Good day, and welcome to the Allegion Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tom Martineau, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you, Sarah. Good morning, everyone. Welcome, and thank you for joining us today as we discuss this morning's announcement that Allegion has signed a definitive agreement with Stanley Black & Decker to acquire Stanley Access Technologies and assets related to the automatic entrance solutions business. With me today are Dave Petrarca, Chairman, President, and Chief Executive Officer, and Mike Wagner, Senior Vice President and Chief Financial Officer of Allegion. Our related press release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to slides two and three. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law.
Please see our most recent SEC filings for 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. This call will include non-GAAP measures as well, and you should refer to our presentation slides for reconciliation of non-GAAP measures and other information. Dave and Mike will now discuss the pending acquisition of the Access Technologies business. We will then open the call for questions. I will be available after the call for any follow-up questions specific to the transaction. Now I'd like to turn the call over to Dave.
Thanks, Tom. Good morning, and thank you for joining us today. Please go to slide number four. Let me start today by saying how excited I am by Allegion's acquisition of the Stanley Access Technologies business, which has the full support of the Allegion Board of Directors. This is a middle-of-the-fairway bolt-on that we've been looking at since our spin almost 10 years ago. It brings a leading position, an important channel, recurring service revenues, and technology. We got a fair price of approximately 12.5x 2022 EBITDA, net of the tax benefit and run rate synergies. Stanley Access Technologies is a leading manufacturer, installer, and service provider of automatic doors in North America, highly aligned to Allegion's vision of seamless access and a safer world. The business is focused on making the world accessible through state-of-the-art automatic entrance solutions.
In fact, in 1931, Stanley received a patent for the world's first hands-free door operator. Now, more than 90 years later, this business is a market leader in its category, like many of the Allegion brands. Today, Access Technologies product offerings include sliding, swinging, folding, transit, and revolving door systems, as well as an array of sensors, control, and security options. Its diversified customer base centers on non-residential settings, including retail, healthcare, education, commercial offices, hospitality, and government, primarily throughout the U.S. and Canada. The business generated approximately $340 million in revenue in 2021, with mid-teens% adjusted EBITDA margin. Strategically important to Allegion, Access Technologies is supported by a team of 1,300 dedicated employees who bring immense talent and expertise in safety and security as well as services.
Like Allegion, this business offers category leadership and a commitment to providing high-quality solutions and services to customers, both of which are made possible by their impressive team. Please go to slide five. Slide five sets out the benefits we saw in this acquisition. It's a clear step forward in Allegion's strategy to create value by securing people with assets through seamless access wherever they reside, work, and thrive. It's a highly strategic combination that expands our presence in security market and unlocks greater value for our employees, customers, and shareholders. Together, we will create a more comprehensive portfolio of access solutions. We'll bolster our geographic leadership in North America through complementary verticals and further penetrate our markets with complementary products and service offerings.
Cross-selling opportunities will create more room for mutual growth as we will enhance and expand a services business that drives customer value in automatic entrance solutions, providing ongoing and consistent revenue streams. With the addition of the Access Technologies business, Allegion will significantly expand its breadth of access, egress, and access control solutions. We will have exposure to high-growth segments across a large installed base, as well as the scale and coverage to better service our existing commercial and institutional customers with automatic entrance solutions and Access Technologies. In return, the Access Technologies business will gain specification and institutional market expertise, strong new end user and architectural relationships and distribution networks. Allegion has a strong track record in investing in innovation and growing our core business. As part of Allegion's core business, automatic entrance solutions will benefit from our strategic focus on this category.
The acquisition of Access Technologies and the additional product lines into the Allegion portfolio has clear synergies. Along with Allegion's strong balance sheet, significant cash flow, and disciplined capital allocation strategy, we believe it will create a stronger financial profile, a stronger value proposition, and new growth opportunities that enhance shareholder value. Please go to slide number six. The acquisition of the Access Technologies business will allow Allegion to expand in an adjacent market. On the screen, you see a more defined look at how our complementary products will create a highly optimized and attractive range of solutions for our customers. Allegion will expand its addressable market through the addition of automatic entrance solutions and services, while our strength in specification in institutional markets can fuel further growth for the acquired business.
