Welcome everybody. Excited to have our next presenters here. We have Allegion fresh off of their investor day last week. We have Mike Wagnes, the CFO, and Tom Martineau, Head of Investor Relations. I know, Mike, you've got some prepared comments, so I'll turn the mic over to you. Thanks for being here today.
All right. Thanks, Joe. Good afternoon, everyone. Thank you for joining us today. Hopefully everyone got a chance to listen to our Investor Day last week. I'm just gonna highlight a few slides that just kinda set the stage for Allegion. You know, I really encourage you all to go listen to our Investor Day. Obviously, we'll start with forward-looking statements. I just ask you just to read it and consider it accordingly. As far as Allegion, our vision is we enable seamless access and a safer world.
What that means in a nutshell is, we're looking to provide the most convenient, secure access for users of both physical credentials, the key, or even mobile credentials, where the people who need access get access on that secure and convenient way, and those who don't need access are not permitted access. We keep people safe and secure. Our strategy here is we're a pure play provider of access and security. We're pretty close to the knitting of what we are. We've been this way since we spun out from Ingersoll Rand 10 years ago and expect to stay a security and access company. If you look at our business profile, last year we had $3.3 billion in revenue. We have the leading brands or some of the leading brands in the industry, especially in North America.
You could think of Schlage, Von Duprin, and LCN. In Europe, you could think of Cisa. Some really iconic brands. We're also the leading margin company in the industry. We have the highest EBITDA margins in the industry, and we expect that to continue. If you listen to our earnings call last week or our investor or two weeks ago, our Investor Day last week, we're gonna push the margin expansion story, and you'll hear that from Allegion. We believe that our market-leading margins are a competitive advantage when we think about investors, and we drive margin expansion. If you think about our business mix, we added these slides to kinda give you a flavor for where we operate. Our business starting over into the right, we're about half aftermarket, half new build.
We have the stability of an aftermarket business that's very consistent. On the middle part, you see the vertical markets in which we play. This is our global footprint, where we're 40% institutional. If you look at our business in the Americas, that number is 45%. We're mostly an institutional vertical market business with commercial 30% in the Americas and then resi 25% globally. I think it's important to understand Allegion. That institutional, that tends to be public finance, not private finance, stable, very late cycle business. When you think of Allegion, and I know there's some narrative out there about commercial office and regional lending, that is not where we play. We're a very institutional-heavy business. Think K–12, hospitals, healthcare, which tends to be public financed.
Then, electronics versus mechanical. This has been growing for us. We're about 30% electronics today. This is the key growth driver for Allegion. We believe that electronics will be a double-digit growth driver for us in the future, continue to be a growth driver, a strong growth driver, and that is really where we're gonna put our investments to drive market outgrowth and shareholder return. Next two slides, I'm just gonna give an example of electronics, 'cause it's so key to the story. Think of a higher ed university. When many of the people in this room were in college, you had a mechanical key to get into your room. Your children, they're gonna go, and there's gonna be an electronic lock.
We're going through that transformation today where universities, in this example, Auburn University, we partner with the Megatechs, the access control provider, in the case of Lenel, the OneCard provider, in the case of CBORD. This is a partnership where we come with a solution for the end user to have a seamless solution, and this is an opportunity to really accelerate electronics growth. In this university, they ripped off all the mechanical hardware, and they're putting on all electronic hardware. Great growth driver for us. Another great opportunity for us is in multifamily. Similar dynamic. Multifamily, traditionally a keyed solution, mechanical solution. It's moving to a electronic solution where the property owner doesn't have to worry about trying to get keys back from tenants when they leave.
The ease of showing a property when people and potential tenants wanna see the property adds a value that today didn't exist a couple decades ago. Moving forward, expect multifamily to be a big growth driver for us, as well as that higher ed solution I illustrated before. I just wanna, before we get to Q&A, this was what we closed our Investor Day with about Allegion and where we're headed. Number one, as many of you know, we ran into some challenges with supply chain that really hurt us operationally in the end of 2021 and into 2022. Middle of 2022 forward, we're really operating at a high level, and you saw that our, in our Q1 results and our back half of last year as well.
We're kind of back to operating at the level that you expect of Allegion. Electronics is going to be that key growth driver for market outgrowth. We think we're gonna outgrow market, and electronics will be that key driver. We're gonna continue to invest in our software and services revenue. As many of you know, we made an acquisition earlier in the year to buy Plano, a small software company out in Germany. And we bought in 2022 the Access Technologies business, which is a great business for us that has a high service component, a stable high service, high margin business. And most importantly, we generate a lot of cash at Allegion. We're gonna deploy that effectively for the benefit of shareholders. With that, I'm happy to turn it over to Q&A.
