Josh Pokrzywinski:

Thank you Jason. Good morning everyone. Thank you for joining us for Allegion's Second Quarter 2024 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 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.

Mike Wagnes:

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide Number Five. As John shared, our Q2 results reflect solid performance from the entire Allegion team. We continue to execute at a high level, delivering another quarter of strong margin expansion with mid-single-digit top-line growth, driven by both price and volume. Revenue for the second quarter was $965.6 million, an increase of 5.8% compared to 2023. Organic revenue increased 5.2% in the quarter as a result of favorable price and volume. We saw strength across both our Americas and International regions. Q2 adjusted operating margin and adjusted EBITDA margin increased by 150 and 170 basis points, respectively driven by price and productivity in excess of inflation and investments, as well as favorable volume leverage. I'm very pleased with the operational execution and margin expansion in 2024. Adjusted earnings per share of $1.96 increased $0.20 or approximately 11.4% versus the prior year. Strong operational performance, accretive capital deployment and favorable interest and other more than offset the headwinds from higher tax. Finally year-to-date 2024 available cash flow was $176 million, which was a 7.4% decrease versus last year. I’ll provide more details on our cash flow and balance sheet a little later in the presentation. Please go to Slide Number Six. This slide provides an overview of our quarterly revenue. I will review our enterprise results here, before turning to the respective regions. Organic revenue grew 5.2% in the quarter, comprised of price realization of 2.7% and volume growth of 2.5%. As I mentioned last quarter, we are seeing the business return to expected seasonality in 2024 versus what we experienced last year. As John discussed earlier, we're accelerating capital deployment and have made investments in inorganic growth in both our Americas and International segments. As a result, acquisitions drove almost a point of growth in the quarter. Currency was a slight headwind, bringing total reported growth to 5.8%. Please go to Slide Number 7. Our Americas segment delivered strong operating results in Q2. Revenue of $770.7 million was up 6% on a reported basis and up 5.7% organically as a result of favorable price and volume in the quarter. Reported revenue includes 0.4% growth from the acquisitions of Krieger and Unicel. Our non-residential business, inclusive of Access Technologies increased mid-single digits in the quarter as end-markets remained stable. Our residential business was up low-single digits in the quarter, showing an improvement versus the declines in Q1. Demand for electronics in our Americas region remained strong. While electronics revenue was down low-single digits in the quarter against a tough comparable, our business has grown well above 30% over the last two years for both the quarter and year-to-date. Americas' adjusted operating income of $226.2 million increased 9.9% versus the prior year period due to solid top-line growth and strong operational execution. Adjusted operating margin and adjusted EBITDA margin for the quarter were up 110 and 130 basis points respectively, as we continue to drive margin expansion through price and productivity in excess of inflation and investments. Overall, our Americas team delivered another strong quarter. Please go to Slide Number 8. Our International segment had a solid second quarter. Revenues of $194.9 million was up 5.2% on a reported basis and up 3.1% organically. Price realization and strength in our electronics business drove the growth in the quarter. Acquisitions were a tailwind this quarter, positively impacting reported revenues by 3.2% driven by the Dorcas and Boss acquisitions announced earlier this year. Currency, however was a headwind of 1.1%. International adjusted operating income of $23.6 million increased 12.9% versus the prior year period. Adjusted operating margin and adjusted EBITDA margin for the quarter both increased 80 basis points. Volume and favorable mix are driving the margin expansion, as well as margin accretion from our acquisitions. Please go to Slide Number Nine. Year-to-date available cash flow came in at $176 million down $14.1 million versus the prior year. We did see year-over-year growth in the second quarter this year. However, the first half of 2023 was particularly strong as it benefited from supply chain lead-time reductions. Next, working capital as a percent of revenue increased primarily driven by higher receivables, as a result of the timing of revenue and collections within the quarter versus the prior year. Finally, our net debt to adjusted EBITDA remains at a healthy ratio of 1.9 times, consistent with where we finished 2023. It is worth noting that our gross debt and cash balances include the proceeds from our $400 million senior note issuance in the second quarter, which will be used to repay a $400 million senior note maturity in the back half of 2024. This resulted in a slightly higher gross debt to adjusted EBITDA at the end of the second quarter, but has no impact on net debt to adjusted EBITDA. Our business continues to generate strong cash flow and our balance sheet supports continued capital deployment. I will now hand the call back over to John.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tim Wojs from Baird. Please go ahead.

John Stone:

Yes. Thanks Tim. Appreciate the question. And I think channel checks recently, have been out in the field with our sales teams and our end-users and distributors, would indicate pretty much what we said at the outset that we are in, what we would just call, a stable demand environment, really driven by the institutional segments and the stability there. I think the specification activity is always on, just the way we said it in the prepared remarks. And our spec writers have the capability to flex to whichever vertical, whichever job that they need to. So whether it is an office building, whether it's a school, a university, a hospital, a data center, our spec writers can do it all. And so just think of that as a flywheel that doesn't stop. I'd say, on the -- just the demand side, certainly there is pockets of strength, pockets of weakness, like we've been saying for the last few quarters. That ebbs-and-flows, depending on where you are or which vertical you are looking at. But in general, I think, we would just stick with a stable demand environment, and we feel like our strength and our execution will differentiate us and we will outperform the market.

John Stone:

Yes, it's a great question, Tim and I appreciate that. And I’d just reinforce, we are really pleased with the acquisitions we've tucked in this year. Every one accretive to EPS right out of the chute. We talked a little bit gave a little bit of an indication on the kind of valuation that we were looking at here in the Americas recently. And I would say, way back to as I first stepped in the seat, we talked about orienting Allegion more towards growth. We do want to be acquisitive. We don't want to become a serial acquirer that just wantonly buys anything. We want to be very strategic. We want to play to our strengths. We want to have acquisitions that complement our portfolio and bring benefits to our customers. We want to have returns that are accretive to our shareholders. And so each acquisition, each deal is going to take on a life of its own and so the timing is going to be what it is. But I’d say, in terms of activity, our view would be -- my view would be the environment for strategics like Allegion is better than it was a year or two ago. We don't see that changing in the near-term, and we do see a good pipeline of opportunity. So I think you can look forward to seeing more quarters like you've seen these last couple from Allegion.

John Stone :

Thank you.

Joe Ritchie:

Hi, guys. Good morning.

Joe Ritchie:

Hi. Maybe we can touch on Americas margins to start off. It is about the best margin we've seen in some time. And I'm just wondering on the sustainability of that margin going forward, what are the key levers? Especially impressive, given that you have margin-dilutive mix coming through in the Access Tech business. And so any color that you can provide on the go forward would be helpful.

Joe Ritchie:

Yes. That's helpful. And John maybe just along that point, we have seen some commodities deflate to start the year. I'm just curious like what are you seeing in your core commodities? And how do you see the cost side of the equation evolving as we progress through the year?

Joe Ritchie :

Okay, great. Thank you.

Joe O’Dea:

Hi, good morning thanks for taking my questions.

Joe O’Dea:

Can you start on the International side, I think this is the first quarter of volume growth in a couple of years. And so just in terms of expanding on what you are seeing there and confidence that things could have turned and expectations for volumes as we move into the back half of the year.

Joe O’Dea:

And then also I wanted to get your views on institutional in Americas. I think maybe some kind of contrasting data points out there when we look at the Dodge Momentum, institutional looks soft. I think recently we had the AIA come out with new forecasts for 2025, it is actually got institutional up 4%. So pretty good. So I guess when you look at spec activity, when you peel back anything you understand about Dodge Momentum, just overall in terms of direction on institutional, and if you see sort of tailwinds, headwinds there based on spec activity.

Joe O'Dea:

That’s great. I appreciate it. Thanks.

Julian Mitchell:

Hi, good morning. Maybe just a first question around the operations kind of guidance on the EPS tailwind. So you raised that, I think, at the high end and the low end, the organic growth guide is unchanged. So maybe just help us understand kind of what moved around in that? Was there just some conservatism and a cushion that you don't need anymore? Given we're at the halfway point of the year, did something move around in terms of, say, expectations on cost inflation? Any help on that, please, why that kind of operating guide has moved up for the year?

Julian Mitchell:

That's great. And then maybe just my follow-up question would be around if we think about the residential outlook surprising, I think, to see a positive result there in the second quarter. Maybe just update us how you're feeling about that market. The sort of consumer discretionary side seems very weak more broadly, understanding though that locks is not that discretionary. So maybe just some color on resi-expectations for the year ahead. Thank you.

Julian Mitchell:

Sounds great. Thank you.

Brett Linzey:

Hi, good morning. Congrats on a great quarter.

Brett Linzey:

Hi. Just a question on the electronic locks performance, better than I expected. The two-year stack did accelerate versus Q1. Would you attribute that to the improvement in the mix of the end-markets so multifamily, commercial softer; institutional, a little better? Or are you just seeing broader adoption across some of the different verticals?

Brett Linzey:

That's great. And then just a follow-up on the sales performance between new versus aftermarket. I understand you lose track of it at some point through the channels. But just curious if you had any granular color on how new construction versus aftermarket performed that you could glean through, whether it is lock categories or some other metrics.

Brett Linzey:

Appreciate the insight.

Operator:

The next question comes from David MacGregor from Longbow Research. Please go ahead.

John Stone:

Thank you very much.

John Stone:

Yes. Tough to break all that down. We'll see if Mike has anything to add, David. But this is John, I'll start. I'd say, for any global company like Allegion, tariffs in general are not helpful, right? That's not helpful to a company like Allegion. I would say -- I'd call you back to the near-shoring that Allegion invested in with our new factory in Querétaro, Mexico. The ramp-up is going well. Our people are safe. They are focused on quality. The numbers are coming through just like we thought. Great culture, great team down there. And that's for a lot of our residential products, are manufactured between Querétaro and our manufacturing campus in the Baja area that we have. I'd say, that investment did significantly derisk our supply chain, made our supply chain more resilient in terms of some product supply that used to be single-sourced and outsourced in China. And so we've acquired the IP, and we can produce that product wherever we want to now. We have that flexibility since we own the design. As well as shortening the supply lines, obviously, sourcing it close to home. I’d say, now is not really the time to speculate about any future tariff regimes. We need to just wait and see how the policies evolve. But in terms of supply chain resiliency, I think the investments we've made over the past 18 months or so have been very well-placed and are delivering the kind of results that we'd like to see. Mike, anything you'd add?

David MacGregor:

Got it. Thanks for that detail. And just as a follow-up, I guess obviously not inventory in the specified business, but just wondering what you're seeing in terms of channel inventory in the commercial and the retail space?

David MacGregor :

Got it. Thanks very much. Good luck.

Operator:

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to John Stone, President and CEO, for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

John Stone:

Thanks, Mike. Please go to Slide 10. As we did last quarter, I want to spend a moment to highlight some of the key factors that we believe distinguish Allegion's business model and how we win in the marketplace. We continue to see favorable long-term demand drivers, particularly in our core institutional markets. Projects in these markets are largely funded outside of traditional bank financing and may be more commonly funded by municipal bond issuance. Bond issuance has continued its steady long-term growth with cycles around election year referendums. Issuance continues to support our view for stable institutional market demand as we progress through 2024.

Matthew Pan:

This is Matthew Pan from Julian Mitchell's team at Barclays. Just the first one, kind of thinking about seasonality, Q2 is typically about 25% of the year's earnings. Any reason that might be different this year?

Matthew Pan:

Got it. And then just 1 follow-up. Lennox talked about some project delays in commercial construction and Otis was pretty downbeat on new orders. Does Allegion see any sort of project delays or any worse market outlook in the Americas nonresi piece versus, say, 6 months ago?

Joseph O'Dea:

So I wanted to ask on Americas electronics. The downward single digit in the quarter on a tough comp, plus 30% to your stack still showing strong demand there. I guess just in terms of as you think about the year and what the comps look like in the remainder of the year, is this an area where you expect to see growth? Any context on kind of magnitude of year-over-year change for electronics demand in Americas on a full year basis?

Operator:

The next question comes from Brett Linzey with Mizuho.

John Stone:

Well, let me -- this is John. I would just open with tariffs of any kind or not helpful to a company like Allegion in terms of our supply chain. I'd say we learned a lot of lessons as did everybody else over the course of 2022 and 2023. And in terms of supply chain resiliency, we feel a lot better about our position than we would have a couple of years ago.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to John Stone, President and CEO, for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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.

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.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joe O'Dea with Wells Fargo. Please go ahead.

John Stone:

Good morning, Joe.

Joe O'Dea:

Wanted to start on op margin in '24. It looks like year-over-year margin expansion maybe in the 60 bps kind of range. So it would fit within the 50 bps to 100 bps, I think, medium-term target, but also comes off a pretty tough comp where you just did 160 and so, I think maybe a little bit better than anticipated. Can you just talk about the drivers of that year-over-year expansion that's embedded in terms of price, productivity, inflation, sort of how much of that is driven by it? And then also how much is already kind of in there in terms of carryover price, price that you've announced, cost actions that you've taken versus how much you still have to go get?

Joe O'Dea:

That's really helpful. And then in terms of non-res and the growth outlook in Americas, can you unpack a little -- that a little bit by vertical then to talk about sort of electronics versus mechanical, but then institutional versus commercial, I think a lot of focus on sort of office and headwinds out there. But what you see on kind of new versus renovation, just trying to understand some of the moving pieces within that growth in non-res.

Joe O'Dea:

I appreciate the details. Thanks.

Operator:

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Mike Wagnes:

Yeah. Thanks for the question. Clearly, Q1 is going to be our most challenging comp when you think about the '24 year. We don't give quarterly guidance. But if you recall, we burned through that backlog Q1 of '23. So when you think about our cadence for top line, ‘23 was not a normal year, right? When we think about '24, I think there's more normal seasonality. So we're a little more back half loaded than first half loaded from a top line. Don't want to get individual quarter forecasting. As you know, we don't give quarterly guidance. But just remember, a little more back half than first half from the top line as a company and that we do have that really challenging comp in the first quarter when you model year-over-year.

