Allegion plc (NYSE: ALLE) Q4 2021 earnings call dated Feb. 15, 2022
Corporate Participants:
Tom Martineau — Vice President, Investor Relations and Treasurer
David D. Petratis — Chairman, President and Chief Executive Officer
Patrick Shannon — Senior Vice President and Chief Financial Officer
Analysts:
Brett Linzey — Mizuho Securities — Analyst
Julian Mitchell — Barclays Equity Research — Analyst
Joseph O’Dea — Wells Fargo Securities, LLC (Research) — Analyst
David MacGregor — Longbow Research — Analyst
Andrew Obin — Bank of America (Research) — Analyst
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
John Walsh — Credit Suisse Securities (USA) LLC — Analyst
Josh Chan — Robert W. Baird & Company — Analyst
Joshua Pokrzywinski — Morgan Stanley & Co., LLC — Analyst
Chris Snyder — UBS Global Research — Analyst
Brian Ruttenbur — Imperial Capital, LLC (Research) — Analyst
Presentation:
Operator
Good day, and welcome to the Allegion’s Fourth Quarter 2021 Earnings Call. [Operator Instructions]
I would now like to turn the conference over to Tom Martineau. Please go ahead.
Tom Martineau — Vice President, Investor Relations and Treasurer
Thank you, Jason. Good morning, everyone. Welcome, and thank you for joining us for Allegion’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 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 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.
David D. Petratis — Chairman, President and Chief Executive Officer
Thanks, Tom. Good morning, and thank you for joining us today. Please go to Slide number 4. Q4 was tough for Allegion. And although we achieved the expected results we discussed last quarter, I was disappointed that we weren’t able to fully meet the market opportunity presented. The strength in demand, particularly in Americas 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 Allegion Americas, ABI and Dodge new construction indices, retail point of sales and macroeconomic indicators in our Allegion International segment all remained 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 in electronic components are expected to continue throughout 2022.
Looking at price versus cost, we continue to experience high inflationary impacts for material cost, 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 Allegion 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 5. Revenue for the fourth quarter was $709 million, a decrease of 2.5% compared to last year. Organic revenue declined 1.4%. The organic revenue decline in the quarter was driven by Allegion 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 offset the sequential improvements in price realization and the growth that the Allegion 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 $0.38 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 in 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 trends of electronic adoption and smart buildings to fuel growth for many years. Allegion’s future is bright, and we will return to the peak performance in profitability that you expect.
Patrick will now walk you through the financial results and I’ll be back to discuss our 2022 outlook.
Patrick Shannon — Senior Vice President and Chief Financial Officer
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 fourth quarter. For the fourth quarter of 2020, reported earnings per share was $1.01. Adjusting $0.48 for charges related to restructuring, M&A costs, impairments as well as a loss on held-for-sale assets, the 2020 adjusted earnings per share was $1.49. Favorable year-over-year tax rate and share count drove another $0.04 and $0.03 increase respectively.
Interest and other income were slightly positive as were the impact of acquisitions and divestitures, both added $0.01 per share. The story for the quarter is reflected in the operational results, which decreased earnings per share by $0.41. The inflation of productivity headwinds were predominantly driven from higher input costs, wage increases, inefficiencies from supply chain challenges and the bounce back of variable-related costs, which were not as high in the prior year. These added costs were partially offset by price. Pricing sequentially improved in the quarter and will continue to accelerate in 2022.
Investment spending increased during the quarter and reduced earnings per share by $0.06. We remain committed to investing in new product innovation and technology that will accelerate future growth and deliver solutions that enhance customer and end user experiences and connectivity. This results in adjusted fourth quarter 2021 earnings per share of $1.11, a decrease of $0.38 or 25.5% compared to the prior year. Lastly, we have a $0.15 per share increase for the combination of a non-cash gain on a remeasurement of an Allegion Ventures investment offset by charges related to restructuring, M&A and debt refinancing. After giving effect to these items, you arrive at the fourth quarter 2021 reported earnings per share of $1.26.
Please go to Slide number 7. This slide depicts the components of our revenue growth for the fourth quarter as well as for the full year of 2021. As indicated, we experienced a 1.4% organic revenue decline in the fourth quarter. Like Q3, the electronics and other component shortages, primarily in the Americas region, had an impact on our ability to meet continued strong demand. We achieved the highest quarter of price realization in the year, which offset some of the volume decline.
For the full year, you can see that total revenue was up 5.4% with organic revenue growth of 4.5%. Both segments of the business delivered organic growth for the year, with the International segment at 10.4% and Americas at 2.4%. As mentioned, end market demand increased considerably faster than we anticipated in 2021. And although we were able to deliver significantly more than our initial outlook, we were unable to meet the full market opportunity currently. However, our record backlogs will enable accelerated revenue in the future once the supply chain constraints are mitigated.
Please go to Slide number 8. Fourth quarter revenues for the Allegion Americas segment were $499.5 million, down 4.2% on a reported basis and 4.3% organically. The organic decline was driven by continued supply chain pressures for both mechanical and electronic products. On the plus side, we did see sequential improvement in price, and the Americas has announced another increase that goes into effect this month. We are driving price in all channels and products and our expectation is that pricing will exceed inflation in 2022.