Yeah. No, that's great. Really appreciated the overview, Mike. We're gonna dig into a few of those seamless opportunities that you just highlighted. Before we even get there, a lot of changes over the past 18 months, right? You took over as CFO, you've got John taking over as CEO. Maybe just talk about like some of the changes that you guys have already started implementing that you're most excited about?
It's an exciting time at Allegion. Obviously, we have a new management team. I joined in March as the CFO, but I've been at the company for 12 years, so I'm a company insider. Many of you know me as my former days as the head of investor relations. John joined a few months after me, so he joined a week after we closed Access Tech. One of the benefits we're really seeing is we're back to operating at a high level, and one of the things we know we struggled with was the supply chain. I feel that operationally, we're executing at an extremely high level. We're also really positioned well to take advantage of the seamless access journey. One thing in particular John brought is John's background. He kind of led this technology-fueled growth at Deere.
They went through this journey a little before Allegion. Coming into a company which had the right strategy, he was able to bring some of his experience to help fuel and accelerate that seamless access strategy. As we talk about things like software, right?
Mm-hmm.
That's a clear example of a direction that Allegion is, you know, focusing on here as we accelerate growth. Look for us to be really focused on accelerating growth to drive shareholder return.
Okay, great. You had the Auburn example.
Yep.
You know, even beyond K–12. What did it ultimately take for Auburn to make the decision with? Was that retrofitting existing buildings? Was that new buildings that was going up? I don't know, is there any way for you to help size like what college campus opportunity would look like for you?
Yeah. I'm reaching for my phone here. What's happening right now is that the phone is becoming the credential. The days of a physical key will soon be part of your phone. A case like Auburn University, here's a university that wants the convenience of a mobile phone application, not just for locks, for the entire campus. If you go to the student bookstore, you need to have on your credential a secure phone credential where you can pay, the credential can pay for your books, the food at the dining hall. It's so much more than locks, but locks is a component. A university will look for a trusted partner like us to work with their other providers on campus, that's why we use the partner of choice, to come with that solution which includes locks.
It's, it's larger than locks. In the case of Auburn as well, traditionally a campus, here's the use case. They'll go every summer and move a mechanical cylinder from dorm room to different dorm rooms. If you were in room 306, you couldn't get in the next year. Now, with an electronic solution, they don't have to do that. They just remove Joe Ritchie's credential, so he doesn't get into that room the next year. There's a real use case for efficiency that drives a larger university like Auburn to implement a full campus solution. In smaller universities, they'll do more piecemeal, where each summer they'll do a couple buildings at a time.
Mm-hmm.
There's a long-term trend that higher ed will get to electronic locking as the standard rather than the exception.
Got it. To be clear, this is all a retrofit opportunity and where you're partnering with a lot of the software providers, and you're providing the hardware associated with it.
Right. We partner with Lenel and CBORD. Obviously, the Megatechs own the wallet within the phone. Lenel is the access control, CBORD is the OneCard provider. It's a partnered solution on a retrofit basis, where historically you wouldn't have replaced via a new sale that those cylinders or those locks unless they broke. This shows a market plus opportunity for us for growth 'cause it's a perfectly working device that gets replaced.
Got it. Then, and then my last question along these lines is as you think about your hardware, is it open architecture? Do you have like the opportunity? Is it exclusively. You know, partnering with certain software providers, like what's the architecture like?
We are open architecture.
Okay.
Great question. We partner with all access control software partners. If you look at our website, we have a page which has our 50 PACS partners that we partner with. We have a open architecture partner strategy in the case of higher ed, where we're gonna partner to make that solution. There are certain applications like multifamily, where the solution is more sophisticated by the access control partners today. We go with a turnkey solution, where it's a simple Allegion solution of hardware and software. We can either partner or we can go with our own solution. Don't look for us to be exclusive either way. We think it's a combination of both and not either.
On the multifamily side, I guess my bias would be that that's more of a new construction opportunity than a retrofit opportunity, but is that... Am I characterizing it?
Historically, that tended to be the case.
Yeah.
You have a dynamic now where property owners are seeing the advantage of putting in that multifamily lock on an existing building. There is now starting to be retrofit. If you talked to me four or five years ago, we would say retrofit was extremely small.
Mm.