Mike Wagnes:

Yeah. Super pleased about our international business when you think about the margin performance. If you look at our 10-year history, that business is breakeven when we spun out a decade ago. Now we’re driving good healthy margin expansion. It’s a much healthier portfolio. When you think about that electronics and software businesses, we’ve been talking about the last few years, strong – stronger businesses from a margin perspective and top line. So really doing some good work to drive productivity in the region, pricing excellence. Tim, he took the excellence we had in the Americas and brought that to International as well. So a lot of things favorable for International as we think about the business for ‘23 and more importantly, moving forward.

Operator:

The next question comes from Jeff Sprague with Vertical Research Partners. Please go ahead.

Mike Wagnes:

Yeah, Jeff. If you look at half, I'd like to talk about it in halves. I think that '14 to '19 is kind of a normal seasonality when you look at the half years. And we expect to be more in line with that a little more back half weighted than first half.

Mike Wagnes:

Yeah. Jeff, if you think about that business, organic -- I'm sorry, inorganic growth for International, you would assume -- about half of that inorganic growth we've highlighted in the outlook is coming from the Boss Door acquisition, the other half coming from currency. So you could see it's a pretty -- it's a smaller acquisition. It's not a massive size. So from a price now on the top line, you have an idea that it's not a huge acquisition, but it's a nice complement to our business. We're really strong at writing specifications in North America. This is bringing that spec writing capability to a large country in Europe like the U.K.

John Stone:

Yeah. It's a good question, Jeff. And I think if listen to the prepared remarks in 2022, strong electronics growth, 2023, around 20% electronics growth. So I mean, over the long haul, long term, like we said at Investor Day back in May last year, think of our electronics performance of high-single, low double-digit growth driver for Allegion. We’ve definitely given backlog burn and things in 2023, we’ll have some tough electronics comps here and there. But demand is still strong. The secular trend still remains this migration to electronic access control for better security and better convenience is still moving and underway. We’re still investing there. XE360 is just on that was very timely to highlight for us given the flexibility and interoperability that, that brings to the market. And also just to highlight the ease of upgrade of that in the field. We’re also pretty excited about that. I mean the flexibility that’s going to offer the end users is quite interesting and quite attractive for us. I think as you – as we move through 2024, you can continue to see, I think, an emphasis from us on things like product vitality, you’re going to see a steady stream of new product launches just like this, and we look forward to highlighting those for you.

Operator:

The next question comes from Julian Mitchell with Barclays. Please go ahead.

John Stone:

Yeah. I think, Julien, when you look at our Americas business, we would say we're in the range around 45% of that business would be institutional. Institutional, of course, would be education, also health care, some government institutions in there. Education, K-12 and higher ed have been quite stable. I think when you see the things that Allegion invests, human capital as well as product investments and terms of helping drive safer schools. It's one, it's a really important mission. We're very active in the partner alliance for safe schools, advocate for proper standards, make sure people are aware and educated on proper standards. And then yes, that is a substantial portion of our business. But 45% of Americas is institutional -- it's a stable vertical. I think you can look around the country, you can see some big bond referendums lately. Those can lead sales by a year or two years or more in some cases. In any given year, certain portions of school budgets, of course, go to safety and security. And we want to make sure people understand proper standards and advocate for that. And if you recall, again, one of the products we highlighted at our Investor Day, these indication lots that just provide a visual indication of the lock status critically important. We've got a great portfolio there, and that's continuing to drive value into that vertical. So I think stable would be the outlook that we would see kind of consistent with the Dodge starts -- chart that we showed you. I think in that low to mid-single digit growth driver.

Mike Wagnes:

Yeah. So as you know, Julian, we don't guide margins per se. However, we do give top line, bottom line, other estimates. So you can back into a margin rate. I think one, Joe kind of talked to margin rates earlier in the call as well. From a business perspective, you can see corporate being flattish for us year-over-year. With that element, you can kind of back into the respective region margin rates. And the big driver to the expansion, like, I mentioned earlier, is that price productivity in excess of investments and inflation. Lastly, you asked about mix, historically, mix is not a huge mover of margin rates for us. They can move around a little, but it’s not something that drives significant changes in our margin profile for a full year.

Operator:

The next question comes from Brett Linzey with Mizuho. Please go ahead.

John Stone:

Hi, Brett.

Brett Linzey:

I wanted to come back just to price volume, Mike, I think you said a good portion of organic growth was price generation. I guess is it safe to assume the volumes are assumed flat to maybe negative for the year? And then, any context on the non-res versus resi volume outlook for this year as well?

Brett Linzey:

Yeah. No. Thanks for that. And then maybe just shifting to the available cash flow. I think implicitly in that 90% ZIP code, but you did have some working capital draw down last year. Is that the right type of conversion you're thinking about? And then I guess what kind of leverage you back up to that kind of 95 to 100 historical range you guys have generated in the past?

Brett Linzey:

All right. Appreciate the detail.

Tim Wojs:

Hi, guys. Good morning. Maybe just, first one, just on investments. I know you guys don't disclose the number anymore in the 10-Qs and the 10-K. But I was just kind of curious how you kind of frame go-forward investments in terms of the incremental dollars you'd spend in any given year, if 2024 would be kind of assumed as a kind of a normal year or if there are some discrete investments around some of the software development and new products and things you want to call out?

Tim Wojs:

Okay. So no changes there. Okay. And then, Mike, you said that if the market was kind of better than you thought you'd be able to participate in some upside, I guess, how would you frame your backlog kind of heading into '24 versus maybe a normal year? And if there was upside, where do you think the most likely source of that would come from?

Tim Wojs:

Okay. And I guess if there's any source of upside, I mean, as you look at the business, where do you think that most likely come from?

Tim Wojs:

Okay. Very good. Thanks, guys. Appreciate it.

Andrew Obin:

Hi, guys. Good morning.

Andrew Obin:

Can we just go back to International because I looked at my model and it's quite fascinating, right? If you look at 2018, just year-over-year comps I think revenues have declined with the exception of one year very, very consistently, yet the margins are materially higher when they were back then sort of underscoring what you've said. So can you just give us a little bit more color because I think in the 10-K, you've also highlighted that portable securities, I think, dragging volumes in '23, and I thought that was mix helpful to the mix in international. Just can you just give us a little bit more color? Is it Europe? Is it Asia? Is it Australia and New Zealand? Is it Interflex? Because under the surface, something is going really, really well there. Just give us a little bit of color there over the long term. Thank you.

Andrew Obin:

I'll take that answer. Thanks a lot. And just to follow up on North American Residential. When do you think just the volumes to bottom out? Is it a ‘24 event or is this sort of something beyond the scope of ‘24 volumes in North American resi?

Andrew Obin:

And if I could just squeeze one more in, sorry. Pricing has been very solid, particularly on a two year stack. Would you say that pricing has been stickier than you would have expected earlier in the year. If we would go back 12 months ago, would you say the pricing is stickier than you would have expected or about where you thought it would come out. Thank you.

Andrew Obin:

Okay. Thanks so much.

Operator:

The next question comes from Chris Snyder with UBS. Please go ahead.

John Stone:

Yeah. It's a fair set of questions there. And I think the channel destock that was, in our opinion, a rather unique and temporary phenomenon that just happened because of all the supply chain disruptions and the lead times got extended and backlogs got extended and ordering patterns were disrupted. I think you saw that manifest itself in late 2022 through about mid '23. We feel like most of that is in the rearview for the industry. In fact, published lead times from Allegion, from our couple of key large competitors are largely back in line with what you would expect. Book and ship business, like Mike was saying earlier. And so I think the vertical mix has been rather volatile. The institutional segment is stable, but the commercial vertical mix has been a bit volatile, right, with office being soft. Multifamily was very strong. Multifamily has been softer a little bit. Data centers have been extremely robust. Warehouses have now been very weak. So you have to kind of disaggregate to see the drivers and then reaggregate to see the total outlook that we're contemplating here for 2024, where we would still say low to mid-single digit growth for the non-res part of our business.

Mike Wagnes:

Yeah, Chris. Clearly, there was some catch up this year. As I mentioned earlier, the inflation was before the pricing a few questions ago. When we think about this business though, I think it's important to understand, we had some challenges operationally over the last few years as well that started to get better in '23. And for '24, we should be more efficient and more productive as well. So it’s not just the pricing element, you will see in ‘24, an acceleration of productivity, which should give us some tailwinds for margins. But if you think long term, clearly, long term, you have to have some volume growth to drive margin expansion. But for the 24 ‘year, you will see us operate more efficiently and accelerate productivity to help drive that margin expansion.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to John Stone, President and CEO for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Jobi Coyle:

Thank you, Drew. Good morning, everyone. Thank you for joining us for Allegion's Third Quarter 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 number 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.

Mike Wagnes:

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide number 6. As John shared, Allegion continued to execute at a high level. We delivered another quarter of solid performance with strong electronics growth, sustained margin expansion and healthy cash flows. Revenue for the third quarter was $917.9 million, an increase of 0.5% compared to 2022. We continue to see favorable price realization along with strength in electronics and access technologies. However, ongoing pressure on our residential business, paired with a challenging prior year comparable, resulted in organic revenue decline of 0.6%. Adjusted operating margin and adjusted EBITDA margin in the third quarter both increased by 110 basis points. Price and productivity in excess of inflation and investment along with strong operational execution more than offset the volume decline impact. On a year-to-date basis, we have achieved the highest adjusted operating margin in our history. I'm pleased with the margin performance over the last 18 months as we have now recaptured the margin loss during our supply chain disruptions. Our operating model and strong execution have positioned us well for future margin expansion. Adjusted earnings per share of $1.94 increased $0.21 or approximately 12% versus the prior year. Operational performance drove nearly $0.10 per share with the remaining coming from tax driven by timing of discrete items versus the prior year. We expect our full year adjusted effective tax rate to be approximately 15%. You can find further details of our earnings per share performance in the appendix. Year-to-date available cash flow was $320.4 million, an increase of approximately $95 million versus last year, driven by higher earnings. I will provide more details on our cash flow and balance sheet a little later in the presentation. Please go to Slide number 7. This slide provides an overview of our quarterly and year-to-date revenue. I will review our enterprise results here before turning to our respective regions. As I just mentioned, we have reported growth of 0.5% with a decline in organic revenue of 0.6% in the quarter, as price realization offset pressure on mechanical volumes. As you see on the top of the slide, Q3 is comping against our prior year quarter with organic growth of more than 18%. If you recall that is when our supply chain improvement efforts allowed us to start working through backlogs and past due customer orders and represented the highest organic growth in our company's history. Currency drove some favorability in the quarter, bringing total reported growth to 5/10. On a year-to-date basis, organic revenue was 6.1% overall with Americas at nearly 9%, driven by strength in our nonresidential business. Our international business is down about 3% year-to-date. Please go to Slide number 8. Our Americas segment continues to deliver strong operating results in the third quarter, expanding margins despite lower volumes. Revenues of $740.9 million was down slightly on a reported basis and flat organically, as favorable pricing was offset by reduced volumes. Let me disaggregate the components further. The Americas non-residential business was up low single digits against the prior year comp, which grew approximately 30% driven by backlog reductions I just mentioned. On a year-to-date basis, non-residential business has grown double digits. Our Americas residential business is down low teens in the quarter as we continue to see weakness in the residential market as higher interest rates continue to impact new and existing home sales. Our Access Technologies business delivered organic growth of mid-teens, representing another strong quarter of top-line growth and demonstrating the stability that this business provides us. Demand for our electronic solutions remained strong in the Americas. We delivered high teens organic growth in electronics in the quarter, and we continue to see a long runway for further adoption as electronics remains a key growth driver for the long-term. As we discussed during our second quarter call, mechanical volumes were expected to be a little soft in the third quarter as customers adjusted to our reduced lead times. We feel the channel has worked through this adjustment, and we are back to a more normal book and ship business. Our Americas adjusted operating income of $210.6 million increased 5% versus the prior year period, while adjusted operating margin and adjusted EBITDA margin for the quarter were up 140 and 150 basis points, respectively. Pricing and productivity exceeded inflation and investments driving substantial margin expansion, demonstrating the resiliency of our Americas business model. Please go to Slide number 9. Our International segment executed well in a challenging macroeconomic environment. Revenues of $177 million was up 3% on a reported basis and down 2.8% organically. Price realization was more than offset by lower volumes, primarily associated with our global portable securities business and our China business, which are operating in challenging markets. We continue to see strength in our electronics and software solutions, which grew low double digits organically in the quarter. In addition, currency was a tailwind this quarter, positively impacting reported revenues by 5.2%. International adjusted operating income of $23.7 million increased over 18% versus the prior year period. We also saw improvements in adjusted operating margin and adjusted EBITDA margins of 180 and 190 basis points, respectively. This substantial margin expansion, despite reduced volumes, highlights the healthier portfolio within our International segment. Please go to Slide number 10. As I mentioned earlier, year-to-date available cash flow came in at $320.4 million, up nearly $95 million versus the prior year. This increase is driven by higher earnings, partially offset by higher capital expenditures related to our new facility in Mexico, which begins production later this quarter. Working capital as a percent of revenue increased versus the prior year. This was primarily driven by timing of revenue and associated receivables within the quarter as well as timing of payments to suppliers in the prior year. Working capital and inventory management remain a priority for our company as we efficiently turn earnings to cash. Our net debt to adjusted EBITDA is down to 2x as we continue to successfully delever following the Access Technologies acquisition. We repaid the final $39 million on our revolving credit facility in the quarter, completing our repayments of short-term borrowings associated with that acquisition. We are now back to pre-acquisition leverage levels, which demonstrates our proven track record of effectively deploying capital while maintaining an investment-grade credit rating. Our business continues to generate strong cash flow and our balance sheet continues to be in a healthy position. I'll now hand the call back over to John for an update on our full year 2023 outlook.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joe O'Dea with Wells Fargo. Please go ahead.

John Stone:

Yes, Joe. I appreciate the question. I'd say again, the short answer, yes, we see organic growth in the future. I'd just keep bringing you back to Allegion as a late cycle business. We're heavily weighted towards institutional. If you look at Dodd starts, if you look at ABI, the institutional segment has been very resilient in the last 12 months or even longer. And so yes, we feel pretty good about that, both on driving organic growth as well as, just like you mentioned on the margin expansion side. So margin expansion might not be as robust as you've seen these last quarters, but we still feel well-positioned to continue to drive margin expansion productivity and as you heard and as you called out, the cost actions that we've taken here recently, still well positioned.