The Americas non-residential business was up low-single-digits as strong price was offset by delayed volume related to electronic allocations and other component shortages. These supply chain constraints, paired with robust market demand slowed the pace of revenue realization and led to historic levels of backlogs at the end of the year. Americas residential was down mid-teens.
Similar to last quarter and mentioned previously, the main drivers of the decrease are the prior year being inflated by channel refill coming out of the pandemic shutdowns experienced in Q2 2020 and the shortage of electronic components that primarily impact us in the DIY space, a big box retail and e-commerce. Electronics revenue was down low-20% driven by continued shortages of electronic components in both the non-residential and residential businesses. The prior-year residential channel refill also had an impact on year-over-year electronics performance.
Allegion Americas adjusted operating income of $105.5 million decreased 29% versus the prior year period and adjusted operating margin for the quarter was down 740 basis points. The decrease was driven by inflationary pressures, productivity challenges related to supply chain and volume deleverage. Incremental investments had a 90 basis point dilutive impact on adjusted margins. Although margins were down significantly in the quarter, down 370 basis points for the full year, margins will improve in 2022 compared to 2021 from increased price realization, volume leverage and improved business mix.
Please go to slide number 9. The Allegion International segment had another solid quarter. Fourth quarter revenues were $209.7 million, up 1.7% and up 5.8% on an organic basis. The organic growth was driven by strength in our Global Portable Security business along with good price realization. Reported growth reflect the impact of currency headwinds and divestitures.
Allegion International adjusted operating income of $29.4 million decreased 11.2% versus the prior year period. Adjusted operating margin for the quarter decreased by 200 basis points. The margin decrease was driven primarily by inflation exceeding price and productivity along with negative product mix, which more than offset the positive volume leverage. Incremental investments reduced margins by 50 basis points. I would also note the full year performance of the International segment; double-digit organic growth and achievement of 11% operating margin. This was a record year for the segment and reflects a tremendous amount of effort and dedication by the entire team.
Please go to Slide number 10. Available cash flow for 2021 came in at $443 million, which is flat compared to the prior year period. The adjusted net earnings were slightly lower and was offset by slightly lower capital expenditures. In total, the working capital impact was near neutral with increased inventories offset by other components of working capital. Looking at the working capital chart, it shows working capital as a percentage of revenues and the cash conversion cycle decreased based on a four-point quarter average.
Last chart on the slide shows our net leverage. The net debt to EBITDA ratio increased from 1.5 last year to 1.7 this year. The increase in the ratio was driven primarily by reduced cash position from shareholder distributions for the year. The business continues to generate strong cash flow and conversion of net earnings. We have a healthy balance sheet, and we executed $542 million in shareholder distributions with $413 million in share repurchases and $129 million in dividends. We also recently announced a 14% increase in our dividend coming later in March.
During the quarter, we entered into a new $750 million unsecured credit agreement consisting of a $250 million term facility and a $500 million revolving facility. We obtained a rating upgrade with Moody’s and moved to positive outlook by Fitch. Our capital structure is an asset of the company and we continue to execute on our balanced capital allocation strategy that will deploy capital through incremental high returning organic investments, capex, M&A or shareholder distributions.
I will now hand it back over to Dave for some comments on 2022.
David D. Petratis — Chairman, President and Chief Executive Officer
Thank you, Patrick. Please go to Slide 11. Before I get into our outlook for the year, I want to highlight the actions we are taking to mitigate constraints and drive growth and profitability in 2022. Our expectation is to fully cover inflation with price. We are in the midst of executing aggressive pricing actions across the globe in all product categories and all channels. We will remain vigilant during the year and we will not hesitate to pull the pricing lever if inflation headwinds increased further.
With regard to timing, we expect net margin pressures during the first half with the price versus cost dynamic improving sequentially throughout the year and turning positive in the middle of the year. Our product redesigns and alternative sourcing work is expected to be completed by the end of Q2. This will help alleviate the supply chain pressures related to our mechanical business and provide access to additional electronic component solutions. However, electronic chip allocations will continue to be choppy throughout the year. As the supply chain normalizes, we will continuously improve our lead times and reduce our record backlog.
Our greatest strength lies in the people of Allegion. With broad tightness in the labor market, we are protecting our labor pipeline. We have implemented pay increases and are not flexing labor to the degree we normally would. This is operationally inefficient in the short-term, but when supply chain pressures ease, we want to be sure we have the labor in place to move product out of the factories and reduce backlogs. We expect to return to margin expansion this year. Second half margins are anticipated to perform stronger than first half. And we will exit the year on a path back to peak margin performance. We continue to invest in R&D and software development that progresses our seamless access strategy and to build critical talent capabilities and innovation.
Please go to Slide 12. For the 2022 outlook on revenue, the Americas is expected strength in our non-residential businesses with the continued recovery in those end markets, particularly education, healthcare and commercial. All leading indicators are positive and the level of institutional specification for our business had continue to be strong. Residential indicators are positive as well and we expect that business to continue growing in 2022. The under-supply of single-family home continues to be corrected and the builder channel and retail point of sale has been strong for quite some time. Electronics and smart home adoption continues to be long-term growth drivers.
As underscored earlier, we are aggressively pursuing pricing in all channels, products in the Americas and around the globe. Given the supply chain challenges that persist, we expect the revenue performance to be better in the second half than in the first, but still project organic revenue growth in all quarters. With the strength in non-residential construction, continued growth in residential, our expectation for electronic chip allocation and redesign work to ease supply chain pressures, we project total organic revenue in the Americas to be up 8.5% to 10% in 2022.
