The operator welcomes participants to the Allegion Fourth Quarter 2023 Earnings Call and provides instructions for the call. Josh Pokrzywinski, Vice President of Investor Relations, introduces the speakers, John Stone and Mike Wagnes, and mentions that the earnings release and presentation are available on the company's website. He also mentions that the call will be recorded and archived. John Stone then begins his presentation, stating that any statements that are not historical facts are considered forward-looking statements and are subject to certain risks. He also mentions that the presentation includes non-GAAP financial measures and turns the call over to John Stone, who recognizes the strong execution of the Allegion team in 2023.

Allegion's strong performance in the quarter and year reflects their commitment to adding value for customers, their partnerships, and their employees. They achieved record revenue, operating income, and EPS, with a focus on their seamless access strategy and strong demand in electronics. Their high operating cadence and industry-leading margins have allowed for a strong balance sheet and cash flow. Over the past decade, Allegion has consistently delivered solid results and executed well, leveraging their 100 year old brands and pioneering safety. They are proud of their track record and excited about their momentum heading into 2024.

Allegion has a balanced capital allocation strategy, with an equal focus on inorganic growth and returning capital to shareholders. They are committed to investing in organic growth and have recently introduced the XE360 series of electronic locks, which offers flexibility and integration with other systems. The company will continue to pay dividends and expects to grow through both smaller and larger acquisitions, while maintaining financial discipline.

Allegion had a successful fourth quarter, with revenue increasing by 4.2% and organic growth of 2.6%. Adjusted operating and EBITDA margins also improved, driven by price and productivity. Adjusted earnings per share decreased slightly due to tax timing compared to the previous year. The company's strong execution and operating model have positioned them for future margin expansion.

The speaker mentions that John will discuss the outlook later in the presentation, and that the company's tax rate will be between 18% and 19% in 2024. They also note that Allegion's structural tax rate will be in the high-teens over the planning horizon. They then provide details on the company's full year available cash flow, which increased by 30.6%. The speaker moves on to discuss the company's quarterly and full year revenue, with organic growth of 2.6% in the quarter and 5.2% for the full year. They highlight strong performance in the Americas segment, with revenue up 3.7% on both a reported and organic basis. The Americas non-residential business had double-digit organic growth in 2023, while the residential market was down low-single digits. The Access Technologies business had mid-single digit organic growth in the quarter.

The Americas electronics sector experienced strong growth in the quarter, with a 10.8% increase in adjusted operating income and margin expansion in every quarter of 2023. The International segment also saw improvement in margins despite soft end market demand, with an increase in adjusted operating income of nearly 13%. The company's acquisition of a software-as-a-service business contributed to growth and margins. Year-to-date available cash flow increased by $121 million, driven by higher earnings and working capital improvements. Allegion plans to continue investing in the business and converting earnings to cash.

In the seventh paragraph, the speaker discusses the improvement in working capital as a percentage of revenue and the decrease in net debt to adjusted EBITDA. They also mention their strong cash flow and healthy balance sheet. The call is then handed back to John, who discusses the key drivers for the company's 2024 outlook, including more modest inflation and stable non-residential markets. They also mention the importance of net price and productivity in driving margin expansion. The company believes their late-cycle business and large installed base will allow them to deliver organic growth. The outlook for 2024 is then presented on Slide 11.

In the Americas, Allegion expects total and organic revenue growth of 1.5% to 3.5%, with non-residential business leading the growth and residential business expected to be flat or slightly down. For Allegion International, total revenue is projected to increase by 1.5% to 3.5%, with organic growth ranging from -1% to 1%. The company is confident in its execution plan for 2024 and expects margin expansion, with adjusted EPS projected to be between $7 and $7.15. The company also expects available cash flow to be between $540 million and $570 million, not including future capital deployment beyond the recent acquisition of Boss Door Controls.

The speaker is proud of the Allegion team's 2023 performance and grateful for their partners and customers. Looking ahead to 2024, they will continue to build on their legacy and deliver new value. The focus will be on executing their strategy and deploying capital wisely. They remain committed to their customers and their vision for a safer world. The Q&A session begins with a question about the projected operating margin for 2024, which is expected to see year-over-year expansion due to pricing, productivity, and cost actions.

