Jobi Coyle and John Stone welcomed everyone to Allegion's second quarter 2023 earnings call. Coyle mentioned that a presentation and earnings release were available on their website. Stone shared his excitement for Allegion's future and pride in their global team's performance.

Allegion had a strong second quarter, with 18% total growth and 130 basis-point increase in adjusted operating income margin. Electronics demand was strong in both the Americas and international segment, but there was some softness in nonresidential and mechanical demand. As a result of their performance, Allegion is raising their outlook for adjusted EPS, which is now expected to be in a range of $6.70 to $6.80.

Stanley Access Technologies' acquisition reflects the company's strategy of providing seamless access in a safer world. This strategy is supported by creating value as a pure-play provider of security and access solutions. In the first year of the acquisition, the teams have integrated well, taken care of customers, and achieved 10% growth in revenue.

Allegion had a strong second quarter with 18% growth in revenue, 5.6% of which was organic growth and 12% due to the Access Technologies acquisition. Adjusted operating and EBITDA margins increased by 130 and 110 basis points, respectively. Adjusted earnings per share also grew by 23%, with 20% coming from operational performance and the rest from acquisitions, offset by higher interest.

In Q2, Allegion achieved 5.6% organic growth, driven by price realization across their portfolio, while their Americas segment delivered strong operating results with 23.8% reported growth and 7.7% organic growth. Electronic component availability was significantly challenged in the first half of 2022, but Allegion's supply chains are now much healthier. Access Technologies, which has been part of Allegion for a year, has seen successful integration and results.

The business had strong pro forma revenue growth and contributed to reported growth. The Americas segment drove a 460 basis point improvement in operating margin, while the international segment saw flat revenue on a reported basis and a slight tailwind from currency. International adjusted operating income increased 2%, with improved margins from favorable price and productivity in excess of inflation and investment.

The company's year-to-date available cash flow increased by $105.6 million due to higher earnings and lower cash used for net working capital, partially offset by higher capital expenditures. Working capital management is a priority for the company and they have successfully deleveraged following the acquisition of Access Technologies, repaying $90 million on their revolving credit facility. The company has tightened their full-year revenue outlook while increasing their earnings per share outlook, expecting the Americas segment to be between 15-16% for total growth and 7.5-8.5% organically. Nonresidential organic growth is expected to be up high-single to low-double-digits, while the residential business is expected to be relatively flat.

Allegion had a successful first half of 2023, with steady demand in their end markets and electronics continuing to fuel their revenue growth. They expect total revenue growth to be between 11.5% to 12.5%, with organic revenue growth of 5.5% to 6.5%, and their adjusted EPS outlook is between $6.70 and $6.80. They are expecting their available cash flow for 2023 to be in the $500 million to $520 million range.

Mike Wagnes explains that their channel partners had been ordering based on lead times that had been reduced, leading to a destocking in the second quarter. He adds that they are mostly a made-to-order business, and that their guide suggests a 50-50 split between the first half and the second half of the year.

Mike Wagnes and John Stone discussed the resilience of the institutional segment in the non-res market and how there are pockets of weakness in the commercial office market. Julian Mitchell then asked if the seasonality of the second half of the year would be abnormal, to which Mike Wagnes responded that historically, variability between the third and fourth quarter earnings, sales, and margins would be much narrower than usual.

John Stone explains that channel inventory levels vary depending on the type of distributor, with two-step distribution partners, wholesalers, and integrated hardware distributors all having different answers. In general, sell-through activity is strong, particularly in the non-res space, and the institutional segment is still resilient.

Mike Wagnes answers Joe O'Dea's question about the margin level of the Americas ex-Access Tech, saying that the back half of the year will not have as much margin expansion as the first half due to the prior year comparison. However, he states that the long-term operating model of driving price and productivity to offset inflation and investment, as well as volume leverage, will still hold and that they are confident in their operational execution over the last four quarters.

Mike Wagnes discussed the pricing actions they took to catch up to inflationary pressures, as well as the four-item dynamic of pricing, productivity, inflation, and investments. Joe Ritchie then asked for a breakdown of what they were seeing on the productivity versus the investment side, and how that will affect the cadence for the rest of the year.

Mike Wagnes reported that the company was seeing an improvement in productivity and efficiency and expected that to continue. He also noted that the company would continue to invest in their business to drive top-line growth, and that they expect to see margin expansion in the back half of the year. Josh Pokrzywinski asked for clarification on the supply versus demand signals on the mechanical side, to which Wagnes responded that lead time normalization and destocking were two separate concepts with the same concept.

John Stone discussed the performance of residential mechanical products being offset by strong electronic performance. He also noted that channel checks have revealed pockets of strength and weakness in the non-residential market, with institutional segments providing stability. Stone also commented that the company has a strong pipeline of potential acquisition targets, with a focus on providing security and access solutions.

The portable security business has seen a decrease in volume due to the COVID-19 pandemic, but is expected to normalize by 2024-25. Allegion is looking to acquisitions to help with their growth strategy and to help make up for the volume drag. They are also looking to outperform the high-single-digit growth of the industry.

Allegion is seeing positive growth in their electronics and software solutions, with low-double to mid-teens organic growth. Their exposure in China is small, but profitable and lower than other areas. Australia-New Zealand is stable and performing well. The institutional segment is more stable than other parts of the commercial business, and Allegion has been performing well there with healthcare and education being resilient. Muni bond issuance and tax receipts are something Allegion has an educated view on for the second half of 2021 and into 2024.

Allegion has increased their human resources to ensure proper codes and compliance for school safety. State tax revenues and bond issuance have been relatively high due to COVID stimulus and economic growth. Allegion is a late-cycle company, so it takes time for projects to be completed. When asked about the impact of the order pattern adjustment for mechanical for the full year, Mike Wagnes said it was resilient in the institutional segment. Lead times for electronics are expected to normalize soon and there may be a similar order pattern adjustment.

Lead times for electronics products have been decreasing, though they are still slightly extended from normal. Demand is still strong in this segment, and it is expected to be a high-single-digit growth industry. It is possible that the same dynamic of supply chain volatility could be seen in the channel, though it is yet to be seen.

In the second quarter, electronics saw strong growth in both residential and non-residential sectors. This is the fourth consecutive quarter of strong growth in electronics. Looking to the back half of the year, there is expected to be good growth in electronics, although the comparisons to last year's robust numbers in the back half may be tough.

John Stone discussed the success of Access Technologies in building out recurring service revenues in the first year of ownership. He noted that the service side of the business has historically been about 40% of the total and has grown at a low-double-digit rate. Stone also mentioned that the international presence of Access Technologies is quite small, mainly focusing investments on new product development and staying close to customer requirements. To increase service offerings, investments are being made in human capital and better productivity and diagnostic tools.

John Stone discusses the difficulty of finding highly skilled technicians to keep customers up and running. He explains that they must be choosy in their hiring process and invest in training and support for these technicians. Mike Wagnes adds that the organization as a whole will look to drive margin expansion by increasing price productivity and leveraging volume growth.

John Stone, President and CEO, concluded the question-and-answer session by discussing the success of the electronics business and the international team. He noted that the international team had achieved flat revenues and margin expansion, and that Allegion was making good progress against their goals. He also highlighted that they were in the early innings of adoption within the industry for electronics.

Allegion's end markets are stable, and while there was a slight decrease in demand this quarter due to improved lead times, indications from their channels show steady demand. The team has delivered strong operational performance, resulting in margin expansion and increased cash flow. As a result, the company is confident in their performance for the remainder of the year and has raised their full-year EPS outlook.

This summary was generated with AI and may contain some inaccuracies.