In the Allegion International segment, we expect growth, but we are starting to see some electronic supply chain issues in that region as well. Currency headwinds are projected to offset organic growth. For Allegion International, we project total revenue to be in the minus 1% to plus 1% range with organic growth of 3% to 5%. All-in for Allegion, we are projecting total revenue to be up 6% to 7.5% and organic revenue growth of 7% to 8.5%.
Our 2022 outlook for adjusted earnings per share is $5.55 to $5.75. Timing-wise, we expect to realize approximately 60% of the adjusted EPS in the second half of the year. As indicated, adjusted operating — our adjusted operational earnings are expected to increase 14% to 18% driven by volume leverage and price exceeding inflation. Incremental investments continue to be a priority as we remain focused on accelerating electronics and seamless access growth in support of our vision and strategy. These incremental investments predominantly relate to added R&D and engineering to further develop, enhance and accelerate new product development and software capabilities. The combination of interest and other expense is expected to be a headwind as some of the more favorable items that we experienced in 2021 are non-recurring.
Our outlook assumes a full year adjusted effective tax rate of approximately 13%. It also assumes outstanding weighted average diluted shares of approximately $88 million. The outlook additionally includes approximately $0.05 per share for restructuring charges during the year. As a result, reported EPS is projected to be $5.50 to $5.70. We are expecting our available cash flow for 2022 to be in the $465 million to $485 million range.
Please go to Slide 13. In summary, end market demand remained strong in the fourth quarter and we expect that to continue. The supply chain issues we are experiencing have hindered our ability to meet that demand. And as a result, we have built record backlogs that will support growth in 2022 and 2023. The product redesigns and alternative sourcing should begin to alleviate some of the supply chain pressures by mid-year, primarily on the mechanical side of the business.
We are projecting solid organic revenue growth of 7% to 8.5% in 2022 even with the expectation that chip allocations will continue to be tight. We expect year-over-year growth in electronics and acceleration in that growth throughout the year. We are aggressively going after price across the globe and in all products and channels. For the calendar year, pricing will exceed inflation. This will help Allegion to deliver margin improvement, which we expect will progress as we go throughout the year.
Please go to Slide 14. A final note in the key leadership announcements before we move into Q&A. Mike Wagnes, who leads to the Commercial Americas strategic business unit, will be transitioning to the role of Chief Financial Officer on March 1. He succeeds Patrick Shannon, who will be retiring later this year. As CFO, Mike brings significant financial experience and a deep understanding of our global business in the markets we serve. He has been with Allegion for 15 years and many of you know him from his time as Treasurer and leading Investor Relations. The board of directors and I have the utmost confidence that he is the right person to step into this important role.
Dave Ilardi has been promoted to Senior Vice President of the Americas segment effective March 1. Dave currently leads Allegion Home and is responsible for the flagship Schlage portfolio of residential solutions. He has been at the company for 20 years and is highly respected, an industry veteran with extensive knowledge of our customers, channel partners and vertical markets. We are thrilled to welcome him to the senior leadership team.
Allegion is equally fortunate to have a strong bench of talented leaders throughout the globe. They are well prepared to execute on our strategy and capitalize on growth opportunities as we emerge from the pandemic, and I want to thank our entire team for their commitment and dedication.
Last, a few remarks for Patrick Shannon. It has been a privilege to work alongside Patrick, who has been a partner, a friend for me and an outstanding business leader. And as a founding member of the leadership team, Patrick has been instrumental in refreshing our business strategy, building a world-class finance organization and creating a strong foundation that will serve us well in the years ahead. I speak for all of the employees of Allegion when I say that it has been an honor and a pleasure to circle Patrick Shannon.
We will now take your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Brett Linzey from Mizuho Securities. Please go ahead.
Brett Linzey — Mizuho Securities — Analyst
Hi, good morning, all, and congrats to Patrick.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Thank you.
Brett Linzey — Mizuho Securities — Analyst
The strong outlook overall. I’m just curious, what level of price are you expecting within the guide for the full year? And any directional color you can give us between how you’re thinking about the residential and non-residential piece within the Americas business for 2022?
Patrick Shannon — Senior Vice President and Chief Financial Officer
Yeah. So I would characterize as you look at price, again good sequential improvement in Q4 of ’21. You will see continued improvement as we progress throughout 2022 both on the non-residential and residential side of the business. It is a large component of our overall revenue growth, kind of reaching a peak, if you will, in terms of price realization in Q3 as we realize the full implementation of all the price increases, including both list prices and surcharges on certain products. So a big part of the revenue growth. And if you kind of look at it relative to non-res, res, the non-resi in terms of our guide, full year revenue growth, you would be looking at the high end kind of low-double-digits. Residential, mid-single-digit type of growth for 2022.
Brett Linzey — Mizuho Securities — Analyst
Okay, great. And then just to come back to the electronics, you noted growth year-over-year on a full year basis. I’m just curious, what’s the pacing look like through the year? Is it really Q3 until that turns positive again or does that happen earlier? Just curious, what your planning processes looks like there?