You're starting to see an acceleration in the retrofit for multifamily as well, highlighting the real above-market growth that electronics would provide us.
Yeah. It's interesting, right? Because we've been talking about electronics growth for a while. It has been good, but you're still at a point where penetration rates are pretty low, right? Like, I think we're talking around, like, 10% type penetration rates. You know, the enthusiasm that I'm hearing in your voice, is that driven by, you know, how many, like, qualifying leads you're being asked to bid for? Or what is really kind of like changing? 'Cause it does feel like there might be an inflection here that's positive.
Yeah. If you followed Allegion for a long time, you would hear us talk about electronics growth historically, and it might have been a little more on the residential side because your front door, you might have been more adapt to change that lock and go with electronic lock. Now the enthusiasm is you're starting to see the momentum in that higher ed, in that multifamily solution. I think that when you think, hear enthusiasm, it's really the acceleration on the non-res side, that it's something we saw coming over the last, you know, half decade. Now we're starting to see more and more momentum, and we've just illustrated a couple examples here. If you think of K–12, school security is a focus of schools. There's more adoption of security products there as well.
It's really across that, the product offering, but I do feel momentum coming in electronics. You saw that in our growth the last three quarters. Electronics growth has really started to accelerate for us. Our demand has been strong. I do think of electronics as a long-term growth driver for us. It's not a within three years, every lock is electrified. Think of it as a multiple year, double-digit growth driver as this install base, which is historically very mechanical, becomes more and more electrified and digital.
Makes sense. At your Investor Day, you talked a lot about Overtur. Maybe for those that aren't as familiar with it, talk us through, like, how does Overtur actually work? How is it differentiated for you guys?
For Allegion, in our non-residential business, it really starts with the demand gen engine and the spec engine in non-res. Overtur is a tool we use to help us take advantage of it. For our business, we write the specification for an architect to help drive demand for our products. With that spec writing, Overtur is a tool we use to, in the design phase, to work with architects, but it goes all the way through the life cycle of a building to the end user. It's a way to create influence throughout all... If you think about commercial construction, all elements of the life cycle of a business has different influencers, whether it's general contractors, distributors, end users, in the design phase with the architect. Overtur's the tool we use to just create more stickiness.
This is something that we do as the market leader to keep that market-leading position. We love the additional stickiness that gives us with our existing customers, and it's a tool that makes us more efficient with the architect. If we can be more efficient with an architect, we can write more specs and drive more revenue.
I imagine that some of your, like, large, like, competitors that are publicly traded, ASSA, dormakaba, like, I would imagine that they have similar design architecture as well. I'm curious, like, is the share opportunity with this specific application maybe targeting more, you know, medium-sized to smaller players that aren't investing or can't invest? How, how are you thinking about the opportunity?
Great question. We were clearly the first with this tool, but with any tool, your competitors will eventually, you know, and make the necessary investments to catch up. I think the key thing you see here in Overtur, when you have that as-designed spec in the tool. When it's time for repair, replace, it just makes it so much harder for someone to not use your product on the repair or replace. When you build a new building on that same campus, if you're already suited with the Allegion product, you're more likely to go with Allegion. It just makes you that much more stickier with your existing customer base, and it stops anyone else from taking some, not making you able to get that like for like. It just makes like for like so much more applicable.
You mentioned plano, the recent acquisition. Just talk through that acquisition specifically. It seems like it's really gonna help you with workforce planning. Talk to me about why that's the right adjacency for your business?
It's not an adjacency in this respect. We have an Interflex business out in Europe, which is in workforce management. What we did is we bought a small software company that can tack on to our existing Interflex solution to make it more user-friendly and easier to adapt, and is frankly cheaper than trying to build this business ourselves. It's a small... We disclosed the amount in our 10-Q, $35 million purchase price to really accelerate that business and make it a better tool for the end user today. Interflex is a great software business we have based in Germany. It's not a case where we're going outside our swim lane.
When we do M&A, look for it to be very closely tied to our existing portfolio where we can get synergies. In this case, it's the leveraging the Interflex business today, that platform.
Got it. I'm gonna turn to the audience in a minute, if anybody's got any questions. Before we get there, just one quick one since we're talking about M&A. I think you have a goal of, you know, 2%-3% of your sales to come from M&A. You just talked about Plano. Access Tec, you seem to be really happy with how that acquisition is performing. What are kind of like the right areas for you to be looking at from an M&A perspective? What does the pipeline look today? Then we'll ask, you know, some questions on Access Tec as well.