Allegion's digital strategy and expertise in mobile applications and software will increase Access Technologies' connected capabilities, also allowing Allegion to further capitalize on the industry shift towards smart security solutions in this category. As I mentioned a moment ago, the acquisition adds services that will provide ongoing and consistent revenue streams. In fact, in 2021, Access Technologies' annual service revenues accounted for approximately 38% of that business's total revenue. This underlines the service business as an important driver of the customer value proposition and a driver of aftermarket revenue in this category. We expect to further grow the services business as it capitalizes on Allegion's broader footprint in the Americas region, captures cross-selling opportunities with Allegion's customer base, and also helps drive our seamless access strategy.
Combining Access Technologies' high-quality products and services with our ability to deliver value through access and category-leading hardware brands will significantly expand Allegion's core business and fuel further growth in profitable aftermarket segments. Mike will now walk you through the deal's valuation and financial highlights.
Thanks, Dave. Good morning, everyone. Thank you for joining today's call. Please go to slide seven. As you likely saw in our press release this morning, we have agreed on a purchase price of $900 million on a cash-free, debt-free basis. This purchase price implies an estimated 2022 EBITDA multiple of approximately 16x. When accounting for the impact of tax benefits of approximately $90 million, the 2022 EBITDA multiple is approximately 14.5x or approximately 12.5x with expected revenue and cost synergies included. We expect $9 million in net run rate EBIT synergies annually achievable by the end of 2024, with two-thirds of that associated with net revenue synergies and the remainder to come from optimized procurement, production, and shared administration functions, which will be partially offset by additional stand-alone costs and investments.
We intend to finance the transaction through a combination of cash borrowings under our existing revolving credit facility and a new long-term debt financing. Allegion is committed to its investment-grade credit rating throughout this financing process. Following the completion of the transaction, the net debt to adjusted EBITDA is expected to be approximately 3:1 . Given our ability to delever very quickly with strong cash generation and EBITDA growth, we anticipate ending 2023 with a net debt to adjusted EBITDA of less than 2: 1. We will prioritize applying available cash flow for the balance of the year to pay off capacity utilized in the revolver to finance the transaction. We are confident in our ability to achieve our deleveraging goals while maintaining maximum financial flexibility for capital deployment. We expect the acquisition to be accretive on a cash basis for 2022 and go forward.
The acquisition is projected to be breakeven to adjusted EPS in the full year 2023 and accretive to EPS by 2024, inclusive of non-cash amortization expense of approximately $30 million annually. This transaction is expected to close in the third quarter of 2022, subject to customary closing conditions that include regulatory approval. Following the close of the acquisition, Allegion expects to operate the Access Technologies business as part of our Americas segment. You can find more on this transaction agreement as an exhibit to the Form 8-K that was filed this morning. Please go to slide eight. As we look at this acquisition, we believe there are many ways it delivers on our promise to create value for Allegion shareholders. As Dave mentioned, the acquisition of Access Technologies business will progress our vision of seamless access in the strategic growth pillars that support it.
We're creating value with a more comprehensive portfolio of solutions that addresses a current portfolio gap for Allegion with a category market leader and staying true to our core business. The addition of automatic entrance solutions will help drive revenue growth and capture market share. This acquisition is also consistent with our M&A strategy. Since becoming a standalone company, Allegion has been selective in our approach to M&A, acquiring assets and companies that are strategic fits and will be long-term contributors to our business. The acquisition of the Access Technologies business is the right opportunity for us. It expands our innovation and electronics capabilities, brings a strong business with good market fundamentals, and complements the core markets and specification expertise of our Allegion Americas business. We believe the acquisition will strengthen our financial profile. It provides synergy and incremental revenue opportunities from the combined portfolio.
For the full year 2022, Access Technologies business is projected to generate high single-digit revenue growth with strong free cash flow conversion. A balanced and disciplined capital allocation strategy will continue to be a top priority for Allegion. Acquisitions and investments are important ways we innovate, and having a strong balance sheet and cash flow to maintain financial flexibility supports that. Ultimately, we believe the automatic entrance solutions and services are strategic investments that support seamless access, and the acquisition will unlock greater value for our shareholders. With that, we'd be happy to take your questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Also, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning, and congratulations on the deal. Maybe just a first question around you know what's been the organic sales growth profile of this business in recent years and how has that large kind of service content within it muted its cyclicality?