David D. Petratis — Chairman, President and Chief Executive Officer
We’ve spent a lot of time looking at electronic chip and component allocations. And as you think about our guide, it will be — it will improve sequentially quarter-to-quarter in terms of the flow of electronic blocks and be strongest in the second half and as we move into ’23.
Brett Linzey — Mizuho Securities — Analyst
Okay, great. I’ll pass it along. Thanks.
David D. Petratis — Chairman, President and Chief Executive Officer
Thank you.
Operator
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Julian Mitchell — Barclays Equity Research — Analyst
Hi, good morning. And thanks for all the help, Patrick, and wish you all the best. In terms of — maybe my question would be around the underperformance of sort of the volumes of Allegion in the Americas. Relative to some of its biggest peers, that’s clearly been a point of focus for investors for a few months now. So just wondered what you saw the main factor were behind that seeming share loss, particularly on the non-resi side? Is it simply a difference in kind of procurement and sourcing strategies? And is there anything else perhaps going on more on the commercial or customer-facing front as well?
Patrick Shannon — Senior Vice President and Chief Financial Officer
I think you’ve got to call our second half as it is. Number one, market is incredibly strong. Number two, a loss in opportunity by the company because of supply chain difficulties. Our supply chains tend to be in region. They perform incredibly well giving high inventory turnover, high return on invested capital when they’re working well. The pandemic, especially as we move through ’22, was severely impacted by chips and labor shortages that affected our very complex supply chain within region. And when I say complex, you’ve heard me say, Julian, complexity is our friend at Allegion. But when you throw that — those challenges in supply chain, you’re really working a variety of issues, which I’d say stabilized as we ended December and we’ll get sequentially better as we go on.
I would also say, some of the moves that we made pre-pandemic to vertically integrate actually helped us. And I think I’m confident that we’ll get the mechanical side of the Americas business strengthen out at things like investing — investment casting that make the Von Duprin Exit Device what it is. And as we move through the year, the pacing item will be electronics. We built our plant based on the allocations that we believe that we will get. And I believe that in the electronics, the supply chain disruptions there have pulled demand forward and will benefit in the secondary markets that will help us exceed our plan in ’22 if that in fact impact. So a lot into that answer. I hope that gives you some color.
David D. Petratis — Chairman, President and Chief Executive Officer
Julian, I would also just add real quickly. When you look at kind of the order activity on non-res, really strong. We’re kind of giving indication maybe similar to what we’re seeing from our peer set. Just this inability to be able to ship and realize the revenue. So it’s — we’ll call it kind of deferred or delayed revenue. It will come. They’re definitive orders, we’re not seeing any cancellations. And that’s why we’re going to anticipate 2022 to have accelerated revenue as we progress throughout the course of the year with the resolution of some of these supply chain difficulties.
The other thing is on the residential side. Keep in mind, we had a large channel load last year that’s impacting negatively the comparisons year-over-year. So that has kind of the distortion. I mean, if you look at it on a two year stacked basis, it’s not as pronounced as what you saw perhaps in Q4 of ’21. So just kind of keep those things in mind, if you would.
Julian Mitchell — Barclays Equity Research — Analyst
Thanks a lot. That’s very helpful. And then just one very quick follow-up. I just want to put a finer point on the sort of the price volume split within the organic sales guide for total company 2022. Is this a sort of rough assumption that the organic sales growth is split sort of 50-50 price and the volume?
Patrick Shannon — Senior Vice President and Chief Financial Officer
Yeah, I’d say that’s pretty much in the ballpark. Again, we’re going to push the price lever and because right now as the numbers would indicate, underwater relative to the inflation we’ve seen. But I think that’s a decent assumption.
Julian Mitchell — Barclays Equity Research — Analyst
Great. Thank you.
Operator
The next question comes from Joe O’Dea from Wells Fargo. Please go ahead.
Joseph O’Dea — Wells Fargo Securities, LLC (Research) — Analyst
Hi, good morning. First just a cadence question. You gave some helpful details in terms of how you’re thinking about the back half of the year, but I think with the fluidity of the current environment, just anything that you’re able to talk about in terms of the first half? I think first quarter EPS tends to be maybe a high-teens percentage of the full year. Just trying to understand based on the visibility you have on supply chain what kind of progression we should be thinking about kind of as we go first quarter into second quarter, if you’re able to talk about that?
Patrick Shannon — Senior Vice President and Chief Financial Officer
I think we gave a nugget there, 60% of the EPS will be in the second half of the year. Second, you think about the labor ramp up that’s I think happening for us. We’re seeing people are coming back to work, back into the factories. That momentum is important for us to drive the supply chain to meet this demand and backlog that we’ve got to direct through. The second would be chip supplies. Sequentially, they will get better quarter-to-quarter. And it leads to that back half being stronger.
David D. Petratis — Chairman, President and Chief Executive Officer
I would just add. Seasonally, Q1 normally our weakest quarter from a revenue perspective and earnings. The year-over-year decline in margin, not as pronounced obviously as what you saw in Q4, but yet margin down relative to Q4 just from a seasonal perspective, that’s kind of normal course of business. But as we progress throughout the course of the year, the price-cost dynamic, you will see continuous improvement beginning in Q1 relative to Q4, and that will progress throughout the course of the year as we get more price realization.
And our assumption is on inflation that we’ve kind of plateaued where we are. And actually steel is, if you kind of look at it on a cold rolled per ton basis, has come down a little bit, maybe a little opportunity there. But margin expansion really back end loaded where that price cost dynamic becomes very favorable, and obviously we have easier comps back half of this year compared to ’21. So that’s kind of how we see it playing out sequentially.
Joseph O’Dea — Wells Fargo Securities, LLC (Research) — Analyst
I appreciate that. And then I wanted to ask about some of the commentary on ’22 but also constructive on ’23 in terms of the conversations that you’re having with customers, I mean the amount of backlog that’s even scheduled for ’23. But if you can just expand on that a little bit in terms of kind of what you’re seeing to help kind of build what would be kind of a two year constructive outlook on improving demand?
David D. Petratis — Chairman, President and Chief Executive Officer
So we certainly filter through the macroeconomic indicators which we feel are positive levels. I think as you travel around the country, you see the strength in construction markets. You’ve got stimulus coming from the top. You also are working through the backlog of work that was disrupted by the pandemic. So as I think about K through 12, hospitals, multi-family and then the overall res which drives expansion, I feel very good about the next couple of years.
Patrick Shannon — Senior Vice President and Chief Financial Officer
I would also add. We’ve talked about this record backlog both on the mechanical electronics. We’ll have an opportunity to work through a lot of the mechanical backlog in 2022. There is still going to be an overhang, if you will, or excess elevated backlog associated with electronic products going into 2023. And so with that backdrop and the continued strength in market demand, would expect ’23 to be have a pretty robust organic revenue growth as well for the Americas region on non-res and really good electronics growth year-over-year. So would expect that to kind of continue on compared to 2022.
Joseph O’Dea — Wells Fargo Securities, LLC (Research) — Analyst
Thank you.
Operator
The next question comes from David MacGregor from Longbow. Please go ahead.
David MacGregor — Longbow Research — Analyst
Yeah. Good morning, everyone. Just a couple of quick ones. So maybe, Dave, you could talk about the backlogs. And in the past, you’ve indicated this inclination to want to put through pricing on backlogs as you protect some of the spec business that you’ve bought. I’m just wondering if that’s changing now as you think about becoming more aggressive on pricing into 2022? And then obviously great results from Europe under some pretty difficult circumstances there as well. Clearly, Tim and his team are executing well there. Can you just talk about what are the biggest pieces of the ’22, ’23 margin progression opportunities in Europe? Thank you.
David D. Petratis — Chairman, President and Chief Executive Officer
So I’ll talk about International first. I think Tim, our Allegion Home Europe, SimonsVoss, Interflex, the Australian business, great focus of execution in ’21 in the face of the pandemic. The consolidation that we drove a year ago and announced in combining that, did a couple of things. One, simplified our structure. We cleaned up some bits of the portfolio. But Tim’s knowledge of the capabilities of America accelerated capabilities that we have here into those markets. It’s things like diligence. It’s things like our electronic software platforms and a belief that some of product platforms that we’re having these things development can be extended and help us compete.
So I think when I think about Allegion International that we pulled that off in a pandemic here is a salute to some work that’s been going on at Allegion for a couple of years and it can go ahead. And I think our best days are ahead of us. I think in terms of margin expansion, I think the long-term goal would be to be at a margin equal or better than offset in the competitive markets. We’re not apples-to-apples in terms of how we compete. Extremely strong in the electronics. And then you get more into the regional market forces and what those markets allow, where we’re competing.
The second part of the question was?
Patrick Shannon — Senior Vice President and Chief Financial Officer
Yeah. So David, on the pricing associated with the backlog, keep in mind, industry standard normally to when you give a quote on a project-based job and/or you have an order in-house prior to the price going into effect, you kind of honor that. So normally there is a time lag between when you announce a price increase and the realization, and that could be, we’ll call it, on average 90 to 120 days type of timeframe. And so that’s why, relative to the price increases we’ve already implemented and are executing, you don’t get to a full run rate realization that we’ll call it Q3, but normally you don’t go back and re-price quotes in backlog. That’s a consistency kind of in our industry. Now we have looked at other parts of the business in doing that, but predominantly, it’s protected.
David MacGregor — Longbow Research — Analyst
Is there any way you can update that $80 million to $100 million of backlog number that you gave us last quarter? Just indicate where you think that is today?
Patrick Shannon — Senior Vice President and Chief Financial Officer
So it exceeded or increased compared to Q3 just kind of given the surge in order activity. Now some of that, and it’s difficult to characterize, would be a pull forward from 2022 activity when customers are just trying to get their orders in and get in line for the products, but increased. And I would say, if you’re kind of looking at the full year revenue impact on Allegion north of $100 million would be how to think about it.
David MacGregor — Longbow Research — Analyst
Thanks very much, gentlemen.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Thank you.
Operator
The next question comes from Andrew Obin from Bank of America. Please go ahead.
Andrew Obin — Bank of America (Research) — Analyst
Hi, yes. Good morning.
David D. Petratis — Chairman, President and Chief Executive Officer
Good morning.
Andrew Obin — Bank of America (Research) — Analyst
Hey, guys. Just trying to understand how much overlap is there between your supply chain and the supply chain of your competitors? I.e. just sort of ability to compensating for the fact that it sounds you underestimated the strength of the demand and sort of catch up when the competitors already have sort of slots on the line or is that not an issue?