If you look at our business, you'll hear us say often, pure play security and access. We are very focused on staying close to our core of what our business is, and M&A targets being those that can really enhance our overall business portfolio, trying to leverage the existing business. I gave an example on Investor Day. There was a small business up in Seattle, Washington, called AD Systems. Makes sliding door solutions for a hospital. We were able to we bought the business and then leverage the demand gen engine in North America, where we were able to put it in our sales force and drive over 20% annual growth in that business.
Great example of the type of assets we like to add, businesses that leverage the existing either front end of the business, distribution partners, but similar to our existing portfolio, so there's real synergies and not a case of, you know, going completely outside of our swim lane. Look for us to be very close to what we do of security and access.
Pipeline right now?
I would say the pipeline has we've put considerable efforts to rebuild it. When Jon came in, one of the things we did is reinstitute regular reviews of pipelines and building pipelines. I think the pipeline is in a healthy position as well.
Okay. Just Access Tech before I go to the audience. Seemed like you got off to a really good start. Just provide any color you'd like to on how that business is integrating into yours.
Yeah. We had a product gap historically. We did not have that sliding solution. When this asset became available, obviously, we made sure we put it as part of the Allegion family. This business got off to a great start. We talked about it in our Q1 call. It grew 15% in a quarter. We're ahead of our business case when we made the acquisition. The real value I see is the leverage of writing the specifications for their products in our spec engine is going to create even more demand for their product that we haven't seen yet because the building hasn't even been designed. It's leveraging that front end that we love with putting this product into the existing product offering.
See, we're talking about Overtur again.
See? Great example.
All right, I'll turn it over to the audience. Any questions from the audience? I'm happy to keep going. Non-res, a lot of discussion around non-res, and you referenced it in your earlier remarks regarding how much of your North America business is commercial new construction. I mean, your business was up, I think, 30%, the non-res business was up this quarter. How do you see the rest of the year playing out? Like, what are you seeing in your front log? Any commentary around that would be helpful.
Yeah. Our non-res business, North America, great Q1, and it's really been healthy for a while here. We gave some guidance for the full year. Think of this as a double-digit growth business for us. I think the key thing to understand our business is the institutional heavy late cycle. Those who sat with us earlier today, some of you in the room heard me talk about this. It's really important to understand that institutional business is publicly financed, and state and local budgets are very healthy. Non-resi for us is really healthy.
For you, leading indicators would be, what is it, Overtur? Like how you're speccing into, you know, certain projects and how much visibility then do you have...
Sure
to the, to your front log?
There's. We have really good visibility because of how late the product goes in a building, right? If you think about the design to construction phase to revenue, I mean, it could be anywhere from 12 to 24 months from when you design a project until you put, you know, product on the door. That gives us that looking glass to see markets, whether that specification is a key indicator. We also look at all the same public, you know, data points that you guys look at, ABI, the AIA Consensus Construction Forecast, Dodge. It's really more than just the public data.
It's really seeing the health of the front end and how long it takes from when our distributors get their order books to when we ship products, give us confidence in the, you know, what we would call near term, the 2023 that, you know, we feel that there's a lot of momentum, and especially in the non-res.
Sounds like it might even give you a little bit more visibility than that. Like, does it seem like you've got decent non-res visibility at least through the early part of next year?
Yeah. We should. We talked about it on our earnings call. Clearly for 23, we gave the double digit framework. We also, in our investor day, gave a long-term guide. You know, in our long-term guide, we gave the market, and the market we see as being stable. So much of that is driven by that institutional business, publicly financed. I know I've said it multiple times, but it really gives us that visibility.
That's great. One of the themes coming out of earnings for a lot of companies was this expansion on price costs, and you guys saw it as well, right? We've been waiting. Last couple quarters, it's been very, very good. Your pricing, I think, was up 10 points this quarter. I have two questions. Number one, historically, like go back several years, you've had good pricing, positive pricing across your business. The first question is, what about your business allows you to continue to get, you know, call it one, 1.5 points of price every year? The second question is, how do you see pricing through the rest of this year?
Yeah. I'll talk to the framework.
Sure
... you can dive in on the details. Non-residential, we compete on value, right? If you look at this industry, historically, you have a situation where you know your inflation, and you price accordingly to ensure that your pricing covers your inflation. It is an industry that competes on value. Complex buildings lead to value being the end user valuing the more complex solutions. That allows us to ensure we're able to cover our inflationary pressures. It is an industry where value is the key determinant by end users, not necessarily who's got the lowest cost for the solution.