John Stone:

Yes. That's tough to peg, Joe, like whereas is the bottom. For international, our portfolio spans Europe and Asia Pacific. And certainly, I think we see continued weakness in China, even though that's a small part of our portfolio. I'd say continued weakness would not be ready to call a bottom. On the portable security business, it's still a challenged market. There's no doubt about it. Time to call a bottom. We're definitely flirting with the bottom, I would say, which could provide a small bit of tailwind into next year and beyond. But you called out the most important piece, and that's the continued growth around our electronics and software solutions portfolio in Europe. They've been performing extremely well. We're continuing to invest in that business, like the bolt-on acquisition of plano. That team came on board and is performing very well, integrated very well with our Interflex team. And we see a really bright future there. And in the electronic space, yes, continued growth, and we will continue to drive investments to drive that growth.

Operator:

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Mike Wagnes:

Yes, Julian, if you think about the current year, so much of the current year growth rates are driven by comps in the prior year. So if you think about Q3, we last year really started to ramp our plants up as we got rid of that excess backlog in mechanical. That continued into Q4 last year. So this year, obviously, back half does have lower growth rates than first half. With respect to the two businesses, I think it's fair to say that non-residential certainly is healthier or stronger than the residential end markets. So as I think about a full year, think of non-res, double digits, right? And you can do the math to back into the Q4 implied. That residential, we are going to be down slightly this year as we put in the prepared remarks, which is we’ve been saying relatively that this year, whether it's down slightly or relatively flat all year. So you do have a dynamic where resi is a little weaker, as we've been saying, and the non-res led by institutional is hanging in there. But prior year comps do impact the year-over-year quarterly growth rates.

John Stone:

Okay. That's about 5 questions in there, Julian. Well done. I'd say on the channel destock, we feel pretty good there. I think our commentary in Q2 kind of indicated we didn't view this as a real long-term issue. And channel checks kind of prove that out. I don't think it's still a big headwind at this point. We've met with our 25 largest distributors in the past few weeks, and then that would confirm that. So again, there's still certain metro areas that are a little bit soft. There are still suburban areas that are quite strong, quite robust aftermarket, et cetera. So overall, feel pretty good along with the comments that Mike just shared. Let's see what else to mention there. I think with respect to the spec activity, spec activities still remain solid, and it's still hanging in there. And so we would expect that institutional heavy business to be driven that's the spec engine that we have to still remain solid as we move forward. So spec activity still remains strong for us.

Joe Ritchie:

So can we maybe just following up on the mechanical business bottoming comment. So your portfolio has gone through some change, obviously, with the Access business, the electronics business growing at a faster pace. If I think about the kind of overall level of where the mechanical business is today, what's the kind of right run rate that should be bottoming, whether that's on a quarterly basis or an annual basis? Just any color around that would be helpful.

Joe Ritchie:

Okay. Great. Appreciate that, Mike. And then maybe my follow-on, John. You talked about the balance sheet getting back into investment grade, good shape. You delevered now to 2 turns. I'm curious, there are some fairly sizable assets that are out there potentially on the security side. As you're thinking about deploying capital, how are you thinking about M&A and particularly like bolt-ons versus maybe some more transformative type deals?

Operator:

The next question comes from Brett Linzey with Mizuho. Please go ahead.

Mike Wagnes:

Yes. Brett, when you think of our business, the more complex the business, a building rather, the richer the mix for us. So if you think about a higher edge school, a hospital, those are really good for us. The K-12 school, there's doors frequently and openings frequently per square foot. If you think about open floor plans like commercial office, there's clearly less openings on a commercial office floor plan than there is in an institution or a warehouse, or a warehouse, absolutely. So warehouse has been awful over the last 12 months from a starts, but we really don't have any openings in the warehouse. So when you look at our business, that institutional heavy aspect of our portfolio gives us a richer mix and gives us more openings to address. So that's a net positive for us. John?

John Stone:

Yes. So I think resi mechanical, when we see our own results and we see some other industry participant results, it's a tough end market, let's just say. So I don't know that I necessarily attribute it just to destocking, but it's a soft end market with mortgage rates going up. House churn, if you will, or resale is certainly a bit depressed. Permits and starts, maybe if you look through a rose-colored lens, you see some green shoots of hope for the future. But I think that overall market is still depressed. When we think about our comps, I would just come back to there was a period of time in 2022 where we just couldn't ship our electronic locks even in the resi segment. And so the restocking phase was still going on until rather recently. And now you could say it's a more normal point-of-sale-driven business on the e-lock side. The mechanical side, I think it's just end market is depressed.

Chris Snyder:

I wanted to ask on the Americas business into Q4. So if we look at and if my match right, if you kind of look at the Q4 or the full year organic guide, it kind of pegs Q4 revenues in the Americas anywhere from flat sequentially to maybe down 4% sequentially versus Q3. And when we look at all the pre-COVID years, it seemed like Americas was typically down anywhere from 4% to 7% into Q4. So it's calling for better-than-normal seasonality. Can you just maybe talk about what's driving that or is there Access Technologies?

John Stone:

And I think, Chris, this is John. I heard you squeeze in, a mention of Access Technologies in there. And you're right. I mean this is now considered in the organic part of the portfolio. And that business is performing very well. Again, you got strong backlogs, blue-chip customer base and a very healthy service business there. So yes, they've been performing well. Very happy with that acquisition.

John Stone:

Yes. I think the way I would see that is similar to what Mike said. Given the rather dramatic volatility and upheaval that the entire industry experienced with the ramp in inflation and the pretty acute supply chain challenges in the latter half or actually, all of 2022. No parts in the first half to work over time, 6 days a week, et cetera, and over ship in second half. That is, at least in our view, normalizing. And I think you could see, as we progress on to another 2, 3, 4 quarters that cycle, Allegion's seasonality, et cetera, starts to look more normal. Our lead times across the portfolio are back to a more normal level. And so with the 9-month or so construction backlog, a lot of work still out there, book and ship business, like Mike said and a spec engine that's running all the time. Yes, I'd say we feel just normalizing is maybe the word that I would use, Chris. And that's what it starts to feel like. And again, our channel checks recently would indicate the same.

Tim Wojs:

I have a couple of just kind of modeling questions. But I guess when you're thinking about raw material inputs, steel, copper, zinc, that set of things. I mean, what are you seeing in terms of your purchases today? And how do you think about inflation versus deflation on kind of a go-forward basis on the raw side?

Tim Wojs:

Okay. Okay. No, that's helpful. And then just on pricing, if I kind of take a 3 years kind of stacked price in Americas, I think there was some acceleration kind of sequentially. And I don't think you put through like a new increase, but is there some mix dynamic kind of going in there, or did you guys put through more price?

Operator:

The next question comes from David MacGregor with Longbow. Please go ahead.

John Stone:

Yes, I think in aggregate, mid-teens organic growth in the electronics and software solutions globally, quite proud of those numbers between new product launches and just good execution by the team. And I'd say the end user demand is still strong. Again, recent end user visits continue to reinforce this. I've been to a couple of large universities lately. And even though they've been on the electronics adoption for a couple of years, they're still just scratching the surface. One university was, hey, I've got -- I haven't even started on the dorms yet. I've just been doing classrooms and event buildings and things like this. And as budget comes next year and putting it straight to e-locks for the dorms, I mean, that's sample size of one, but it's indicative of what we're hearing in the end user base, particularly education and health care. I would say our electronics and software business in Europe is doing very well. Blue-chip customer base, great value prop on the electronic cylinder with the SimonsVoss team. And the plano acquisition adding a bit of inorganic growth into that space as well, and that's a space we'll continue to invest in. Very proudly, it's a tiny amount, but our solution for multifamily in the United States, the Zentra platform, that's a very simple electronic access control platform designed specifically for multifamily applications is now a revenue-generating product for Allegion. So cloud-based SaaS revenue is a reality. It's very small. We're just getting started, but we do expect to accelerate that growth. I think the end-user economic benefits of electronics adoption is important and it's real. And I think the smartphone wallet and this mobile credentials and that convenience and personalized security you get out of that will continue to drive end user demand. That's the main trend, David. I'd encourage you not to get wrapped around the axle about channel build or restock, destock, anything like that. It's really, this is end user demand driven.

Mike Wagnes:

David, as you think about imports, they play at the very low end of the marketplace in, let's say, North America, if you think of our non-res business, we tend to be really strong in the premium space with our institutional heavy business. We've been talking about this for years. We tend to be strongest when the customer values that premium offering of complexity and solutions that we provide. So a strong dollar or a weaker dollar is not something that we view as really going to be changing the dynamics of our competitive industry.

Operator:

The next question comes from Andrew Obin with Bank of America. Please go ahead.

John Stone:

Yes, Andrew. I really appreciate that question because I am just super proud of how the international team has been on this steady march of building momentum, increasing productivity, expanding margins without a volume tailwind giving them operating leverage to lean on. They've been doing extremely well. I would say the Interflex in particular, we're not going to call out a specific margin or a P&L for them, but that's a very strong business, let's just say. And we talk about them together with the other electronics portfolio in Europe, double-digit growth for us and has been for a while. Strong margin performance as well. And I think we put our money where our mouth is with the plano acquisition. And while that was rather small, the growth potential is quite large, the margin is very attractive, and the customer value delivered there between plano and Interflex together is very compelling. And Interflex is another one of those very special businesses. Like in this call, we mentioned Access Technologies has a blue-chip customer base. Interflex really has a blue-chip customer base. And we take pride in delighting those customers with good solutions and good service, and that business continues to grow very positive for us.

John Stone:

Yes, Andrew, it's a hugely important point. When the supply chain challenges hit and orders started piling up and backlog started piling up, we were in the business of just shipping everything we could to make up for orders that had been in the queue for a long while. And then, obviously, aftermarket work is going to take a backseat to whatever, 3, 4 months' worth of backlog that's just sitting there in orders that you've already got to fill for project business and other things. So I would say I'd feel like when the supply chain challenges were at their worst, we definitely lost some aftermarket share to competitors that Allegion typically doesn't and shouldn't lose share to. We're now in a position with our lead times, our published lead times back to normal. Our delivery performance improving. Our supply chain performance is vastly better. We're in a position to now compete and gain that share back, and I think that's a real opportunity for us that has been a long time coming. But getting the lead times back to where they ought to be, getting the delivery performance up and getting our internal productivity better now puts us in a better position to get out and win more of that business.

John Stone:

Well, thanks, everyone, for a great Q&A. And just to wrap up the main themes that I hope you heard today. Allegion continues to operate at a high level. Strong execution drove these Q3 results that include mid-teens organic growth in electronics and software solutions, continued margin expansion and a healthy balance sheet and cash flow, giving us good momentum going into next year. We're on track for a record year of revenue, adjusted operating income and adjusted EPS results in 2023. We will continue to drive organic growth and margin expansion, as we mentioned. In both the short term and the long term, I feel we're very well positioned to both build on our legacy and continue to invent and deliver new value and seamless access. Thank you. Be safe, be healthy. Have a great day.

Jobi Coyle:

Thank you, [Joe]. Good morning, everyone. Thank you for joining us for Allegion's second quarter 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.

Mike Wagnes:

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide Number 6. Allegion delivered another strong quarter, with both top- and bottom-line growth as well as improving cash flows. Revenue for the second quarter was $912.5 million, an increase of 18% compared to 2022. Organic growth of 5.6% was driven by price realization along with strong growth in electronics, offsetting lower volumes in mechanical products. Our Access Technologies acquisition contributed approximately 12% to total growth. Adjusted operating margin and adjusted EBITDA margin in the second quarter increased by 130 basis points and 110 basis points, respectively. These increases were attributable to strong operational execution and favorable price and productivity, which more than offset inflation and investments. Excluding our acquisition of Access Technologies, adjusted operating margin was up 270 basis points. Adjusted earnings per share of $1.76, increased $0.33, or approximately 23%, versus the prior year. Operational performance drove 20% earnings per share growth with additional earnings per share growth coming from acquisitions, offset by the unfavorable impact of anticipated higher interest. Details of our earnings per share performance versus the prior year are in the appendix. Year-to-date available cash flow was $190.1 million, up nearly 125% versus last year. Please go to Slide Number 7. I will start by reviewing the revenue results for the enterprise here before turning to our respective regions. In Q2, we delivered 5.6% organic growth, driven by price realization across the portfolio. Strong volume growth in electronics was more than offset by volume declines in our mechanical products. Our Access Technologies acquisition served as the primary driver of our 12.5% growth in net acquisitions and divestitures. Currency pressure were minimal in the quarter, bringing total reported growth to 18%. First half organic revenue growth was 10.2% overall, driven by strength in electronics. Americas operating growth was nearly 15% and international was down 3%. Please go to Slide Number 8. Our Americas segment continued to deliver strong operating results in the second quarter, with revenues of $727.2 million, up 23.8% on a reported basis and up 7.7% organically. During the second quarter, we achieved double-digit price realization. Our electronics growth for the Americas was nearly 40% as we continue to see both improvements in our supply chain and strong demand. Electronic component availability was significantly challenged in the first half of 2022, making the quarter an easier comparison versus the prior year as our supply chains are much healthier now. In the second quarter, we saw soft mechanical volumes as customers adjust to our reduce lead times to our improve supply chain and operational execution. Organic growth was up high-single-digits for both our nonresidential and residential Americas businesses. As John mentioned earlier, Access Technologies has now been part of Allegion for just over a year, and we are pleased with the ongoing integration and results. This business had pro forma revenue growth of approximately 9.5% versus Q2 2022, and contributed over 16% to the Americas reported growth. Our adjusted operating income of $205.9 million increased 32.9% versus the prior year period, while adjusted operating margin and adjusted EBITDA margin for the quarter were up 190 basis points and 180 basis points, respectively. Excluding Access Technologies, our Americas segment drove a 460 basis-point improvement in operating margin versus the prior year. Our team is executing well and we were able to drive price and productivity in excess of inflation and investments to deliver the strong margin expansion. Please go to Slide Number 9. Our international business had a solid second quarter, with revenues of $185.3 million, flat on a reported basis and down 1% organically. In the quarter, price realization was more than offset by lower volumes, primarily associated with our Global Portable Securities business. As we've discussed previously, this business benefited from a COVID-related demand surge in the first half of last year. We expect this market will normalize and be less of a headwind to our international segment in the second half of this year. Our electronics and software solutions are performing well and continued to be a growth driver for our international segment. In addition, currency was a slight tailwind this quarter and positively impacted reported revenue by 0.6%. International adjusted operating income of $20.9 million increased 2% versus the prior-year period. We saw a significant improvement in adjusted operating margin and adjusted EBITDA margins of 30 basis points and 40 basis points, respectively, when compared to last year. The margin improvement was primarily driven by favorable price and productivity in excess of inflation and investment, reflecting strong execution by the team. Please go to Slide Number 10. Year-to-date available cash flow came in at $190.1 million, up $105.6 million versus the prior year. This increase is driven by higher earnings and lower cash used for net working capital, primarily offset by higher capital expenditures. Working capital as a percent of revenue increased versus the prior year, partially driven by our Access Technologies business, which was not owned in the first half of last year. Working capital management remains a priority of our company as we efficiently turn earnings to cash. As committed, we deleveraged following the acquisition of Access Technologies, and our net debt-to-adjusted EBITDA is back down to 2.1 times. We repaid $60 million on our revolving credit facility in the second quarter and the remaining $30 million outstanding was repaid in the month of July. This means, we have completed our repayments of short-term borrowings for the acquisition, demonstrating our ability to effectively deploy capital and maintain an 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 it back over to John for an update on our full-year 2023 outlook.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Julian Mitchell with Barclays. Please go ahead.

