating activity, just the size of projects, your content, order size, timing and that sort of stuff?

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

I would say spec rating 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. I 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.

Joseph Nolan
Analyst at Longbow Research

Great. Thanks. I'll pass it on.

Operator

Thank you. Our next question comes from Brian Ruttenbur from Imperial Capital. Please go ahead.

Brian Ruttenbur
Analyst at Imperial Capital

Thank you 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 fourth quarter and obviously down year-over-year. Do you expect gross margins to increase from first quarter to second quarter and then progress a couple of hundred basis points per quarter? Is that what you're seeing?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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 2022.

Brian Ruttenbur
Analyst at Imperial Capital

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

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

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

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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

Brian Ruttenbur
Analyst at Imperial Capital

All right. Thank you very much.

Operator

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

Sabrina Abrams
Analyst at Bank of America

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

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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 drive through that. We're not totally immune, but our in-geographic production capabilities position as well.

Sabrina Abrams
Analyst at Bank of America

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 inflation in the remainder of the year?

Michael Wagnes
Senior Vice President and Chief Financial Officer at Allegion

As we think about where we are today, we just completed the first quarter, got three quarters to go. I feel good that we got off to a nice start to the year. You do see -- 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.

Sabrina Abrams
Analyst at Bank of America

Great. Thanks. I'll pass it on.

Operator

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.

David Petratis
Chairman, President, and Chief Executive Officer at Allegion

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 Allegion, but does affect us.

Pressure and 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.

Operator

[Operator Closing Remarks]

Alpha Street Logo

 


Featured Articles and Offers

Search Headlines:

More Earnings Resources from MarketBeat

Upcoming Earnings: