Allegion plc (NYSE:ALLE) Q4 2023 Earnings Call Transcript
Allegion plc (NYSE:ALLE) Q4 2023 Earnings Call Transcript February 20, 2024
Allegion plc beats earnings expectations. Reported EPS is $1.68, expectations were $1.57. Allegion plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Allegion Fourth Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Josh Pokrzywinski, Vice President of Investor Relations. Please go ahead.
Josh Pokrzywinski: Thank you, Drew. Good morning, everyone. Thank you for joining us for Allegion's fourth quarter and full year 2023 earnings call. With me today are John Stone, 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 Slide 2. 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. Please go to Slide 3, and I'll turn the call over to John.
John Stone: Thanks, Josh. Good morning, everyone, and thanks for joining us. I'd like to start today by recognizing that 2023 was a year of strong execution by the entire Allegion team. This performance reflects the value we add for our customers, the strength of our distribution partners, as well as the quality of our brands and the capabilities and expertise of our employees. Let's walk through some highlights of the quarter and the year. After celebrating our 10th anniversary as a standalone company in December, we closed the year with record revenue, adjusted operating income, and adjusted EPS. Reinforcing the thesis behind our seamless access strategy, electronics demand remained strong. We delivered approximately 20% organic growth in electronics for the year as supply chains normalized, and that's on top of mid-teens organic growth in the prior year.
We sustained a high operating cadence and expanded our industry leading margins in the quarter. And for the full year, our adjusted operating margin performance was 22.1%, up 160 basis points. Simply stated, the Allegion team delivered on price and productivity, bringing margins back to pre-pandemic levels, with room to expand further in 2024 and beyond. Our balance sheet and cash flow generation are strong. We ended the year under 2 times net debt to EBITDA, which sets up a 2024 return to the balanced capital deployment you've come to expect from Allegion. When you look at our past decade, this team has delivered solid results and executed well through a variety of macroeconomic backdrops. We've built on the strength of 100 year old brands, consistently meeting customer needs and meeting our commitments to shareholders.
We've operated with excellence, sustained the highest margins in the industry, and are still pioneering safety, better securing people and their property where they live, learn, work, and connect. Driven by our vision of enabling seamless access and a safer world, we're proud of this track record, we're proud of what we delivered in 2023, and we're excited about the momentum we're carrying into 2024. Please go to Slide 4, and let's talk about our capital allocation strategy in action. Reflecting on Allegion's first 10 years, we've had a roughly even split between inorganic growth and the return of capital to shareholders through dividends and share repurchases. We remain committed to balanced, consistent capital allocation, and having quickly delevered from the Access Technologies acquisition, our balance sheet supports this strategy.
As we move into 2024, we will continue investing for organic growth, prioritizing projects and solution that drive seamless access forward. One recent example in new product development is Schlage's next generation of innovative electronic locks, the XE360. This is the latest wireless lock family from Schlage, designed with flexibility and interoperability in mind. With solutions for perimeter and interior doors, this series has the security and access features most looked for by multifamily and light commercial properties at attractive price points. It leads with open architecture, supports the latest credentialed technologies, and integrates with the Allegion and our partner systems. In addition, Schlage's innovative FleX Module allows the XE360 series to be easily upgraded in the field to allow migration from an offline to a network solution and to adapt to emerging trends in security and connectivity down the road.
Next, Allegion will continue to be a dividend-paying stock. You can expect our dividends to grow commensurate with earnings over the long term, and we've just announced our 10th consecutive annual increase. We also expect to grow through acquisitions. Bolt-on acquisitions that fill portfolio gaps in the hardware space and high margin, recurring revenue business in the access solutions space will remain priorities. Larger deals like Access Technologies may be more episodic, but we will be disciplined and have demonstrated the ability to quickly delever. Boss Door Controls, which we closed this month, is a classic bolt-on that both complements and expands how we go-to-market in the UK. This acquisition bolsters our local business with a strong architectural channel, flexible supply chain, and also positions us to increase our spec-driven business there in the future.
Lastly, with regards to share repurchases, as we've said, at a minimum, we will continue to offset incentive compensation. And as you saw in the fourth quarter, we will make additional share repurchases as appropriate. Mike will now walk you through fourth quarter financial results, and I'll be back to discuss our full year 2024 outlook.
Mike Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide number 5. As John shared, Allegion continued to execute at a high level and delivered another solid quarter. Revenue for the fourth quarter was $897.4 million, an increase of 4.2% compared to 2022. Organic growth of 2.6% was driven by our Americas non-residential and Access Technologies businesses, offset by declines in residential and international. Adjusted operating margin and adjusted EBITDA margin increased by 130 basis points and 120 basis points, respectively, in the fourth quarter, driven by price and productivity in excess of inflation and investment. I am pleased with the margin performance as we have recaptured the margin loss during the supply chain disruptions experienced in late 2021 and early 2022.
Our operating model and strong execution have positioned us well for future margin expansion. Adjusted earnings per share of $1.68 decreased $0.01, or approximately 0.6% versus the prior year. Operational performance drove growth of $0.17 per share, with the offset coming from tax, driven by the timing of discrete items versus the prior year. John will cover the outlook later in the presentation, however, I want to note that our tax rate will migrate to between 18% and 19% in 2024, inclusive of the implementation of global minimum tax. We expect Allegion's structural tax rate will be in the high-teens over the planning horizon we laid out at our Investor Day in May. Finally, full year available cash flow for 2023 was $516.4 million, a 30.6% increase versus last year, driven by higher earnings and improved working capital performance.
I will provide more details on cash flow and balance sheet a little later in the presentation. Please go to Slide number 6. This slide provides an overview of our quarterly and full year revenue. I will review our enterprise results here before turning to our respective regions. Organic growth in the quarter was 2.6%, a strong price realization offset pressure on volumes. Currency and acquisitions drove additional favorability in the quarter, bringing the total reported growth to 4.2%. On a full year basis, organic revenue growth was 5.2% overall, with Americas at 7.4%. Our international business was down 2.5% for the year. Our full year organic growth was led by our electronics and software solutions, which grew globally by approximately 20% in 2023, with both regions in double-digits.
Please go to Slide number 7. Our Americas segment continues to deliver strong operating results in the fourth quarter. Revenue of $704.6 million was up 3.7% on both a reported and organic basis as favorable pricing offset lower volumes. Our Americas non-residential business was up mid-single digits against a prior-year comp that grew in the mid-20%’s. On a full year basis, this business had double-digit organic growth in 2023. Residential markets are soft, with our business down low-single digits in the quarter and for the full year, as higher interest rates continue to impact new and existing home sales. Our Access Technologies business delivered organic growth of mid-single digits in Q4. Americas electronics growth remained strong on a multi-year basis, with mid-single digit growth in the quarter on top of the nearly 50% comparison in Q4 2022.
Our Americas adjusted operating income of $188.4 million increased 10.8% versus the prior year period, while adjusted operating margins and adjusted EBITDA margins for the quarter were up 170 basis points and 190 basis points, respectively. The team executed well. We are performing more efficiently, driving price and productivity, and we delivered margin expansion every quarter in 2023. Please go to Slide 8. Our International segment continues to execute well in a challenging macroeconomic environment. Revenue of $192.8 million was up 5.9% on a reported basis and down 1.3% organically. Price realization was more than offset by lower volumes associated with soft end market demand. Currency and acquisitions were a tailwind this quarter, positively impacted reported revenues by 4.4% and 2.8%, respectively.
International adjusted operating income of $32.3 million increased nearly 13% versus the prior year period. We also saw improvement in adjusted operating margins and adjusted EBITDA margins of 110 basis points and 100 basis points, respectively. The team delivered margin expansion for Q4 and the full year despite a challenging topline, highlighting the healthier, more resilient business portfolio we have within our International segment. The acquisition growth I mentioned earlier is primarily driven by our plano business, a tuck-in software-as-a-service business we acquired early 2023, which is accretive to both growth rates and margins. Please go to Slide number 9. As I mentioned earlier, year-to-date available cash flow came in at $516.4 million, up nearly $121 million versus the prior year.
This increase is driven by higher earnings and working capital improvements, partially offset by higher capital expenditures. You can look for Allegion to continue to invest in our business and convert earnings to cash. Next, working capital as a percent of revenue improved versus the prior year, driven by higher inventory turns as supply chains normalized. Finally, our net debt to adjusted EBITDA is down to 1.9 times as we successfully delevered following the Access Technologies acquisition. We are now back to historical leverage levels, which demonstrates our proven track record of effectively deploying capital, while maintaining both our leverage profile and our investment grade credit rating. Our business continues to generate strong cash flow and our balance sheet continues to be in a healthy position.
I will now hand the call back over to John for our 2024 Outlook.
John Stone: Thanks, Mike. Please go to Slide 10. And before we get to guidance, I want to spend a moment on what we see as a couple of key drivers for 2024, including macroeconomic inputs that inform our outlook. We're expecting more modest inflation in 2024, enabling normal levels of margin expansion from net price and productivity. We report these to you as aggregate price, productivity, inflation, and investments shown in the left-hand chart. Since the beginning of 2019, we've averaged approximately 60 basis points of margin contribution annually from net price and productivity. This has been a hallmark of the business over time and it's a key driver of our 2024 outlook. We're expecting a stable non-residential environment, underpinned by healthy institutional markets.
You can see Dodge starts for institutional have shown steady growth in the past few years, contrasting the higher volatility in commercial leaning verticals. As you all know, Allegion is a late-cycle business, and starts can lead our business by a year or more. We're not expecting many market tailwinds, however, we believe the visibility and stability of late-cycle institutional verticals, as well as our large installed base, will allow us to deliver organic growth. Please go to Slide 11, and let's walk through the outlook for 2024. We expect total and organic revenue growth in the Americas to be 1.5% to 3.5%. This is led by our non-residential business, forecast to grow low to mid-single digits organically. Please note, the non-residential business is inclusive of Access Technologies, starting this year.
The residential business is expected to be flat to down slightly on an organic basis. Overall, for the Americas, we are expecting more normal seasonality with tough comps in the first quarter. For Allegion International, we expect total revenue to be up 1.5% to 3.5% and minus 1% to up 1% on an organic basis. Inorganic growth includes the recently announced acquisition of Boss Door Controls. While mechanical markets remain sluggish in international, I'm pleased with how the team executed to close out the year. We have a high quality portfolio and continue to see good growth potential in our international electronics and software solutions businesses. All in, for the company, we are projecting total revenue growth of 1.5% to 3.5%, with organic revenue growth of 1% to 3%.
We expect to drive margin expansion consistent with our historical framework. We're confident in the execution playbook we have for 2024, given cost actions taken in '23 and a more modest inflation environment. Based on our strong operating momentum, prior cost actions, and more normalized inflation, we are projecting an adjusted EPS outlook in the range of $7 and $7.15. This represents growth of approximately 1% to 3% over the prior year period, inclusive of a $0.37 headwind from tax. Lastly, we expect our outlook on available cash flow to be in the range of $540 million to $570 million. While we are committed to balanced and consistent capital deployment, this guidance does not include future capital deployment beyond the recent acquisition of Boss Door Controls.
Please go to Slide 12. Bottom line, I am very proud of the entire Allegion team's 2023 performance and grateful for the strong distribution partners and loyal customers we have. As we look ahead to 2024, we will continue to build on the Allegion legacy and deliver new value in access. Our team is focused on relentless execution of our strategy and balanced capital deployment against what we expect to be a stable market backdrop. We remain committed to putting our customers first and delivering our vision of enabling seamless access and a safer world. I look forward to updating you more in the future as we work to achieve another record year for Allegion and propel our company into its next decade of growth. With that, let's turn to Q&A.
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