Mike Wagnes:

Yes, Julian. If you think about the guide, the last few years, we really struggled with lead times and we got considerably better the end of last year. Our channel partners were maybe a little late to adjust to our reduced lead times. So, what we saw in the second quarter is they're starting to adjust that ordering pattern to our reduced lead times. Especially on the mechanical side, they're back down to normal and were, let's say, at March 31. It took a little longer for them to adjust their ordering. So, they're burning through some of the work that they previously ordered. As you know, we're mostly a made-to-order business, but channel partners will order based on what they think manufacturers can provide product at. And so, we did have some of that choppiness in the second quarter that you saw. When you think about the business in general, I talked about this at Investor Day, expect for us to be total company roughly 50-50 first half to back half. And as you look at our guide right now, you would say it's roughly 50-50 as a company. So, I do think in the second quarter, we did see that channel partners are adjusting to our improvement operationally, which is great because we put a lot of effort to get back to operating at a high level. And then second part of your question related to markets, I'll kind of let John answer that.

Julian Mitchell:

That's helpful. Thank you. And then just my follow-up, just to make sure we sort of calibrated properly within the second half. Clearly, seasonality is abnormal this year. Your revenues were down sequentially in Q2, which is unusual. And you talked in the prepared remarks about flatter seasonality this year. So, should we assume that you have a much narrower sort of variability between the third and fourth quarter earnings as we look at that, and maybe sort of sales and margins also not that different across the two?

Julian Mitchell:

That's great. Thank you.

Operator:

The next question comes from Joe O'Dea with Wells Fargo. Please, go ahead.

John Stone:

Yes. Joe, I think you would find -- and we find on our channel checks and customer visits, a very wide range of answers there. I think our two-step distribution partners, our wholesalers would have a different answer than some of the more traditional contract hardware distributors. And our integrated hardware distributors might have a different answer. I think, in aggregate, we still hear comments like aftermarket activity is very strong, particularly in the non-res space, again, and then the leading macros would say the institutional segment is still pretty resilient. So, we still see, I'd say, good levels of sell-through. And the inventory state of the business is going to be different within the channel. Overall, I think the best way to think about it is you just listen to what Mike said and think first half, second half, 50-50 as kind of the way we see 2023 working out.

Mike Wagnes:

Yes. So, Joe, a great question. As you know, obviously, the back half of the year won't have as much margin expansion year-over-year as first half just because the back half of last year was pretty strong. And so, as a result, we still expect to see margin expansion in the back half in total. But it won't be as strong as what you saw in the last two quarters just due to the prior year comp. If you think of last year, we started to really pick up operationally back half. Long-term on Investor Day, I talked about that 50 basis-point to 100 basis-point improvement, that's part of our operating model, and we still believe on a long-term basis, we can deliver margin expansion in those levels. Quarter-to-quarter, it could change by a prior-year comp. But think of the operating model where we're going to drive price and productivity to offset and fund that inflation and investment, drive some expansion with that and the volume leverage. So, in total, the operating model I talked about in length at Investor Day still holds, and we feel good about the progress we've made in our operational execution over the last four quarters.

John Stone:

Thanks. Joe.

Joe Ritchie:

Thanks. Good morning, everybody. And John, congrats on the one-year anniversary.

Joe Ritchie:

Yes. So, maybe let's just start on pricing. Obviously, very strong this quarter. Americas was, what, 10%, and you had international pricing that actually accelerated in 2Q. Maybe just tell us a little bit about what's -- what to expect as we progress through the year and whether you're putting additional pricing actions in either region.

Joe Ritchie:

Got it. That's helpful, Mike. And my follow-on since you referenced that equation. That price and productivity net of inflation and investments is the strongest, I think, we've seen in really many years. And so, can you maybe just break down a little bit what you're seeing on the productivity versus the investment side? And again, how that's expected the cadence for that going forward through the remainder of the year?

John Stone:

Absolutely.

Mike Wagnes:

Yes. I don't want to forecast or guide that dynamic. Just make sure you get the margin rate right as you look at our EPS guide and revenue. I kind of gave you the pricing as well so you can back into the -- all the dynamics you need for your model. But expect to see margin expansion in the back half. And then as you look at quarters, just be cognizant of our Q3, Q4 comparables of last year as well.

Operator:

The next question comes from Josh Pokrzywinski with Morgan Stanley. Please, go ahead.

John Stone:

Hi, Josh.

John Stone:

Yes. Josh, we'll segment is down a little bit. So, I think when you look at mechanical products broadly, as we indicated in the comments, residential mechanical for us is indeed soft, offset by very strong electronics performance. In the non-res side, I think that dynamic -- again, you can imagine if, for the last eight, nine, 10 months, you're placing your orders and you're not getting delivery for 15, 20 weeks, and then suddenly you're getting delivery and two to four weeks. It takes a little bit to work through that. I think channel checks have anecdotally indicated things to us, like when you look across the Americas, places like the Midwest, South, Southeast, really, really strong. And if you go to some major metro areas that are probably a bit heavy commercial losses, they're pretty light. So, it's pockets of strength and pockets of weakness. On balance, we still see good sell-through. We still see that the non-res market is stable, primarily supported by the institutional segment.

John Stone:

Yes. I'd say short of talking about any specific targets or anything, I would feel very good about the top of our funnel in terms of looking for acquisition targets. I think, again, think of us as a pure-play provider of security and access solutions. We've talked a lot about the importance of electronics, the importance of controlling software, really driven by the increasing use of smartphone wallets and mobile credentials. That as a macro tailwind really propelling and giving new uses for smart hardware, electronic access control solutions. We feel, again, as an industry, that's still -- all the signals we can find, that's still high-single-digit growth that we can tend to outperform by a point or two and get Allegion's performance in the low-double-digit range. And certainly acquisitions plays a part in that. And I think as we've said now, you can look for us to be acquisitive, you can look and expect us to also be a disciplined buyer. But we do see acquisitions playing a key role in our overall growth strategy.

John Stone:

Thank you.

Andrew Obin:

Hi, guys. Good morning.

Mike Wagnes:

Good morning, Andrew.

John Stone:

Yes. I'll take a little bit different angle and hope it still answers your question, Andrew. But it's a good...

John Stone:

Thank you. So, I'd say, the portable security business, without a doubt, volume drag. No doubt about it. As Mike mentioned in the prepared comments, the post-COVID demand spike that you saw in that space was quite dramatic. We do expect that market is going to normalize as you get into 2024 and '25. But I'd say -- and we're not alone and seeing this or commenting on it, but residential in general in Europe is rather weak. And that's by and large a mechanical business. So, those volumes are under pressure. There is no doubt. Our electronics and software solutions would still be probably the low-double to mid-teens organic growth. So, we feel really good there, which is, again, more than the commercial side of our business, the non-res side of our business. APAC for us, we do have some China exposure, it's not a lot, but there's no doubt, China is under a lot of pressure. And so, our relatively small but profitable business there is certainly lower relatively speaking. Australia-New Zealand, pretty steady, pretty stable, kind of falling in line with what you'd see in the Americas, just stable end markets, our teams are performing well there.

John Stone:

You're very kind in your comments, Andrew. I'd say looking at the institutional segment, you don't see quite the amplitude of volatility that you might see in other parts of the commercial business. It's a little bit steadier. It's a little bit more stable. That is the segment that we performed very well in. That's a segment where codes, compliance, safety standards for your building really matter. And that's where Allegion differentiates and I think really excels. Healthcare has been pretty resilient, education has been pretty resilient. And that's both higher ed and K through 12. School safety is always important. Allegion has for a long time been a very proud and vocal advocate for proper standards, proper codes, and compliance. We've increased our human resources, human capital in that space, and continue to be, I think, a very positive participant in the industry for school safety there. When we look at things to the second half, to your question, like muni bonds and state tax revenues, the picture is actually pretty stable, pretty favorable, I'd say. State tax revenues look to be relatively high, like what you saw back in the '08, '09 crash. The environment is a little different this year, maybe some COVID stimulus, maybe just good economic growth, very low unemployment, etc. The tax revenues at the state level seems to be pretty good from the data that we see. Bond issuance in '21 and '22 was very high. And obviously, it has taken a bit of a dip here, but it seems to be sequentially recovering somewhat. Then also remember, Andrew, Allegion is a late-cycle. So, from bond issuance to budget development to projects being firmed up, to shovel in the dirt, so to speak, to finally, door-to-door hardware going on, that can take some time. And so, I think, in general, looking at bond issuance over the long term, drawing a trend line there, you can kind of understand why that segment we see is particularly stable. And so, I'd say, again, flashing signals of resilience in the institutional segment would be the way we see it.

Operator:

Thank you. The next question comes from Ryan Merkel with William Blair. Please, go ahead.

Mike Wagnes:

Yes. So, I'll talk about the first one. If you think about our business, Ryan, I keep on talking about that roughly 50-50 first half to back half. We -- so if you think about it for the full-year guide, that will be completed by the end of the year. So, it really won't have an impact on full year. But you could see a flatter quarter-to-quarter variance, like we talked about earlier in the call. So, for a full year, it's really not applicable. But when you think about quarterly timing, it does result in a little more smoothing quarter-to-quarter over the last three than you would normally expect. And then remind me again, your second question?

John Stone:

Yes, the electronics, should we expect to see a similar ordering pattern and adjustment in lead times, etc. Lead times have been coming down. I'd say that is the portion of our business where lead times are still a little bit extended, certainly down from the peaks that we saw in the middle of last year, but maybe not yet back to normal, but have been on a pretty good glide path getting back to a more normal, say, four- to six-week kind of lead time for those products. And backlogs are still a little bit elevated there. Demand is still strong. If you see the -- our Investor Day material talking about the non-res mechanical segment being a low-single-digit growth industry, the electronics portion would be high-single-digit growth. So, I think that's the main thing, is we see that as the key growth driver. So, will that same dynamic pop up in the channel? It certainly could. Yet to be seen. And I think as we all get a little bit smarter here and having gone through these quite volatile and dynamic times of the supply chain, maybe with good work, we can we can mitigate it, but yet to be seen. I guess, I don't have a real good detailed forecast for you there. But we'll be watching out for it.

Ryan Merkel:

Got it. Thank you.

Operator:

The next question comes from David MacGregor with Longbow Research. Please, go ahead.

John Stone:

Hi, David.

Mike Wagnes:

Yes. What you'll see, David, a couple of dynamics in the second quarter. And I talked about it earlier in the prepared remarks. Admittedly, Q2 last year was a little weaker. So, you do have some growth here due to a weaker previous year. But still, this is now four quarters in a row, really strong growth in electronics. We saw strength in both electronics growth in resi as well as non-res. So, both were strong in the quarter. And as we look forward to the end of the year, the back half, we expect to see good growth in electronics. The one thing I'll remind you is the comps in the back half of last year get much tougher, particularly, in electronics, right? So, if you remember last year, we threw some pretty robust numbers up in the back half. So, just make sure you take that into consideration when you model your electronics. But overall, still expect to have some good growth this year and beyond this year in electronics in both res and non-res.

John Stone:

Yes. A really good question, David, and we're always thrilled to talk about Access Technology. There has been a great add to the Allegion portfolio. I'd say the service side of the business has historically been about 40% of the total. It has also historically grown around the low-double-digit rate, high-single, low-double-digit rate. And so, we feel really good about that. We see lots of future opportunities and potential there as our overall, our total Allegion's service capabilities continue to expand and grow. Then, I'd say in terms of international presence with Access Technologies, it's quite small. And so, it's not zero, but it's quite small. This is mainly an Americas business, and where we really focus the investments for new product development and just really staying close to those customer requirements.

John Stone:

Yes. So, I think, certainly, it's human capital-intensive business, right? These are very highly qualified, very highly trained, very professional service technicians that go out and do this work. I'd say it's a lot of things. We've got to put better productivity tools in their hands, better diagnostic tools in their hands. We're working on a variety of technology there. And then as we work together with certain channel partners as well, making sure we've got the right coverage and the right people to take care of those customers. So, the human element is important. Absolutely. Technology is also important there.

John Stone:

Okay. So, three follow-ons. All right. Yes. I'd say, obviously...

John Stone:

Yes. Don't take advantage of me. Come on. These -- again, these people are hard to find. I won't sugarcoat it. These are very highly skilled, very professional technicians. But we put a lot of investment into training and support as well. And so, we have to be very choosy, because these technicians are the ones keeping our customers up and running. So, it's not just hire as many as you can, it's hire the best. And that's what we focus on doing. Thanks very much for the questions.

Operator:

The next question comes from Brett Linzey with Mizuho America. Please, go ahead.

Mike Wagnes:

Brett, we think about gross margins for the organization moving higher over time as we drive the price productivity in excess of the inflation and investments and we leverage volume growth. So, I don't think it's just in electronics, I think as an organization, we're going to drive margin expansion. With respect to electronics, I would say there are roughly similar percentages, but with a higher selling price, electronics will give us a little more dollars per every unit of sale. That's a dynamic we've talked about in the past. So, it's great when we can upsell to an electronic device, and it's something we're focused to drive long term.

John Stone:

Yes. I appreciate the question because we were really proud of what the international team put up in 2Q. Flat revenues, roughly, and still driving margin expansion, to your point. Price productivity net of inflation and investments is a positive dynamic for that group. I'd say, like previous quarters, the Allegion international business is on a much more firm foundation as a business, and we're continuing to find improvement opportunities. So, Tim and the team are performing very, very well. We're proud of what they're accomplishing. And I think we're making good progress against the goals that we've got set out for international. I appreciate you calling that out.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to John Stone, President and CEO, for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Tom Martineau:

Thank you, Andrew. Good morning, everyone. Thank you for joining us for Allegion’s first quarter 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 Slides 2 and 3. 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 4. And I will turn the call over to John.

Mike Wagnes:

Thanks, John and good morning everyone. Thank you for joining today’s call. Please go to Slide #6. This slide reflects our earnings per share reconciliation for the first quarter. For the first quarter of 2022, reported earnings per share was $1.05. After $0.08 of adjustments for the items noted on this slide, 2022 adjusted EPS was $1.13. Operational results were strong in the quarter, adding $0.46 per share, which drove approximately 40% growth. This was driven by double-digit organic revenue growth, favorable operating execution and positive business mix, which more than offset currency headwinds. Acquisitions and divestitures delivered $0.13 to earnings – of earnings per share. This was primarily driven by Access Technologies, which continues to deliver strong results. Interest expense reduced earnings per share by $0.11 driven by increased debt to finance the acquisition of Access Technologies and higher variable interest rates versus Q1 2022. A higher year-over-year tax rate reduced earnings by $0.03. This resulted in first quarter 2023 adjusted earnings per share of $1.58, an increase of $0.45 or 39.8% compared to the prior year. Lastly, as detailed on the page, we have an $0.18 per share reduction from adjusted EPS to arrive at reported EPS. As we discussed in our last earnings call, this amount now includes an adjustment for all acquisition-related amortization. After giving effect to these items, you arrive at first quarter 2023 reported earnings per share of $1.40. Please go to Slide #7. This slide depicts our revenue growth for the first quarter. I will talk to the results in total on this slide and address the regions on their respective slides. We delivered 15% organic growth driven by price realization across the portfolio and strong volume growth in the Americas non-residential business. Net acquisition and divestitures contributed 14.1% growth driven by Access Technologies. Currency pressures continue to be a headwind, primarily impacting our International segment bringing the total reported growth to 27.6% in the quarter. Please go to Slide #8. First quarter revenue for the Americas segment was $740.9 million, up 42% on a reported basis and up 22.6% organically. During the first quarter, price realization remained strong, offsetting ongoing inflationary pressures. In non-residential, we continue to see strong end market demand and volume growth, which benefited from the catch-up of improved electronic component supply. When coupled with price, this drove organic growth to approximately 30%. Our residential business was up mid single-digits, with favorable price offsetting lower volumes. Residential electronics volume growth was strong, but we continue to see weakness in end markets for mechanical products. Electronics growth exceeded 30% for the quarter as we continue to see both improvements in our supply chain and strong demand. Backlogs for non-residential electronic solutions remain elevated as we exit Q1 as demand is still limited by supply availability. Additionally, we expect residential electronics demand to be more aligned to retail point-of-sale as we go forward. We are pleased with the ongoing Access Technologies integrations and results. This business had pro forma revenue growth of approximately 15% versus Q1 2022 and contributing nearly 20% to the Americas reported growth number. We continue to see the benefits of a stable high-growth service business that Access Technologies provides us and the business is performing as well as we anticipated when we purchased it. Americas adjusted operating income of $198.1 million increased 59.5% versus the prior year period, while adjusted operating margins and adjusted EBITDA margins for the quarter were up 290 and 260 basis points respectively. Excluding Access Technologies, the Americas segment drove 500 basis point improvement in operating margins versus the prior year. Pricing productivity in excess of inflation and investments, volume leverage, along with positive mix, contributed to the margin improvement. Please go to Slide #9. First quarter revenue for Allegion International segment was $182.1 million, down 9.7% on a reported basis and down 4.8% organically. In the quarter, solid price realization was more than offset by lower volumes, primarily associated with our Portable Securities business. This business benefited from a COVID-related demand surge that extended into the first half of 2022. This resulted in the first half of 2023 having a more difficult comp as the market works its way back to a more normal cycle. Notably, the demand for our electronics and software solutions remained strong in Allegion International. In addition, currency headwinds persisted this quarter and reduced reported revenues by 4.4%. International adjusted operating income of $19.7 million decreased 27% versus the prior year period. Compared to 2022, adjusted operating margins and adjusted EBITDA margins declined 260 and 220 basis points respectively. The margin decline was primarily driven by reduced volumes. Please go to Slide #10. Year-to-date available cash flow for the first quarter came in at $46.7 million, up $34.9 million versus the prior year. This increase is driven by higher earnings and lower cash used for net working capital partially offset by higher capital expenditures that were mostly related to our new manufacturing facility in Mexico, which is scheduled to come online in the second half of 2023. Working capital as a percent of revenue increased versus the prior year. This is driven partially by the Access Technologies business, which was not owned in Q1 ‘22. Working capital has also increased from Q1 2022 as a result of the investments in inventory we made in the second half of last year to increase our safety stock and protect our customers. We saw a year-over-year and sequential improvement in inventory turns as we remain committed to manage our working capital more efficiently and drive improvement. The business continues to generate strong cash flow and the balance sheet continues to be in a healthy position. I will now hand it back over to John for an update on our full year 2023 outlook.

Operator:

[Operator Instructions] The first question comes from Julian Mitchell with Barclays. Please go ahead.

Mike Wagnes:

Yes. So Julian, why don’t I tackle the kind of the components of the guide, and John can talk to the general business dynamics. If you look at our non-res business, we expect to see both revenue growth driven by price and volume. As you know, we’ve been committed to fight that inflationary pressure. So pricing should be good for the full year. You saw a good pricing in Q1. And then as you look at a full year basis for volume, we will have growth, but not to the level you saw in Q1, obviously. We are running up against that tough comparable in the back half of the year. If you recall, non-resi grew 30% and I think in the third quarter and then greater than 25% in the fourth quarter. So we do have a tougher comparable. And then, John, do you want to talk to the spec activity and other items?

Julian Mitchell:

Thanks very much. And you did have a very good tailwind in the Americas from that sort of line price and productivity versus inflation and investment spend. I think it was over 300 points in the first quarter as a margin tailwind. So maybe as we think about the balance of the year, how does that – how quickly does that tailwind shrink? Should it still be a tailwind overall in the fourth quarter or is it more kind of back to neutral there? Just trying to understand some of those moving pieces in what you’re guiding for margins this year?

Julian Mitchell:

That’s great. Thank you.

Operator:

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

John Stone:

Hey, Joe.

Mike Wagnes:

Hey, Joe, thanks for the question. If you think about our Americas business, starting late ‘21 and all of ‘22, we’ve put in a substantial amount of pricing actions. We are starting to comp up against those pricing actions in ‘23. So as you move through the year, the realization percentage will be highest in the first quarter and then less as you proceed through the year. You’re still going to sell the product at a higher value, but the incremental price realization percent will come down. We do expect our pricing to be very sticky. As you remember, our non-residential business, we do list price adjustments that tend to stick. So we feel good about our pricing, but the magnitude will decline the amount of price realization as we progress through the year.

John Stone:

Yes, Joe, this is John. It’s a good question. And it’s top of mind for everyone. I would say, again, if you think about Allegion’s business model, we are late cycle. We are a bit heavily weighted to the institutional segment, which tends to have sources of financing like bond referendums, public finance or these mega projects with large bank finance. So there is part of the business that maybe is not all that susceptible to the regional banks. And certainly, a lot of the business is susceptible to regional bank lending and credit conditions. So could that become an issue? Of course. Are we seeing a big impact right now? No, we’re not. Again, think about engaging with the architect, writing specifications of the classic pull strategy to pull the product through the channel. The timing from spec to project initiation to when doors and door hardware goes in the building can be 12, 18, 24 months. And so projects that have been started tend to get completed, and I think we’re seeing that right now.

Operator:

The next question comes from Jeff Sprague with Vertical Research Partners. Please go ahead.

John Stone:

Good morning, Jeff.

John Stone:

Yes, that’s a good question. And I think it’s always tricky to see. When we sell through distribution, you’re not quite sure the source of the project, the source of the financing. We’re – like – anyway, I’d say you see stimulus in airport terminal renewals, that was a big part of the Infrastructure and Jobs Act. You know there is funding going to higher ed through the emergency relief fund back from the COVID days to help with contactless, touchless, which goes very well into seamless access and electronic locks and credentials, etcetera. So I think, certainly, that’s flowing. I think there is still stimulus dollars left. Those tend to take a long time to work their way through the system. I would say, again, the leading indicators for our non-res industry still read positive. Our spec writing activity is quite robust. Our quoting, bidding activity in the channel is still robust. And given the fact that mechanical supply chain has improved, we are back to the book and ship, we are back to made to order there. Sell-through on the channel has been pretty strong. And so I think at least now, we would just still continue to reiterate, we feel good about non-res through 2023.

John Stone:

Yes. I appreciate the prelude to that question, Jeff. It’s good. No, I would say let’s hold the fireworks around the strategy and the technology and all that for now. What I am really excited about is getting all of you over here. You can come in and see what we are doing, see what we are all about and get some more time with this new leadership team. That’s important to us. We just appreciate the chance to spend some time with you and share with you what we are working on.

Operator:

The next question comes from Joe O’Dea with Wells Fargo. Please go ahead.

John Stone:

Good morning Joe.

Mike Wagnes:

Yes. Joe, if you look at the first quarter, we had an extremely strong non-residential revenue quarter. As you know, that is our strongest margin business. So, we had positive mix there and a very elevated revenue number versus what we were in the previous Q1. So, we had both combinations working in our favor. As we move through the year, the one item I do want to highlight, we are ramping up that new manufacturing facility in Mexico. Q1 doesn’t have any real cost there. But as we move through the year, there is investment in start-up costs that are going to be a headwind to margin rate that’s in the assumed guide. And obviously, we are going to be conservative when you think about start-up costs of the new plant so that we are adequately prudent in that guidance. But in general, I would say the factors that drive margin expansion, the productivity that is accelerating from what it was last year, the pricing actions which we feel good about, I think the activity we are driving is sustainable and should be a long-term margin expansion driver for the business.

Mike Wagnes:

Yes. I would say if you think about the margin percentage in Q1, historically, less. However, if you look at that dollar amount of revenue for commercial, you would not have the same size of margin uplift delta versus Q1 than maybe historically you have seen. And then the investments – think of the investment for the plant, you could see 10 basis points, 20 basis points full year impact from that level of investment.

Mike Wagnes:

And Joe, just to clarify that number for the plant, that would be closer to 20 basis points.

John Stone:

Yes. I think that’s why we took the organic growth guide up, the total growth guide up, EPS guide up that we do feel like we got off to a really good start. We do feel that non-res demand is robust. And I think again, quarter-to-quarter looks different just because of the comps last year. But full year, we feel good about the guidance.

Operator:

The next question comes from David MacGregor with Longbow Research. Please go ahead.

John Stone:

Thanks David.

Mike Wagnes:

Yes. David, if you think about the non-res business, new construction tends to be quoted work where it is bid. Historically, it is an industry where everyone competes on value or the market leaders, I should say, compete on value, not price. And so as there is inflation, market participants drive pricing actions to cover inflationary pressures. And since there is a higher inflationary pressure, we are able to get more pricing. But the key takeaway on this industry is everyone competes on value. It’s not a race to the bottom on pricing in the non-residential business. It tends to be a very complex configured offering and that allows everyone to compete on the value of their portfolio.

Mike Wagnes:

I would just say for us, and our perspective, I don’t want to talk about anyone else. It’s the inflationary pressures that we felt the last 2 years and the pricing is catching up to some of those pressures. And so you really have to look at it over the last few years, and we have been able to mitigate some of those pricing – I am sorry, the inflationary pressures that we felt end of ‘21, ‘22 and into early ‘23.

John Stone:

Yes. We do field visits all the time. And I think – again, let’s divide this a bit between electronic products and mechanical products. So, on mechanical products, most of our lead times would be back to a normal level, which puts us in our distribution channel and kind of a made-to-order book and ship type model. And so destocking, restocking is not really a dynamic we see in the majority of the channel. In some of the two-steps, some of the large wholesalers, perhaps. But I think the evidence that we have seen and the anecdotal evidence, at least is demand is pretty robust, sell-through is pretty rapid. And again, as lead times normalize, ordering behavior adjusts and adapts back to that more normal lead time. There are – some of our electronic products, our commercial electronic products, like we said, still elevated lead times, elevated backlogs and that we are just working hard with the supply base and our redesigns and new suppliers are coming onboard just to catch up to demand and get that part of the business back into this book and ship normal lead time space. We are just – we are not quite there yet.

Operator:

The next question comes from Brian Ruttenbur with Imperial Capital. Please go ahead.

Mike Wagnes:

We would always announce a price increase to the channel before we would on an earnings call. I would just say, if you look at our pricing and you try to model it for the back half of the year, you got to just take a look at how much price started to accelerate Q2, Q3 and Q4 last year, which is driving some of the reduction in the overall realization. But it’s important to note, you are still selling the product at the same price. So, it’s not like you are selling it for less dollar value, it’s just the incremental realization percentage will decline versus a more challenging comparable.