Hey, Julian. Good morning. This is Dave. I think you called it that this would probably be a good fit in our portfolio a few weeks ago. In terms of the organic growth, we did some pretty heavy lifting to understand the performance of this business over time through a variety of eyes. I would characterize the organic growth of this business, you know, mid-single digits and towards the strong side. It clearly is a feature through seamless access, retail energy efficiency that we believe will continue to perform at that level. We also believe the organic growth can be propelled by the ability and strength of our specification capability. That specification capability is relatively modest within the Stanley operations, but really bolsters us.
In terms of service, if you think about the cyclicality of it, doors have to open. There's clearly a customer base that look at the recurring service nature or preventive service nature of this product as well as break fix. We think this service element is rather non-cyclical, that it will be a constant driver in any type of economy.
Hey, Julian, to add, as you think about service businesses, certainly I would say it's less cyclical than just manufacturers of product when you think of Allegion. Adding that service capability and recurring stream does provide us a less cyclical element to that revenue stream.
That's helpful. Thank you. Then, I don't think you can give much color on the trading update and the pre-announcement. You know, if you can say anything, please do. I guess looking at the deal terms on the financials specifically. It looks like the EBITDA you're looking at this year is maybe sort of $55 million or so. You have the amortization of $30 million that you call out, and you're saying that kind of all in it's only break even next year. You know, when we're thinking at that, of walking from that kind of, you know, underlying EBITDA of $25 million, you know, down towards a net income of close to zero, just trying to bridge that.
Is it just very large kind of base depreciation and amortization in the business? Maybe another way of looking at it is what's the EBITDA to free cash flow conversion of the business you're buying, you know, is it similar to where Allegion is at sort of 65% or so?
Yeah. As you think about it, we're gonna finance this business with debt. We're underlevered today, so adding debt is not problematic for us. In the case of going from your EBITDA down to your net income or EPS, you gotta take into account the large amortization expense, which we put in the presentation, as well as the interest costs associated with the debt that we expect to finance the transaction with. That biggest driver that you've identified would be expected borrowing costs to finance the transaction.
Great. Thank you.
Thank you, Julian.
Our next question comes from Andrew Obin with Bank of America. Please go ahead.
Oh, yes. Good morning.
Hey, Andrew.
Good morning, Andrew.
Congratulations on the deal. Yeah, a couple of questions. The first one, this large service component. Will the service organization be sort of contained to the family business? Or, you know, if the idea is to sort of create more of a service component for the remainder of Allegion and really use it as a platform to build out service offerings across your products?
Great question, Andrew. As we think about services, as we stand this business up, it'll be focused on executing within its space. As I think about the world of seamless access, more connectivity, you know, through Wi-Fi, Bluetooth Low Energy, battery replacement, we see the opportunity for that service capability to support customers and distributors, which helps the overall equation. In my experience, you know, service and service capabilities are, can be a real strength of a company. Our ability to extend, you know, the service offerings of Allegion through automatic doors as well as our seamless access, we think is an important growth component.
As we think about, you know, this new service capability, how do you think about this sort of impacting your TAM and opportunity to do further sort of strategic bolt-ons down the line? What else do you think as we think about potential adjacencies that services open up to you? Could you just talk about that, just, you know, over the next several years, what else becomes open to you once you enter them? Because over the years, you sort of you never quite went there, but now that you have, you know, I guess my view is that it really does open up a ton of strategic opportunities for you.
If we just look about Access Technologies, it adds about $4 billion of market availability to Allegion. About half of that is product, half of that is service. I think as you extend that and you start continuing to build our software and connectivity capability with customers, particularly the software and connectivity, service is an important element to that. Think about a K-12 school where we have a strength or a hospital. As these capabilities our vision of seamless access gets more woven in to the daily work that's going on in institutional customers, our ability to support that those products, those software capabilities in terms of our vision of seamless access, we think is an important growth engine. I would also say this, extremely difficult to just build out a service capability.
You know, I've experienced this in the past. We get a very well-run service capability which we think will add further value to Access Technologies and Allegion as we continue to pursue this connected seamless access world.
No, terrific. Thank you very much, and congratulations.
Thank you, Andrew.
Our next question comes from Timothy Wojs with Baird. Please go ahead.
Hey, everybody. Good morning.
Good morning.
Good morning, Tim.
Maybe just if we can, on the product itself, could you just give us the end market breakdown, you know, in terms of, you know, retail and institutional and commercial and kind of, you know, those types of end markets? Then just so I understand, like how is this sold into like a hospital? I mean, is it the, you know, the entrance system sold with the same specifiers as the interior mechanical business, or are they kinda two different people? I mean, how exactly does that kind of fundamentally work?