The midpoint is the main driver of growth and will lead to margin expansion in 2024. The company has taken pricing and cost actions, positioning them well for an increase in productivity. In terms of non-residential growth in the Americas, the institutional verticals are more stable while the commercial sector, including office and multifamily, is softer. The company is not expecting a significant rebound in these areas.

The speaker discusses the strength of data centers and the stable aftermarket in the non-residential sector, which leads to a projected low to mid-single digit growth. They also mention the impact of backlog burn in the first quarter of 2023 and anticipate a more normal seasonality in 2024.

The speaker mentions that the company does not give quarterly guidance but expects a higher revenue in the second half of the year compared to the first half. They also mention that the international segment had a strong margin expansion in the fourth quarter and expects it to continue in the future. The speaker also confirms that the company is comfortable with the assumption of normal seasonality similar to the pre-COVID period.

The speaker believes that the company's performance in the next few years will follow a normal seasonal pattern, with stronger growth in the second half. They also discuss the impact of the Boss Door acquisition on international margins and highlight the growth potential of their new Schlage electronic product. They expect strong growth in electronics over the next few years and plan to continue investing in this area.

The speaker discusses the education vertical in the company's business, noting that it makes up around 45% of the Americas business. This includes education, healthcare, and government institutions. The education sector has been stable and the company is investing in human capital and product development to promote safer schools.

The speaker talks about their involvement in the partner alliance for safe schools and their efforts to promote proper safety standards. They mention that 45% of their business comes from the institutional sector and that sales in this area are driven by bond referendums. They also discuss their product portfolio and their expectation of stable growth in this vertical. In terms of operating margin, they do not provide a specific guide but mention the 60 bps average from price, productivity, inflation, and investment. They also mention that mix and volume may offset each other. They do not provide an outlook for corporate costs.

The speaker discusses the business perspective of the company and how it is expected to remain flat compared to the previous year. They mention that the main driver for margin expansion is price productivity and not mix. The speaker also declines to provide specific volume and pricing outlooks, but states that the company is focused on generating price growth. They also mention that they expect to have a 90% conversion rate for available cash flow, taking into account the working capital drawdown from the previous year.

The speaker discusses the company's plans to increase its leverage back to its historical range of 95 to 100. They mention their focus on improving working capital and managing inventory in order to maintain historical performance. They also mention their continued investment in the business, particularly in software and electronics, to drive organic growth. The speaker also mentions the potential for upside in the market and the company's ability to participate in that.

Mike Wagnes discusses the company's made-to-order business and how they have returned to normal lead times for customers. He mentions that the backlog is not as extended as it was two years ago, and the company is doing a better job of serving customers. When asked about potential upside, Wagnes mentions stability in institutional markets and softness in the residential market. The next question from Andrew Obin focuses on the company's International segment, which has consistently seen declining revenues but higher margins. Wagnes attributes this to mix and mentions that portable securities may be dragging volumes in 2023.

The speaker is discussing Allegion's international performance, noting that China is still soft but the team has executed well on productivity and electronics. The acquisition of Boss Door Control is also mentioned. The speaker is uncertain when North American residential volumes will bottom out, but the outlook is for a flat to slightly down end market.

In the paragraph, John Stone discusses the potential impact of changes in interest rates on secondary home sales and expresses caution about the outlook for the residential segment in the Americas. He also explains that pricing for the company is based on value and tends to be sticky, and that the recent deceleration in growth in non-residential Americas could be due to a channel destock and any potential cycle pressure from starts may still be on the horizon.

John Stone and Mike Wagnes are discussing the state of the industry and the impact of supply chain disruptions on the channel destock phenomenon. They believe that this is mostly in the past and that lead times and ordering patterns are returning to normal. The vertical mix has been volatile, with some segments performing well and others weaker. They expect low to mid-single digit growth for the non-residential part of the business in 2024. The Americas margins have increased by 200 basis points this year, but this is mainly due to catch up from inflation. They may face a glass ceiling until the cycle allows for positive volume growth.

The speaker discusses the challenges the business has faced in recent years, but expects efficiency and productivity to improve in 2024, leading to margin expansion. They also mention the importance of volume growth in the long term and reiterate their commitment to their strategy and capital allocation. The speaker concludes by thanking the audience and ending the conference.

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