Mike Wagnes:

Yes. I would really not – don’t really want to give specifics on a quarter per se, but a full year. The only thing I would say is, Q1 obviously a little higher than historically we would do in the first quarter. But I wouldn’t anticipate, don’t model something where the summer season is significantly less than Q1. We still have summers that tend to be pretty strong.

Operator:

This concludes our question-and-answer session. And at this time, I would like to turn the conference back over to John Stone, President and CEO for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Tom Martineau:

Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegion's fourth quarter and full-year 2022 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 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. 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. Before I turn the call over to John, I have a couple of announcements to share. Kevin Sayer, who has been Allegiant's Director of Investor Relations for the past six years has been promoted to the role of Finance Director of our Commercial Americas business. This is a fantastic role for Kevin, who will now serve as our senior finance leader for that business. And I want to express my thanks and appreciation for all of Kevin's support. I'm also pleased to announce the promotion of Joby Coyle to the Director of Investor Relations role. Most recently, Joby has been leading our Americas home finance organization. Effective today, Job is the primary contact for our Investor Relations office. I will continue to lead the Investor Relations function. I would also like to share that Allegion will be hosting a 2023 Investor and Analyst Day on May 2nd of this year. The event will be at our Carmel, Indiana facility, which is in the North Indianapolis Metro area. A webcast option will also be available. Look for more details as we get closer to the event. John and Mike will now discuss our fourth quarter and full-year 2022 results, as well as provide an outlook for 2023, which will be followed by a Q&A session. [Operator Instructions] Now I'd like to turn the call over to John.

Mike Wagnes:

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to slide number seven. This slide reflects our earnings per share reconciliation for the fourth quarter. For the fourth quarter of 2021, reported earnings per share was $1.26, adjusting down $0.15 per share for a non-cash gain on an investment remeasurement offset by charges related to restructuring, M&A and debt refinancing costs, the 2021 adjusted earnings per share was $1.11. Operational results were very strong in the current quarter, adding $0.48 per share, reflecting 43.2% growth. This was driven by double-digit organic growth, favorable operating leverage and positive business mix, which more than offset currency headwinds. Access Technologies delivered $0.08 to earnings per share as operational results of $0.12 per share were offset by $0.04 of intangible amortization expense. We are pleased with the performance of Access Technologies in the first six months as the business results were in line with our expectations. A lower year-over-year tax rate increased earnings by $0.04 and favorable share count added another $0.03. Interest expense reduced earnings per share by $0.10, primarily driven by increased debt to finance the acquisition of Access Technologies. We continue to invest in the long-term strategy of the business, resulting in a $0.04 earnings per share headwind. This resulted in the fourth quarter 2022 adjusted earnings per share of $1.60, an increase of $0.49 or 44.1%, compared to the prior year. Lastly, we have a $0.07 per share reduction from adjusted EPS to arrive at reported EPS. This reduction is primarily attributed to M&A and additional non-cash purchase accounting items related to the acquisition [Technical Difficulty] of Access Technologies. After giving effect to these items, you arrive at a fourth quarter 2022 reported earnings per share of $1.53. Of note, starting in 2023, we are making a change to our adjusted operating income, earnings and EPS to exclude amortization expense related to acquired intangible assets. This change is based on the non-cash nature of those expenses and supports our growth strategy. Please go to slide number eight. This slide depicts our components of our revenue growth for the fourth quarter, as well as the full-year. As indicated, we experienced 11.4% organic revenue growth in the fourth quarter, driven by price across all segments. Volume growth in the Americas mostly offset declines in the international region. Net acquisitions and divestitures delivered 13.4% growth driven by Access Technologies. Currency pressures continued to be a headwind, primarily impacting our Allegion International segment bringing the total reported growth to 21.5% in the quarter. For the full-year, you could see the total revenue was up 14.1% with organic revenue growth of 10.7%. Both segments grew organically for the year, led by Allegion Americas, which grew 14.4%. Please go to slide number nine. Fourth quarter revenues for the Americas segment was $683.9 million, up 36.9% on a reported basis and up 18% organically. Price realization remains strong in both our residential and non-residential businesses offsetting ongoing inflationary pressure. In non-residential, we continue to see strong volume growth that when coupled with price, drove organic growth in the mid-20%. Residential was up low-single-digits with favorable price being offset by lower volumes. Electronics revenue was up approximately 50% for the quarter as we compare against supply chain headwinds in the prior year. Full-year electronics growth was approximately 20% and as our engineering and supply chain actions are yielding good results. We are pleased with the ongoing access technologies integration and results. This business contributed nearly 20% to the Americas reported growth number. Americas adjusted operating income of $164.4 million increased 55.8% versus the prior year period, while adjusted operating margins and adjusted EBITDA margins for the quarter were up 290 basis points and 320 basis points, respectively. Excluding Access Technologies, the business drove a 530-basis point improvement in operating margins versus the prior year. Pricing productivity in excess of inflation along with volume leverage on America's non-residential business and positive mix contributed to the margin improvement. Please go to slide number 10. Fourth quarter revenue for our Allegion International segment was $177.6 million, down 15.3% on a reported basis and down 4.3% organically. In the quarter, strong price realization was more than offset by lower volumes attributed to softening end markets. Notably, the demand for our electronic and software solutions remain stable. Currency headwinds persisted this quarter and reduced reported revenues by 9.9%. International adjusted operating income of $23.3 million decreased 20.7% versus the prior year period. Compared to 2021, adjusted operating margins and adjusted EBITDA margins decreased 90-basis points each. The margin decline was driven by reduced volumes and FX pressure, which more than offset the favorable impact of the combination of price, productivity and inflation. Please go to slide number 11. Available cash flow for 2022 came in at $395.5 million, down $47.7 million versus the prior year. This reduction is driven by higher capital expenditures, as well as increases in working capital. Given the inconsistencies in the supply chain and component availability, we increased inventory to protect our customers in 2022. When combined with the added working capital of the Access Technologies acquisition, there is an increase in working capital as a percent of revenue. We expect this to improve in 2023 as supply chains disruptions moderate. Capital expenditures as a percent of revenue also increased as we made strategic investments to drive future growth and improve supply chain resiliency like our new production facility in Central Mexico mentioned earlier. The last chart on the slide shows our net leverage. The net debt-to-EBITDA ratio increased from 1.7 times in 2021 to 3.3 times following the Access Technologies acquisition. We have quickly delevered post acquisition and are down to 2.5 times as of the end of the year. The business continues to generate strong cash flow, providing the opportunity for capital deployment with a focus on organic investment and acquisitions. Previously, our Board declared a dividend increase of approximately 10% in the dividend payable in March. I will now hand it back over to John for our 2023 outlook.

Operator:

We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from Joe O'Dea from Wells Fargo. Please go ahead.

John Stone:

Good morning, Joe.

Joe O'Dea:

I wanted to -- hi, just wanted to start on sort of Americas non-res end markets trends you've seen sort of in the year-end, the beginning of this year. If you could talk about color across verticals, I think seeing sort of ABI sub-50 for four months, looks like Dodge momentum remains pretty strong. I think we're hearing about some mix toward bigger projects. So just kind of what you're seeing kind of institutional side, commercial side with visibility into 2023.

Joe O'Dea:

That's helpful. And then just wanted to touch on growth investments in 2023, just from a capability and end market perspective, where some of those growth investments are focused?

Operator:

Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Mike Wagnes:

Yes. Thanks for the question. As you think about our residential business historically, say, before 2022, we've struggled to get price in residential, and we made it a focus area to drive pricing due to all the inflationary pressures we had. We had the strongest price realization I can recall in my decade-plus here in residential in 2022. And we expect to see price realization next year as well. So as we deal with inflationary pressures, look for us to combat that with pricing, and we've had significant progress in that area across the entire portfolio in 2022, moving into 2023, we expect that to continue.

John Stone:

So I think -- this is John. Kind of two things going on there in that channel. I think on the mechanical side, again, you heard earlier in the call, our lead times are essentially back to normal. So book and ship business, retail point-of-sale pull-through. Certainly, on a volume basis, particularly on the mechanical side, it's a little softer. There is no doubt. On the electronics side, again, demand is very strong. Backlogs are still elevated. And in all honesty, we still have -- by historical values, we still have shelf space to fill with electronic products, both on the commercial side and the residential side. So I think there's -- again, electronics will continue to be a growth driver for the company in all segments.

Brett Linzey:

Hey, good morning, all.

Mike Wagnes:

Good morning, Brett.

Mike Wagnes:

Brett, as we've talked over time, we're committed to fight that inflationary pressure we see. We expect price realization -- substantial price realization in 2023 and such that, that price, productivity, inflation and investment dynamic is a net positive. You've heard me talk about this for at least 6 months now. We've made good momentum in '22, and we're set up nicely for '23 such that we have a net positive of those 4 characteristics or those 4 items.

John Stone:

Yes. It's the right question. I think payback is going to be pretty quick. I mean, these are high-volume products and the cost reduction that we're looking at is substantial. I'm not going to give you the exact down to the penny number, but it's substantial. And we see, because of that, a favorable impact on margins and a favorable impact on market share in those segments. It's -- we're quite excited about getting this facility ramped up.

Operator:

Our next question comes from David MacGregor from Longbow Research. Please go ahead.

Mike Wagnes:

Yes. As you think about it for next year, definitely positive. Obviously, price cost will be better in the first half because of the prior year comparable. And then if you think about quarters, we try not to guide quarters. But think of it as price cost inflation and investments, ‘this is a net positive for us moving forward. We fell behind last year, right, in 2021. '22, we caught up, we made some positive traction at the end of the year, and now we're set up nicely moving forward and expect this dynamic to continue to be positive.

Mike Wagnes:

So if you look at the first half of the year, that would be considered inorganic growth. And so on the slide in the presentation, we show a delta between reported and organic for the Americas, that inorganic would be Access Tech. The back half of the year, it will be part of organic growth and is included in that non-residential number John mentioned earlier in the prepared remarks. So it's a combination of both the first half is that inorganic growth.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead.

John Stone:

Hey, Jeff.

Jeff Sprague:

Good morning. Just a couple for me, if I could. Just first, back to price cost and everybody has asked the question a couple of times. But I just want to be clear really on your volume expectations for the year. It would seem we could get two or pretty close to your organic revenue growth just on carryover price. And the fact that I would think you've also got some positive mix effects on revenue as electronics ramps up. So perhaps you could just give us a little bit more color on what you're expecting for volumes for the year.

Jeff Sprague:

Great. And then actually, I just wanted to ask a little bit of a philosophical question about going to ex-amort and I agree it's the right thing to do, ultimately, particularly given a lot of other folks do it. But the main premise of it is, right, that amortization is non-cash. So when I go to adjusted EPS, my earnings and my cash flow are then, in fact, similar, right? And the EPS is kind of an economic number. You're only going to convert at about 85% free cash flow to adjusted net income this year according to your guide. Do you -- and it's certainly understandable supply chain inventories elevated and the like. But do you see those numbers converging over time? And getting the organization to, I don't know, 95% to 100% conversion to adjusted net income.

Operator:

The next question comes from Chris Snyder from UBS. Please go ahead.

Mike Wagnes:

Yes. So when you think about 2023 and pricing. Clearly, we had good momentum coming into the year. We have more pricing than volume growth. Residential is when you build your models, don't forget, starts have been down considerably there in the residential space. So residential volume is going to be more challenged, right? So overall, the volume growth coming from non-res in the total segment, I don't want to give subsegment targets for volume versus price. But I would just say the total segment is more pricing than volume when you build your models.

Mike Wagnes:

Yes. So if you look at our history, we're not going to guide quarters. I would say this 2022 very back-end loaded. Our historical norms for the Americas is probably more indicative of what you think 2023 would look like from a percent of the total. As a result, you'll see more revenue growth in the first-half than the second-half, but we do expect to see growth in the back half of the year.

Tim Tojs:

Hey, good morning, [Indiscernible]. Maybe just on backlog. Just maybe if you can give us a little bit of flavor for where backlog is maybe versus a year ago? And I know there's some noise in there just from the supply chain, kind of, constraints. But just maybe any color on the trajectory of that backlog through the year would be helpful.

Tim Tojs:

Okay, okay. So it sounds like you've burned off most of the kind of buildup from ‘21 and now it's just stronger demand.

Tim Tojs:

Yes. Okay, okay. Got you. And then John, maybe just bigger picture. I mean, you've been CEO now for six to nine months. And now that you've gotten maybe a little bit more settle into role. Just maybe some color on any potential strategic changes or tweaks that you think you might make with the business going forward.

Operator:

Our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead.

John Stone:

Good morning.

Josh Pokrzywinski:

So John, you talked a few times about the visibility in the non-res business, particularly on electronics with the elevated backlog. Just wondering if you could give us sort of any view on where backlog levels stand? Or how you think about conversion or something like book-to-bill in the framework this year?

Josh Pokrzywinski:

Got it. That's helpful. Looking forward to hearing more about that at the Investor Day as well. On the margin guide in the Americas or I guess implicit in the guide overall, how do we think about sort of what's an easy comp and timing elements around things like either price/cost or miss shipments, productivity versus just kind of volume leverage. Is there any way you guys would sort of break down those buckets of what just comes from kind of the absence of the bad guys versus some of this healthy mix, price/cost, some of the other things you're talking about.

Operator:

The next question comes from Ryan Merkel from William Blair. Please go ahead.

John Stone:

Yes, it's a great question. Maybe start with residential. I think the rise of the mega tech smart home ecosystems, the two most popular products that you find connected to those systems would be thermostats and locks. People might do other things, but those two fundamental elements seem like the most popular the functionality you get with a phone connected to your smart -- excuse me, a phone connected to your lock, the visibility of the state of that lock the peace of mind aspect that, that gives you, I think that's quite attractive to a lot of folks. On the non-res side, it's -- I mean, this is a B2B environment. So here, you're talking about like real economic value add for the end user. So think about a multifamily residential setting, an apartment complex rather than the landlord managing and swapping out metal keys. You can do this all digitally now with digital credentials, mobile credentials. It's just -- there's operating cost savings there that will continue to drive adoption in spaces like that. So -- on the non-res side, this is real economic benefits that are delivered over time. Residential side, peace of mind, visibility, higher tech connected to my smart home, et cetera. Those trends are, I think, still in the early stages of a traditional S-curve of adoption and a nice long runway ahead of us.