Yeah. If you think about their end markets, their largest end market would be retail. Think about, like a CVS, a Walgreens, something like that, as well as a strong presence in healthcare hospitals. In the case of a hospital, if you see the synergies with our existing business and the architectural relationships and specification capabilities that we have, that would be written in the same section of the building code. Our spec writers can spec this product and help drive it through the sales cycle. We see natural synergies with this product offering. If you think about our legacy AD Systems business that we bought in 2018, similar concept as when we bought that, where our regional sales offices are able to spec that and drive it through the end user relationships.
We feel pretty good about our ability to drive these synergies between the two businesses.
Okay, good. On the synergies, the $9 million, is there any way to kind of talk about what the key buckets of that are?
Yeah. The largest one is really revenue opportunities. We talked about on the script two-thirds of it coming from those sales synergies. From a cost synergy, we see some cost elements, but a larger percentage are gonna come from the ability to leverage the sales force and the spec engine.
I built on that. If you think about where these products are positioned, you know, retail, commercial, hospital, government, as you move up into the strong institutional piece of this in the specification, we see that market and have allowed it to really, you know, move through the forces to be, you know, a Stanley, an ASSA, a Horton, and including that in our spec package, we think will strengthen Access Technologies as well as Allegion.
Okay. Okay, great. Thanks, guys, for the time and good luck on everything. We'll talk next week.
Thanks.
Our next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, good morning, everyone, and congrats.
Thanks, Joe.
Hey, I guess my one question really is as I think about the margin of this business, you know, it's very different than what you experienced with your legacy locks business, particularly in the Americas segment. You know, when you think about the opportunity, it sounds like a lot of the opportunity is more sales than cost focused. But is there, you know, is there a potential to improve, like structurally the margins of this business? I think about, you know, when you guys were part of Ingersoll and how, you know, the focus on becoming a standalone entity really helped the performance of your business as well. Maybe if you could just talk about that a little bit, that would be helpful.
As part of the due diligence, you know, toured the primary factories as well as the service center. I think our focus and the manufacturing excellence that we bring can help drive margin expansion in this business. It's been a bit of an orphan in the Stanley portfolio, and we see the opportunity to invest, drive productivity, efficiency and growth, particular emphasis on the growth side by, you know, being under our umbrella. An example of that would be our acquisition of AB Systems with the sliding medical doors. This is a nice complement with automatics that can help drive growth as well as just some good core focus on how we can better produce these products.
Julian, as a security pure play, we feel that we bring expertise. When you leverage this business with our existing business, I think the value from margin expansion will come over time naturally as it's with the right fit with the rest of our Allegion portfolio.
Another thing. Two major sites, one in Connecticut, well run, one right here in our front yard. It's called Carmel, Indiana, but it's Indianapolis. You know, we've got a huge capability that, you know, we can go in and provide resources that will help drive improvement.
Got it. Helpful. Thanks, guys.
Our next question comes from David MacGregor with Longbow Research. Please go ahead.
Yes, good morning, everyone. Congratulations on the transaction. I just have one question, and it was really with respect to the capital investment requirements of the business and what your plans are with respect to, incremental CapEx that the business may require either immediately or within the foreseeable future.
David, as you think about it, there will be some CapEx that we have associated with this business, setting up some whether it be IT systems or other elements. I would say if you look at the business in totality, the CapEx or investment requirements would not be different than the legacy Allegion on a long-term basis. When you think about this business, it would have a similar investment profile.
Okay. Thank you.
Our next question comes from Chris Snyder with UBS. Please go ahead.
Thank you, and good morning, everyone.
Good morning.
I guess, you know, maybe starting off higher level, can you talk about the company's capacity to integrate the pretty sizable Access Technologies business, you know, amidst a very challenging macro and still difficult supply chains, which I would assume is still consuming a lot of the company's time and human resources.
I would point out that Allegion was created nine years ago, you know, with the challenge of standing up a company in a variety of areas, you know, in the separation from Ingersoll Rand, which included IT systems, purchasing, some engineering, you know. There is some muscle memory here. We have thought deeply about that as we did our due diligence. We'll have senior leadership as a part of that. We'll use outside resources. You know, I think there's a mechanical side of it. I think there's also a cultural side of it. The cultural aspects of this, I think are also interesting. You know, as we, you know, met the Access Technologies team, you know, really a desire and hope to be part of a security business and an access control business.