Patrick Shannon — Senior Vice President and Chief Financial Officer
I don’t believe there is little overlap. If you think — look at Von Duprin Exit Devices and look at [Indecipherable] whatever brand they go to market with, significant differences on the mechanical side, different Schlage came out of San Francisco. I mean, there’s just differences. I think there is also advantages, disadvantages. Assa have scale, something we’re not shy of. A bigger electronic expense may give us some advantage. I think when I look at the performance of Assa in ’21, I’m humbled. And I would say, it’s a strong reflection of the opportunity out there in the marketplace for our products.
Andrew Obin — Bank of America (Research) — Analyst
Yeah, we can take it offline. I was thinking more on the electronics side, but that makes a lot of sense. And another question, sort of, look you guys have been fairly conservative with the balance sheet usage, particularly on the technology side. You have a lot of sort of things incubating inside, but the valuations out there are a lot more favorable than they were a year ago. How do you think about strategic opportunities post the sell-off, and I would imagine there are more sort of desperate buyers/sellers than they were a year ago? How does that look for you?
David D. Petratis — Chairman, President and Chief Executive Officer
So I’d say, number one, on the software electronic seamless access side of this, our software stacks that support expanding access, capabilities to customers have never been stronger. We’ve invested through the pandemic. And our ability to bring in visitor management in schools or capacity flow through a building or solving problems and verticals where there’s multifamily K through 12 hospitals, those software stacks are critical, and I believe we’re in a leadership position.
Two is, the valuations are softening. We will be opportunistic on both. You’ve got to have one leg in the mechanical world and one foot at least in the seamless access world. And we’re ready to deploy capital in both that — in areas that extend our value proposition and advance our position in seamless access around K through 12 multifamily and hospitals. And we’ve never have been in a better position to do it, Andrew.
Andrew Obin — Bank of America (Research) — Analyst
Great. And congratulations to Patrick. Thanks a lot.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Thanks.
Operator
The next question comes from Jeff Sprague from Vertical Research. Please go ahead.
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
Thank you. Good morning, everyone.
David D. Petratis — Chairman, President and Chief Executive Officer
Good morning.
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
Just kind of come back to price cost and also, Dave, your comment about kind of glide back to prior peak. When you’re talking about recovering inflations fully in 2022, is that kind of accumulative inflation, burden that you’ve taken through this entire episode or are we just speaking about 2022 specifically? And really the nature of my question ties back to the glide path comment. Your revenues here in 2022 look like there’ll be 12% or 13% above 2020 and the margins are 100 bps below 2020, 100 bps below 2019. So maybe you could just kind of bridge us a little bit more back to where you think your normally heading here?
Patrick Shannon — Senior Vice President and Chief Financial Officer
Yeah. So on the price cost dynamic, the commentary relative to 2022 is margin accretive, obviously. Pricing exceeding inflation cost. And then when you add in productivity, we’re in the positive territory there, margin accretive. If you look at it over a two year basis, net positive, okay, but down on margin, and you understand obviously the math on this. You can offset inflation, but it’s not enough to kind of cover your normal margin profile. So pressure there.
When I look forward to 2023, you’ve got continued growth in the business. So you can have volume leverage there. Assuming inflation is normalized, we carryover a price improvement there, plus any incremental pricing improvements would be additive. And then you just have the normal leverage on the business, plus business mix should be favorable as well. So kind of looking forward, past 2022, glide path to peak margin performance from an overall Allegion perspective, you heard Dave talk about the improvement in the International segment, leveraging corporate spend, etc., I think it puts Allegion in a good position to be at peak margin performance hopefully by the end of ’23 and going into ’24.
David D. Petratis — Chairman, President and Chief Executive Officer
I’d add one other. As I think about pricing versus pre-pandemic, we are increasing product — pricing on our residential products and we’ll make sure that we true that element up of our portfolio as well.
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
And could you just speak to — I mean, obviously everyone is dealing with supply chain issues, but your key competitor does seem to be fairing a little bit better. Is there any kind of just slippage in kind of distribution posture with key distributors or in retail where you’re kind of, for a lack of better term, I guess stocking out and kind of losing shelf space?
David D. Petratis — Chairman, President and Chief Executive Officer
I’d say, my reaction is no, not losing shelf space. I think one is, when I think about Assa, they would run with significantly more inventory, Allegion versus Assa. It’s a different model. But if we would typically run with $400 million, $500 million worth of inventory, they are 4 times or 5 times bigger on that. So you got a bigger math. They have to drive that on a global basis. I think their electronics position is particularly driven by HID gives an advantage there.
With that said, we worked extremely hard to adapt our supply chain. Again, I talked about the velocity we get through that supply chain in a normal time. We were hit by the electronics, investment casting, some extrusion, the mechanical side easier for us to go in effect. The electronics as we think about our guide, allocations equal to the guide. If electronics improve, which I see some bricks, we’re going to sell more electronic locks which will be good for Allegion.
As I think about lack of shelf space, Jeff, you know as well as I do, if a installer needs it today and you can’t provide that, it goes to the competition. And I’m confident we have faced some of that. I’m confident that we will regain whatever we lost.
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
Great. And maybe just one housekeeping question. Wages came up a couple of times. Can you just give us a sense of kind of labor — direct labor as a percent of COGS or however you’d want to frame it for us just to have the perspective on that?