John Stone:

So the supply chain, the way I described it last quarter, the same way I'll describe it this quarter of a year ago. We had 50 suppliers on the delinquent list that was shutting our assembly lines down on any given day. Today, that number is down to a handful, three or four. So that's the order of magnitude of improvement. The constraint is the semiconductors themselves, microprocessors in particular. And it's just been a matter of the industrial Internet-of-Things, that space has had extremely strong demand, while you've probably seen news headlines and other things about some foundries or chip manufacturers seeing softening demand, that’s from things like consumer goods and mobile phones, these much smaller, much more advanced, much more expensive chips. But these chips that hit the sweet spot of cost and power and performance for the industrial IoT, which is like what we use in our products. That demand has still outstripped supply and capacity all the way back to the foundries. We've been working very closely to do a couple of things. One would be expand the quantity of supply that's been improving. The other thing has also improved the visibility and the linearity of deliveries. So then our factories can run a bit more efficiently and we can bring our lead times down. So it goes all the way back to the semiconductor itself, and that's the value chain we're trying to work through and continue to make improvements. And we're happy with the improvement so far, but we're still supply constrained versus very strong demand.

Brian Ruttenbur:

Okay, thank you very much. So one other question on the residential side in 2023. It looks like it's going to be driven by pricing. Can you talk a little bit about -- you say it's primarily driven by pricing. Will volumes actually be down? And could they be down 2% to 3%, 4% or 5% and you still hit that -- your goals for 2023 on the residential side?

Brian Ruttenbur:

Okay. And then along those same lines, have you experienced on the residential side or even the international side, any debooking in the fourth quarter where you've just heard about some debooking in the residential side, and I didn't want to kind of get your color on that, if there's been any debooking and you've seen a recovery post fourth quarter?

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to John Stone for any closing remarks.

Operator:

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Tom Martineau:

Thank you, [Francheska] [ph]. Good morning, everyone. Thank you for joining us for Allegion's third quarter 2022 earnings call. With me today are John Stone, President and Chief Financial 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 Slides 2 and 3. 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 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. John and Mike will now discuss our third quarter 2022 results, which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up and then re-enter the queue. We would like to give everyone an opportunity given the time allotted. Please go to Slide 4 and I’ll turn the call over to John.

Mike Wagnes:

Thanks, John, and good morning everyone. Thank you for joining today's call. Please go to Slide number 7. This slide reflects our earnings per share reconciliation for the third quarter. For the third quarter of 2021, reported earnings per share was $1.59 and adjusted earnings per share was $1.56. Operational results were very strong in the quarter, adding $0.49 per share, reflecting 31.4% growth. This was driven by strong pricing, volume, and operational execution, which more than offset inflationary and currency pressures. Access Technologies delivered $0.06 to earnings per share as operational results of $0.10 per share offset $0.04 of intangible amortization. The operational results were as expected and amortization was favorable. A year-over-year tax rate reduced earnings by $0.28 per share. This decline was driven by tax benefits in 2021 that were non-recurring. As anticipated, interest expense was a $0.12 per share drag on earnings, primarily driven by increased debt-to-finance the acquisition of Access Technologies. Other income was a $0.08 per share reduction as the prior year had some favorable items that did not repeat in 2022. Favorable share count offset the impact of investment spending in the quarter. This results in adjusted third quarter 2022 earnings per share of $1.64, an increase of $0.08 or 5.1%, compared to the prior year. Lastly, we have a $0.34 per share reduction from adjusted EPS to arrive at reported EPS. This reduction is attributable to M&A and additional non-purchase accounting items related to Access Technologies, along with the loss on the divestiture of our Milre business in South Korea. After giving effect to these items, you arrive at third quarter 2022 reported earnings per share of $1.30. Please go to Slide number 8. This slide depicts the components of our revenue performance for the quarter. I'll focus on total Allegion results and cover the regions on their respective slides. As indicated, we experienced a robust 18.6% organic revenue growth in the third quarter, driven by both price and volume. Strength in Allegion Americas, both non-residential and residential led to volume growth. Net acquisition and divestitures delivered 12.4% growth driven by Access Technologies. Currency pressures continue to be a significant headwind, primarily impacting our international segment, bringing the total reported growth to 27.4% in the quarter. Please go to Slide number 9. Third quarter revenues for the Americas segment was 747.2 million, up 42.5% on a reported basis and up 25.8% organically. This segment delivered significant price realization in both our non-residential and residential businesses as we remain committed to addressing inflation. Aided by substantial price and strong volume, non-residential grew approximately 30% in the quarter. Residential was up mid-teens, also driven by both price and volume. A portion of our growth was fueled by backlog reductions as the actions our team undertook helped us improve component availability and shipments in the quarter. Electronics revenue was up approximately 30% and was a significant improvement from the growth rates experienced the past few quarters. This was supported by continued strength in demand and the timing of component availability. While it is important to note that electronic component supply chains remain choppy, our reengineering and alternate supply efforts are providing improved flexibility to our supply capabilities. Access Technologies contributed mid-teens percent to the Americas reported growth numbers. Americas adjusted operating margins and adjusted EBITDA margins for the quarter were up 50 basis points and 80 basis points respectively. This includes Access Technologies, which we previously stated, would be dilutive to margins. Excluding Access Technologies, the business drove a 300 basis point improvement in operating margins versus the prior year. Volume leverage contributed to the margin increase and for the quarter. Price productivity inflation dynamic was positive both on dollars and margins. Please go to Slide number 10. Third quarter revenue for our Allegion International segment was 166.5 million, down 13.6% on a reported basis and down [0.8%] [ph] organically. In the quarter, strong price realization mostly offset lower volumes. Lower volumes are attributable to end market softening. However, demand for our electronics and software solution remained stable. Currency headwinds persisted this quarter and reduced reported revenue by 12.8%. Third quarter international adjusted operating margins decreased 180 basis points compared to last year, and adjusted EBITDA margins were down 160 basis points. The margin decline was driven by reduced volume and FX pressures, which more than offset favorable impacts of the combination of price productivity and inflation. Please go to Slide number 11. Year to date available cash flow is 225.6 million, which is a decrease of more than 102 million, compared to the prior year period. This year's available cash flow continues to be in-line with three pandemic levels. We continue to operate with a strong debt structure with 80% of our debt having fixed interest rates. We currently have 199 million outstanding on our revolving borrowings. During the third quarter, we repaid approximately 140 million from the initial draw used to help fund the acquisition of Access Technologies. We have a strong leverage profile with our net debt-to-EBITDA ratio at 2.9x at the end of the quarter. We still plan to use the excess cash generated during the remainder of the year to pay down the revolver. This would be after paying expected dividends, which are subject to Board approval and other debt payments. The 2022 full-year available cash flow outlook is unchanged from our prior outlook remaining at a range of 420 million to 440 million. I will now hand it back to John for an update on our full-year 2022 outlook.

Operator:

[Operator Instructions] The first question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

John Stone:

Good morning. Josh, good to hear you on the call.

Mike Wagnes:

Yes, Josh, as you know, we had built backlog starting the end of last year. And most of that driven by some supply chain, as well as really strong demand. As you look at the third quarter, we have better component availability as we talked about on the call. That helped drive more revenue in the Americas non-res at 30%, and not all of that obviously is demand. So, we did reduce backlog levels. We don't disclose the exact amounts, but we did have a very strong volume growth, which we provided and that's driven by both demand being strong, as well as backlog reductions. With respect to margins, the key thing about margins for us is, we're driving that price realization to offset the inflationary pressures that we've been seeing. This quarter, we finally turned the corner on the margin percent. Last quarter, it was offsetting on dollars. So, we've made significant progress here as we progressed over the last few quarters on that element. So, it's those key items, I think that have led to the margin expansion you saw.

Josh Pokrzywinski:

Got it. Thanks. And then just a quick follow-up on the pricing dynamic. I know you guys and the industry in general honors exist and quotes out there. So, price kind of layers in over time. What inning are we in, in terms of being caught up on price versus having these outstanding older price quotes?

Josh Pokrzywinski:

Perfect. Appreciate the color. Thanks guys. Best of luck.

Kiran Patel-O'Connor:

Hi. This is Kiran Patel-O'Connor on for Julian Mitchell. So, I just wanted to ask on residential. So, it looks like residential growth in the Americas are inflected positively, and I just wanted to get a sense of, is this more of a function of supply chains easing versus underlying demand and to what extent do you see this growth as sustainable going forward given what we're seeing in housing market?

Kiran Patel-O'Connor :

That's helpful. Thanks. And then my follow-up is, just kind of what you're seeing in the channel? Based on your results today, it doesn't seem as if you're seeing any signs of destocking, which we're seeing in some other industrial markets. So, can you give us a color of what you're seeing in channel from an inventories perspective? And what underlying demand is looking like relative to that?

Kiran Patel-O'Connor :

Appreciate it. Thank you.

Ryan Merkel:

Hey, good morning and thanks for taking the questions. My first question is on 4Q. It looks like guidance implies a little bit of a cut there. Can you unpack any changes you made versus prior expectations?

Ryan Merkel:

Got it. That's helpful. And then for my follow-up, you mentioned progress on supply chain, but still some choppiness. Where are there still issues? And when do you expect to fully catch-up?

Ryan Merkel:

Thank you.

Brett Linzey:

Hi, good morning all.

John Stone:

Good morning.

Mike Wagnes:

Yes. Brett, with respect to next year, we'll give an outlook when we come back in Feb, I'm certainly not on the third quarter call going to get that specific of price productivity inflation. However, in general, think of this dynamic as progressively improving to this point, right? We were weaker last year, negative, got back to positive this quarter on a substantial way. Obviously, volume drives more ability to get that price because you have more revenue, but in general, we're going to fight that inflation and have that dynamic positive moving forward.

Mike Wagnes:

Yes, especially long-term, this is a great growth driver for us and that be a double-digit growth business for us as you think about the long-term. We talked about choppiness, right, but long-term, this is a double-digit growth opportunity for us.

Mike Wagnes:

Yes, I'm not going to guide a specific quarter, but as you looked at our results for the Americas in particular, we have a pretty healthy top line guide in Q4. So, you can draw your conclusions to that particular item, but we still see strength in Q4 as indicated in our guide.

John Stone:

Thank you.

Joe O’Dea:

Hi, good morning. I wanted to start on the operational and FX piece of the guide. And if you could just, sort of bridge from prior guide to revised guide, I mean, the numbers didn't change, but what some of the moving parts are and given the strength we saw in the third quarter, would have expected to see that that could have moved up, but if you could just talk, kind of the Americas piece, the international piece, the FX piece in terms of what moved from last guide to this one?

Joe O’Dea:

Okay. And then I wanted to ask on the Americas margin, excluding Access Tech, clearly some nice progress that we saw sequentially, but when we go back to where, kind of pre-pandemic margins were, there still now appears be some good opportunity there. So, again kind of bridging to that, I mean, what are the keys to, sort of get back to those kinds of margins pretty good volume this quarter. I'm not sure sort of mix side of things. If still from a price productivity inflation, there's room to go and you have visibility into that. It's kind of a timeline to getting back to where your margins were.

John Stone:

And Joe, this is John. I'd add that again there's an electronics angle to this as well. Electrified and connected products are delivering substantially higher value to the end customer, which then should also be not just organic growth on the top line, but also a margin expansion opportunity too as electronics adoption continues. So, that's an element as well that we're really keen to continue to grow, and deliver more value to the customer.

John Stone:

I think both. I think we're doing very well today and I think there's continued opportunity. That's a tailwind for Allegion.

Operator:

Next question is from David MacGregor with Longbow Research. Please go ahead.

Mike Wagnes:

Hi, Joe.

Mike Wagnes:

Yes. Historically, we don't disclose those individual components. What we did share for the quarter was, they were both up pricing and volume for each segment, but the individual numbers historically we have not and don't anticipate disclosing that level of detail.

John Stone:

Yes, I appreciate that question. I think as we said in the prepared comments, off to a great start, our teams are gelling very well. There's this or the other small project win here and there. So – and I think the early work on some of the heavy lift in terms of systems and things like this will continue for the next many months, but off to a very good start, cultural fit is very good, strategic fit is very good, the automatic doors is an excellent complementary portfolio to the rest of Allegion. And just really excited for that team. And really excited for the services business that comes along with that. And we're quite bullish on the future there.

Operator:

Last question is from Brian Ruttenbur with Imperial Capital. Please go ahead.

John Stone:

Yes, it's certainly not appropriate for us to comment on that particular situation. I would say we feel good about our product portfolio, about our brands, about our competitive position in the market. I think our third quarter results reflect that that as we made the supply chain improvements, we continue to talk about, we generate good results. We've been saying for several quarters now, we were supply constrained versus demand constrained. And I think that continued to prove itself out. And so, yes, we'll continue to compete vigorously in the segments where we compete. And I think Allegion's best days are still ahead.

Mike Wagnes:

Yes. We put a number of increases in. I would say it all depends on what the future inflationary environment is, but as we sit here today, we would always communicate future price increases to the channel for an earnings call, but expect us if inflation persists, expect us to pass along pricing to mitigate that, but it all depends on the inflationary environment moving forward.

Operator:

This concludes our Q&A session, and we like to turn conference back over to John Stone for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Tom Martineau:

Good morning, everyone. Thank you for joining us for Allegion's second quarter 2022 earnings call. With me today are Executive Chairman, Dave Petratis; President and Chief Executive Officer, John Stone; and Senior Vice President and Chief Financial Officer, Mike Wagnes. 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 Slides 2 and 3. 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 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. We will now discuss our second quarter 2022 results which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up and then reenter the queue. Now, I'll turn the call over to Dave.