I think, you know, when you think about the work that has to be done, and we're mindful of the amount of work, and I think the 20 acquisitions we've done to this phase, it's sizable, but we believe we have the capability, team, and expertise to be able to execute on it.
Appreciate that color. For my follow-up, the guidance is that the deal will be EPS neutral in 2023, which makes me think it will be, you know, dilutive in 2022, albeit, you know, maybe very slightly. Yet the company's maintaining the full year 2022 EPS guide. So I guess with that, are there any underlying positives you have seen in the market since you know, first provided the guidance in January? You know, in that same vein, is it fair to assume that the China shutdowns are not having a material impact on the company's ability to procure electronic components?
You know, we're here today to talk about the acquisition. We'll update our view and thoughts on the full year outlook in Q1 on Tuesday when we come back and meet with our investors. We did say in our press release, on a standalone basis, we are affirming the EPS guide, and we gave some color and some numbers on Q1. With respect to 2022 guide that you see in that release, it does not assume any impacts from the proposed acquisition. We'll update investors at closing, when we have more input on that transaction. With respect to 2022, you know, we gave 2023. As you think about 2022, it would be, I would say, similar profile as what we've said for 2023.
The timing of the transaction close obviously will impact it, as well as you're gonna have a higher debt service level or interest cost in 2022 than you do in 2023, only because we're paying down some debt, as we said in the call earlier, with cash flow that we generate during the back half of this year. We'll give more color when we close the transaction for the updated guide, including the acquisition. I think that answers your question.
Yes. Thank you.
Our next question comes from Joe O'Dea with Wells Fargo. Please go ahead.
Hi, good morning and congrats.
Good morning.
First question just on the synergies. You know, it looks like around 2.5% of revenue, which doesn't seem like a high hurdle. Can you talk about, you know, whether, you know, there's sort of a conservative bent to your approach in terms of thinking about those synergies? Related to that, I think you talked about some investments that would be a partial offset to cost synergies. You know, interested in what those investment priorities are that you see today.
As you take on a deal, as part of our due diligence process, you know, walk before we run, we think the synergy work that we've done from the bottoms up, is where we need to be. You know, beginning today, we'll be working to expand, you know, that, you know, synergistic opportunity both on the revenue and cost side. I think number two, as we think about capital investment, I'd say this is relatively capital light, in terms of manufacturing goes. You know, we've got some work to do, you know, around the IT aspects of this. I think maybe the most important lever to pull in the growth of this business is human capital around services. That has to be well run. It has to be well manned. We're in a labor-tight environment.
You know, we will be laser-focused on making sure that service fleet exceeds the needs and capacities that the customers require in the marketplace.
Related to that piece, when I think you sized the market and talked about a roughly 50/50 split between the equipment and service, I mean, what percentage do you think service can be of revenue related to Access Technologies? Is that something that you can grow to, you know, 50% of the revenue pool?
I think you really gotta go well out in the future. As I think about the world of seamless access, particularly in the institutional phase, service capabilities and the potential and importance that will play within Allegion will give good growth opportunities. I don't wanna go to any hard numbers, but as we've seen in many industries, you know, services becomes an important, you know, growth accelerator and this acquisition help positions Allegion for that.
Got it. Thank you.
To clarify a point, we put in a presentation. Service isn't quite 50%. We have it down on the page, slide six of the presentation at 38%.
Yep. No, understood. I just wasn't sure where I could get to.
This concludes our question and answer session. I would like to turn the conference back over to Dave for any closing remarks.
To emphasize what you've heard today, the acquisition of Stanley Access Technologies business will bolster Allegion's seamless access strategy with highly complementary category leader, ultimately creating significant value for our shareholders. With Access Technologies, Allegion will expand in an adjacent market segment, providing customers and end users with a more comprehensive offering that includes a full spectrum of high-quality automatic entrance solutions. We'll also add expansive service and support network, which provides ongoing and consistent revenue streams. Both companies have cultures focused on strong operating performance and continuous innovation. Last, we broaden the portfolio of Allegion's offering for attractive end markets and leverage our strengths and specification to grow the business. We're confident that we have the right team to first integrate and then execute, and we look forward to developing significant value and growth with the potential in this acquisition.
I wanna thank the Allegion teams and the Stanley teams to get this deal to this position, and thank you for your time today on the call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.