Patrick Shannon — Senior Vice President and Chief Financial Officer
So if you look at it relative to the gross profit, it’s a low piece of the overall product manufacturing cost. Wage rates have increased here. We’re competitive in the marketplace. And so what you’re seeing across the board, we would participate in that relative to the increases and ensure we’re competitive in attracting and retaining good talent.
David D. Petratis — Chairman, President and Chief Executive Officer
I would just add, especially in the major sites, our goal is that, Allegion to be that shiny manufacturer on the hill, great benefits, great wages, great opportunity to develop, one of the safest workforces in the world and a place where people can engage and grow.
Jeffrey Sprague — Vertical Research Partners, LLC — Analyst
Great, thanks. Patrick, congratulations. Enjoy retirement. Mike, congrats.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Sure.
Tom Martineau — Vice President, Investor Relations and Treasurer
And just a reminder, if we could just have one question and a very short follow-up if possible just to make sure we get everybody in.
Operator
The next question comes from John Walsh from Credit Suisse. Please go ahead.
John Walsh — Credit Suisse Securities (USA) LLC — Analyst
Hi, good morning, and congrats to Patrick and Mike both. I guess just for my one question here. As we think about the margins for the two segments, and I appreciate we’re not going to get kind of quarterly detail here, but would you expect both of them to kind of lever at a normal type incremental back half of the year? Is there any kind of divergence between the two of them as we think about the margin growth opportunity for both segments in 2022? Thank you.
David D. Petratis — Chairman, President and Chief Executive Officer
Yeah. I would say the International segment would be on a more normalized basis and obviously didn’t see the pressure that the Americas region did in ’21. And so your question specific to the back half of the year, Americas would lever more than what you would normally see, again because of the price cost dynamic becoming much more positive there, and the efficiencies from a manufacturing perspective as we work through some of these supply chain constraints. Now they will have much better leverage because productivity will be a lot better and then kind of leveraging on the SG&A cost base. So higher incrementals in the back half of the year, and you would expect that just kind of given the dynamics of where we are today.
John Walsh — Credit Suisse Securities (USA) LLC — Analyst
Great. I’ll just leave it at the one question there. Appreciate it.
Operator
The next question comes from Josh Chan from Baird. Please go ahead.
Josh Chan — Robert W. Baird & Company — Analyst
Good morning, Dave, Patrick, Tom. Best wishes Patrick in your retirement.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Thanks, Josh.
Josh Chan — Robert W. Baird & Company — Analyst
I guess my one question based on your comments about raw materials and steel maybe be coming down a little bit and your — kind of how costs flow through your P&L. When do you expect to sort of hit peak raw material costs, if you will, prior to steel maybe benefiting you a bit later on?
Patrick Shannon — Senior Vice President and Chief Financial Officer
So we’re currently at peak costs right now. That will kind of carry forward into Q1, Q2 it starts to level off relative to prior year comparison. But just a quick reminder, even with the market costs being lower today than what it was well say in early Q4, we don’t see the benefit of that roll into our numbers, maybe three to six months later, just kind of basis of how we manage our supply chain and entering into contracts with average prices and those type of things. So kind of like the pricing dynamic, there’s always a lag relative to market. And so would expect if they retain here some of that to flow through, we’ll call it in Q3.
Josh Chan — Robert W. Baird & Company — Analyst
Great. And I appreciate the color, and good luck in ’22.
Patrick Shannon — Senior Vice President and Chief Financial Officer
Thank you.
Operator
The next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.
Joshua Pokrzywinski — Morgan Stanley & Co., LLC — Analyst
Hi. Good morning, guys, and congrats to Patrick and Mike both. Just maybe first question on the supply chain side. You guys had talked about a lot about chip shortage, but I guess, maybe just kind of zooming out the bulk of the portfolio really is mechanical versus electrified, like any other pieces of supply chain that are still kind of jump balls for ’22 that we should think about or will a lot of that throttling really be determined by chips?
David D. Petratis — Chairman, President and Chief Executive Officer
We have what I would describe as more control over that mechanical supply chain, have been able to move faster and to develop alternative sources wherever that could come from the world. Again, I’d say a lot of our U.S. mechanical supply chain is based in region. And again, the mitigating moves that we’ve made I think are substantially more operational execution than the chip side of it.
Joshua Pokrzywinski — Morgan Stanley & Co., LLC — Analyst
Got it. And then just quick follow-up to want to make sure I heard you right, Patrick, on the return to prior peak margins. It was an exit rate for ’23 not a full year comment. I know it’s sort of silly like sitting here in early ’22, but just making sure I understood you right?
Patrick Shannon — Senior Vice President and Chief Financial Officer
So first of all, what I did mention is, exit rate ’22, kind of if you kind of go back to, we’ll call it, more of a normalized margin profile, Q4 this year ’22 is going to look pretty good. So feel good about that. As we progress throughout ’23, we could be back as a total company, Allegion peak margin. Again, a lot of inputs there and factors kind of playing into that and things could change. But so if you were in a good trajectory for ’23 for peak margin for the full year, Americas will still have some wood to chop, kind of get back to peak margins, but we’re working at.
David D. Petratis — Chairman, President and Chief Executive Officer
I want to make one more comment to make sure I’m clear on the electronics side of this. The team, our engineering resources have done a great job of adapting and developing second sources for electronic chips, particularly in some of our newest locks. Those chips are in high demand in the external market. So things like our exit devices, those chips, maybe more options on the market than some of the things like the Encode Plus that are right on the cutting edge.