I think it's also important on the pricing, especially on the non-residential side, it's sticky. Because of that value that's being brought to the solution, typically it's not one you're gonna give back. Even in deflationary times, you can look back, as you know, alluded to, you're still gonna be able to get a little bit of price. It drives that dynamic. When we make the comment for the year, the price productivity inflation, not only, you know, kinda covering it on the dollar basis, but also margin now. You know, we were a little behind on that, but we think that's the mantra of the business model going forward. You know, that gives us that insight. If, you know, we've already gone out with kind of our initial price increase, that's built into the guide.
you know, we would announce it to our channel before we'd announce any other additional prices publicly. you know, it's a lever that we'll pull if we were to see increased inflation. Typically, we'll have some visibility to that too.
Is there a lag in your pricing to some degree because you're speccing into projects, again, because typically you don't actually deliver for another 12 to 24 months, you might be speccing in earlier? My question is, you're seeing good pricing come through now. You've got visibility into, call it, the next 12 to 24 months. Are we expected then to continue to see very positive price then over the course, at least over the next 12 months because of how you'd spec into these projects?
Let me more say long term. That lag does provide you a nice long-term tailwind when you think of pricing. One thing about more near term is we can't forget that we had multiple price increases as the inflationary pressures started that we're lapping. So what you have in 2023 is you do have some lapping of previous year where we had multiple price increases. I think what we feel good about is we're back to expanding margins, where price plus productivity is gonna fund our investments and our inflation. I think that dynamic is not a short term. I think it's a long term. As you look out through the planning period we talked about in Investor Day. This is something we expect every year to drive that margin expansion of 50-100 basis points.
Okay. That's super helpful. We haven't talked about your residential business at all, but it's still 25% of the overall portfolio. As you think about the U.S. versus outside of the U.S., what are you seeing right now from a demand perspective? How are inventories? What are you hearing from your channel partners? Any color would be helpful.
Residential, we talked about some even on our 1st quarter call. Clearly residential is not as strong as non-res. What we had in the 1st quarter for us, we've been talking about the opportunity to restock shelves with electronic products because historically we were struggling to meet demand in electronics for resi. We were able to accomplish that in the 1st quarter, so we had a really strong residential electronics in Q1, which was restocking the shelves. Moving forward, you can expect to see resi kind of mirror on the aftermarket side, point of sale at a big box retailer. On the new build side, we're closer to completions than starts. Our products tend to go in at the end of a home as well as a commercial application.
As you look at completions, that will impact, especially on the mechanical side. I do think there's opportunity in electronics based on consumers' desire to adopt that electronic product to drive above-market growth. The underlying market assumptions are muted by, you know, residential, which residential, as many of you know, has been on a short-term basis, softer. Longer term, I do think resi is a longer-term opportunity. There's been a lack of supply of homes.
Mm-hmm.
for quite some time. I do expect this to bounce back, or we expect it to bounce back. In the near term, as we guided on our first quarter call, we expect residential to be more challenged than non-res.
Makes a ton of sense. I just wanna ask one other question around international, since we haven't gotten there, and we don't have Tim here to answer this question. You know, he took over the international segment 2 .5 years ago when you guys merged it. What's the right dynamics for margins and the right framework for margins in that segment going forward? He's done a great job getting the margins much higher than when he first took over, but where do margins go from here?
Business is much healthier than what you think of it when you started covering us 10 years ago. Even in the first quarter where revenue was really challenged, it was still a, you know, double-digit low-teen margin business. I expect that business to expand margins on a long-term basis that's similar 50-100 basis points as part of our framework. What you're not gonna see is the multiple 100 basis points a year that took us from 0 up to the double-digit mid-teen EBITDA business it is today. We do expect them to expand margin longer term. Obviously, in the current year, we had some discussion in our Q1 call about margins being flattish to slightly down this year.
Great. One last question. I think I heard correctly, but I'll give you an opportunity to hit the nail on the head on this one. In terms of M&A, it sounds like you're really focused on adjacent markets. We shouldn't think about you as potentially wanting to do something much larger in like the fire and security space, which, you know, could potentially, you know, it could be adjacent, but at the same time, you know, a little bit different than your knitting.
We would say look for us to stay in security and access where we play today. Adjacencies, that is not where we're looking to go. We're looking to stay within security and access.
Great. Thank you so much for coming today, both Mike and Tom. It's great having you here. Appreciate it.
Thank you.