Joshua Pokrzywinski — Morgan Stanley & Co., LLC — Analyst
Appreciate it guys. Thanks.
Operator
The next question comes from Chris Snyder from UBS. Please go ahead.
Chris Snyder — UBS Global Research — Analyst
Thank you. Actually just wanted to follow-up on those prior comments around chip procurement. Can you maybe talk where the company is in terms of sourcing alternative suppliers? And at this point, is the chip constraint more of a revenue headwind, in that, you cannot get the chips or is it more of a margin headwind and that the chips can get from alternative suppliers are running at a higher cost?
David D. Petratis — Chairman, President and Chief Executive Officer
I would say, the chip constraints are our revenue headwind. If we could get more, we could sell more. And I’d encourage you take a look at our new Encode Plus. It’s the first touch to tap lock on the market. It’s constraint. It’s got some of the newest chip technologies, battery savings, energy savings, you’ll like it, but it’s constraint.
The second part of your question?
Chris Snyder — UBS Global Research — Analyst
I think that answered. I guess, my follow-up question was actually would be on pricing methodology. Obviously in the current market where availability matters more than price, you can push pretty hard. But how do you guys determine or how do you gauge like what’s the sustainable level? How much can we put in Q1 ’22 that could sustain through ’22 because it sounds like the assumption is that availability across the supply chain improves throughout the year?
David D. Petratis — Chairman, President and Chief Executive Officer
I think in the bid-quote market, we’re testing that market. We’re testing that pricing every day. So two price increases in ’21 in the commercial institutional, another coming out. So we’re raising list prices. We’re making sure we’re capturing our freight. But in the bid — in the quote bid order procurement phase of that, it’s been tested everyday by the marketplace. Are you winning or losing and whether it’s a bit of an auction market, but we’re living that every day. On the residential side, we’re going to be strong and stand up from the inflationary forces that are impacting our products and not give away some of the furnished products on the plan in terms of residential security.
Patrick Shannon — Senior Vice President and Chief Financial Officer
And Chris, I’ll just add to your question on the product redesign and alternative sourcing strategy, making really good progress. It impacts a lot of products throughout our product portfolio. The expectation is, the majority of it will be completed and executed by the end of the second quarter. It’s kind of phased in throughout a little bit this quarter, most of it Q2, which will help us alleviate and start getting more product into the channel or customers, etc. and higher growth rates organically. And so — and to start working down the backlog.
Chris Snyder — UBS Global Research — Analyst
Appreciate all the color. Thank you.
Operator
The next question comes from Brian Ruttenbur from Imperial Capital. Please go ahead.
Brian Ruttenbur — Imperial Capital, LLC (Research) — Analyst
Yes. Just real quick. I had a number of questions, so I’m going to hit you with maybe the easiest one. The total price increases that you had in 2021, can you give us a range? Was it on the low of 5% up to 20%? Can you give us a range on where prices went in 2021 and where you anticipate those to go in 2022 overall in terms of the ranges of price increases you had on your products?
David D. Petratis — Chairman, President and Chief Executive Officer
I would say, characterize it as a wide range, different product segments get different price increases, residential, non-residential is different. Even within non-residential, our hollow metal door business for example has surcharges attached to it, which would be higher than is specific to steel, but list price increases maybe is what you’re more at asking for. I’d say, we’re competitive with the market relative to the increases we’ve already announced and implemented in the market. And then another increase this month as well, pretty sizable, but remember, it’s list price and as always discounts off a list price. So the key item here is what you end up realizing, and that number will continue to accelerate reaching a peak in Q3 of this year.
Brian Ruttenbur — Imperial Capital, LLC (Research) — Analyst
Okay. Just as a follow-up to clarify that, since you didn’t mention any specific numbers. The market as I hear it is around 15% increases, is that the right market that I’m hearing that you’re talking about?
David D. Petratis — Chairman, President and Chief Executive Officer
I’d say, again, it depends what you’re talking about. That to me sounds like there’s a lot of surcharges baked into that number. That is not in aggregate kind of the list price on your traditional mechanical electronic business.
Brian Ruttenbur — Imperial Capital, LLC (Research) — Analyst
Thank you.
Patrick Shannon — Senior Vice President and Chief Financial Officer
So let me — specifically with hollow metal steel doors, you could easily be in that zip code or more. But there’s a wide range of SKUs here and we’re in a — a lot of it’s been spec where we’re competing every day, but prices are up.
Brian Ruttenbur — Imperial Capital, LLC (Research) — Analyst
Thank you.
Operator
This concludes our question and answer session. I’d like to turn the conference back over to Dave Petratis for any closing remarks.
David D. Petratis — Chairman, President and Chief Executive Officer
To wrap up the main things you heard today, demand remains robust and leading indicators are positive. We’re working through the supply chain challenges, which are expected to improve, but we still see some pressure in electronics. We will get the price cost equation back to positive this year and we expect to deliver organic growth of 7% to 8.5%, adjusted EPS of 7% to 11% and high cash conversion in 2022. The long-term fundamentals of Allegion remains strong and we are well positioned to capitalize on the opportunities and we’ll return to peak performance as conditions normalize. Thank you, and have a great day.
Operator
[Operator Closing Remarks]