John Stone:

Yes. Thank you, Dave and good morning everyone. Thank you for joining our call. I'm looking forward to getting to know each of you a lot better over the coming quarters. Dave, I am super energized to be here, highly motivated by our higher purpose of pioneering safety and motivated by our vision of seamless access for a safer world. I agree with you that Allegion has a very sound foundation. We've got great brands, great products, a strong team strong culture, and customer relationships that have stood the test of time. I'm looking forward to visiting more of our sites in the coming weeks, getting to know our employees, our investors, and our customers and learning the business at a deeper level right alongside our experts. I feel it's a really exciting time to be part of Allegion. Back to you, Dave.

Mike Wagnes:

Thanks, Dave, and good morning, everyone. I want to echo Dave's comments in welcoming John as our new President and CEO and in welcoming Access Technology employees to Allegion. Please go to Slide number 8. This slide reflects our earnings per share reconciliation for the second quarter. For the second quarter of 2021, reported earnings per share was $1.31. Adjusting $0.01 per charges related to restructuring and acquisition expenses, the 2021 adjusted earnings per share was $1.32. Strong operational results increased earnings per share by $0.13, net of $0.05 per share pressure related to FX. The performance was driven by significant price, which exceeded inflation and business mix driven by the strength of the Americas non-residential business. Favorable share count increased earnings per share by $0.03 and the impact of acquisition and divestitures drove another $0.01 per share. A higher year-over-year tax rate reduced earnings by $0.02 per share and the combination of interest and other income drove another $0.05 reduction. Investment spending had a $0.05 per share drag on earnings as we continue to invest in the business to fuel long-term growth, expand our electronic capabilities, and drive our seamless access strategy. This results in an adjusted second quarter 2022 earnings per share of $1.37, an increase of $0.05 or 3.8% compared to the prior year. Lastly, we had a $0.07 per share reduction from the net of non-operating gains and charges related to restructuring, acquisitions, and debt financing costs. After giving effect to these items, you arrive at the second quarter 2022 reported earnings per share of $1.30. Please go to Slide number 9. This slide depicts the components of our revenue performance for the quarter. I’ll focus on total Allegion results and cover the regions on their respective slides. As indicated, we experienced 6.4% organic revenue growth in the second quarter, driven by strong price realization. Although the total company volume was down, we did see significant strength in our Americas non-residential business, which is starting to benefit from our supply chain actions over the last year. As mentioned previously, currency headwinds were significant in the quarter and reduced reported revenue by 3%. There was a small impact from acquisitions bringing the total reported growth to 3.5% for Q2. Please go to Slide number 10. Second quarter revenue for the Americas segment was 592.3 million, up 7.8% on a reported basis and up 8% organically. The segment delivered significant price realization coming in at 9.4% in the quarter. Both the non-residential and residential businesses delivered strong pricing. Pricing helped the non-residential business grow high teens when combined with volume growth. Residential was down mid-teens driven by a prior year catch-up on COVID related backlogs and continued pressure in electronic components availability. Electronics revenue was down low single digits, driven primarily by electronic component shortages that limit our ability to fully meet demand. Americas adjusted operating margin and adjusted EBITDA margins for the quarter were down 150 basis points and 160 basis points, respectively. The Q2 margin performance was a sequential improvement from Q1. For the quarter, price exceeded inflation and productivity headwinds on a dollar basis, but were dilutive to operating margins. Please go to Slide number 11. Second quarter revenue for our Allegion International segment was 180.8 million, down 8.5% on a reported basis and up 1.9% organically. The organic growth was driven by solid price realization, which more than offset the volume declines experienced as a result of COVID shutdowns in China and geopolitical pressures in Europe. The negative impact related to currency headwinds reduced reported revenues by 10.9% as the U.S. dollar has strengthened substantially against other foreign currencies. Second quarter international adjusted operating margins decreased 100 basis points, compared to last year and adjusted EBITDA margins were down 60 basis points. The margin decline was driven by unfavorable impacts from volume and mix, FX, and incremental investments that more than offset the favorable impact of price and productivity exceeding inflation. Please go to Slide number 12. Year to date available cash flow for the first half of 2022 came in at 84.5 million, which is a decrease of more than 165 million, compared to the prior year. The 84.5 million is more in-line with historical levels. Last year's cash flow was driven primarily by lower working capital, due to the pandemic. We are now projecting that 2022 full-year available cash flow to be between 420 million and 440 million. The reduction in ACF from the prior outlook is primarily related to investing in inventory to create supply chain resiliency and to better serve our customers. This will position us to manage backlogs, which are expected to be elevated entering 2023 due to strong non-residential demand. The revised cash flow outlook includes the impact of the Access Technologies business, inclusive of operational cash flows offset by acquisition and integration costs related to the transaction. As discussed earlier, we closed on the acquisition of Access Technologies business on July 5. The transaction was funded by issuing senior notes and utilization of our revolver. As mentioned when we announced the acquisition, we expect to use excess cash generated during the remainder of the year to pay down short-term debt to taken on to complete the transaction. This would be after paying expected dividends, which are subject to Board approval. Please go to Slide number 13. We now turn our attention to the revised revenue outlook. Non-residential markets in the Americas continues to be robust, leading indicators remain positive, and the level of specifications continues to be strong. Consistent with the broader macro industry, we are beginning to see signs of residential softening from robust COVID level peaks. However, we remain positive on the long-term growth opportunity in residential due to the undersupply of homes to meet demand and the long-term trend of electronic adoption. We've been aggressive in pursuing price in all channels and products and as a result, expect to deliver solid price realization for the remainder of the year that will more than offset substantial inflationary headwinds. As noted previously, we expect the newly acquired Access Technologies business to deliver approximately 9% growth for the full-year reported Americas revenue. With these parameters in place, we are now projecting total growth for the Americas to be up 21% to 22% and organic revenue to be up 12% to 13%. The increase in the Americas organic revenue outlook is primarily driven by price to offset the ongoing inflationary pressures. Allegion International experienced sequential improvement in price realization. However, we are beginning to see markets soften and currency pressures are anticipated to continue. For Allegion International, we are revising our outlook for total revenue to be down 7% to 8% with organic growth coming in at 2% to 3%. All in for a total Allegion, we expect revenue growth to be in the 13% to 14% range with organic revenue increasing 9% to 10%. Please go to Slide 14. For our EPS outlook, we are expecting reported EPS to come into a range of $5.05 to $5.15 per share, and adjusted EPS to be between $5.35 to $5.45. These ranges include the approximately negative 10% impact related to Access Technologies acquisition as the discussed earlier. The updated outlook also includes a $0.09 per share reduction from the prior outlook related to currency pressure. This outlook assumes incremental investments of approximately $0.20 per share. As a reminder, the incremental investment spend is predominantly related to R&D and technology investments to accelerate future growth and support our seamless access strategy. Also included in the revised outlook is a slight increase in interest expense driven by an increase in variable interest rates on the base business. This does not include the Access Technologies acquisition, which will have a $0.17 per share negative impact related to financing we secured to close the transaction. That impact is included in the overall $0.10 per share dilution from the acquisition. I will now hand it back to Dave for some closing remarks.

Operator:

Thank you. [Operator Instructions] The first question is from the line of Julian Mitchell with Barclays. Please go ahead.

Dave Petratis:

So, thank you for your comments, Julian, and for your questions, and support over the years. When I think about the residential market. We moved through this – went through this supply chain, which has been pretty dramatic over the last 24, 36 months. I continue to be positive on residential. We still have some noise, but there's an undersupply of housing. We'll see some softening in the R&R, but we have maybe been hit harder in res because of the lack of electronic chips. We'll build momentum back over the second half and into 2023. I think the nation's got to build between 800,000 and a million single family homes. So, I think that's net opportunity as we look at the change.

Julian Mitchell:

That's helpful. Thank you. And then just my second question would be around the, sort of the price cost dynamics. Any updated thoughts around how that plays out in terms of margin impact in the back half? And I suppose based on the recent declines in spot commodity prices, when do you see those perhaps rolling into your gross margins in terms of the timing of those lower costs starting to help the gross margin? And do you think you can retain those savings when they come through or they might have to be passed back to the customer?

Julian Mitchell:

Great. Thank you.

Joe Nolan:

Hi. This is Joe Nolan on for David. Congrats on a nice quarter, guys.

Joe Nolan:

So, I was just wondering within the Americas non-residential business, can you just talk about how distributor inventories look? And also just wondering, are you seeing any increase in order cancellations or signs that distributors maybe getting more cautious about holding inventory in a slowing macro environment?

Mike Wagnes:

Yes, I would say that the – if you think of our business, we've had such supply chain challenges last year. So, as we move forward to this year, our distribution base is looking for product. So, we have very healthy backlogs. Demand is very strong, elevated backlog. So, as we move forward, we feel very confident about the non-residential business.

Joe Nolan:

Got it. Okay. Thank you. And then just as a quick follow-up on the Access Technologies business, can you just talk about what this acquisition adds revenue wise to your aftermarket business and whether it would be accretive or dilutive to margins on the existing business? Thanks.

Dave Petratis:

I would add that in our vision of seamless access and smart connected edge devices on the doors, the service component becomes required by our customers and the ability to grow recurring revenues through services, we like the opportunity.

Joe Nolan:

Got it. Okay. Thank you very much. I'll pass it along.

Brett Linzey:

Hi, good morning and congrats today, best of luck, and welcome to John.

Dave Petratis:

Thank you.

Mike Wagnes:

Brett, as you think about revenue growth, so much of it has to do with the prior year comparable. Electronics growth should be better in the back half from a growth percentage as you think about prior year. In addition, we are seeing signs of improvement related to the activity we've been driving on the product redesign. So, both those areas should lead to better second half growth than what we experienced in the first half.

Mike Wagnes:

Yes. So, if you think about the one-timers we backed that out of reported EPS to get to our adjusted EPS, right? So, if you look at our guide, we have that at the bottom of the schedule. With respect to amortization expense, we started the year obviously with our guide. We're using the same presentation that we have when we started the year, but clearly identifying that amortization drag because it is significant for Access Technologies. We're going to get through 2022 using this presentation. With respect to the future, we can tackle that in the future, but when you think about 2022, we're going to have that amortization in the adjusted EPS, but we're going to clearly show it to you and provide it to you so you can have all those details.

Operator:

Thank you. Next question is from the line of Brian Rutenberg with Imperial Capital. Please go ahead, sir.

Mike Wagnes:

Yes. As you look at our guide for the back half of 2022, we are seeing improvement, especially in the mechanical space in the non-residential business. This is attributable to all the sourcing actions we've taken over the last year. So, as we think about that non-res growth, right, that high teens that we had, part of that is attributable to a better supply chain due to our activity. Our back half is taking into account what we've known we've done and chips that our partners have committed to get to us or provided us. Chips are always fragile, as you know, that can move, but this is not seeing a [sea change] [ph] of improvement that we don't have line of sight to. So, if you think about back half, think of it as the activity we've driven is helping provide better confidence in our ability to meet our customers' needs.

Brian Rutenberg:

Great. Thank you.

Dave Petratis:

Thank you. This concludes my 56th earning call as a CEO. The balance here at Allegion. This will likely be my last call. I want to thank our shareholders and the financial community for their support over the years. I also want to thank Nelson Peltz and Mike Lamach for the opportunity to create and lead Allegion. I want to thank Kirk Hachigian and the Allegion Board. Kirk has been with me since the day one. Kirk and the Allegion Board has helped create this company and guide us to where we are today. Last, a heartfelt thank you to the people of Allegion worldwide. You have a great new leader in John Stone. We have done some great work together. Allegion, your best days are ahead of you. Be safe, be healthy, and thanks for all your contributions. Have a great day.

Tom Martineau:

Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegion's first quarter 2022 earnings call. With me today are Dave Petratis, Chairman, 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 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 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. Dave and Mike will now discuss our first quarter 2022 results, which will be followed by a Q&A session. Please, for the Q&A, we would like to ask each caller to limit themselves to one question and one short follow-up and then reenter the queue. We would like to give everyone an opportunity given the time allotted. Please go to slide four and I'll turn the call over to Dave.

Mike Wagnes :

Thanks, Dave. And good morning, everyone. Thank you for joining today's call. Please go to slide number 6. This slide reflects our earnings per share reconciliation for the first quarter. For the first quarter of 2021, reported earnings per share was $1.18. Adjusting $0.02 for charges related to restructuring expenses, the 2021 adjusted earnings per share was $1.20. Favorable share count increased earnings by $0.03 per share and the impact of acquisition and divestitures drove another $0.01 per share. Higher year-over-year tax rate reduced earnings by $0.02 per share and the combination of interest and other income drove another $0.03 reduction. Investment spending had a $0.04 per share drag on earnings as we continue to invest in the business to fuel long-term growth, expand our electronics capabilities, and drive our seamless access strategy. Operational results decreased earnings per share by $0.08, driven by significant inflation, productivity challenges associated with supply chain pressures and unfavorable currency, which more than offset the favorable impacts of price. This results in adjusted first quarter 2022 earnings per share of $1.07, a decrease of $0.13 or 10.8% compared to the prior year. Lastly, we have a $0.02 per share reduction for the net of a non-operating gain and charges related to restructuring and acquisition costs. After giving effect to these items, you arrive at the first quarter 2022 reported earnings per share of $1.05. Please go to slide 7. This slide depicts the components of our revenue performance for the quarter. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we had 6.4% organic revenue growth in the first quarter, driven by improved price realization. Although the company's volume was essentially flat, we did see strength in Allegion International and the Allegion Americas non-residential business. Currency headwind and divestitures more than offset the impact of acquisitions, bringing the total reported growth to 4.2% in the first quarter. Please go to slide number 8. First quarter revenue for the Americas segment was $528.2 million, up 5.9% on both a reported and an organic basis. The segment delivered significant price realization. Non-residential price was strong and residential business experience improved price realization. The price helped the non-residential business grow low-double digits. Residential was down mid-single digit against a tough comparable from last year's channel load in, which drove Q1 of 2021 to be up low 20s percent. Electronics revenue was up low-single digits as component shortages continued to dampen our growth. Americas adjusted operating income of $123.9 million decreased 8.6% versus the prior-year period and adjusted operating margin for the quarter was down 370 basis points. The Q1 margin performance was a sequential improvement for the Americas as we expect to see further improvements as we progress through the year. The decrease in margin was driven by continued inflationary pressures, productivity challenges associated with supply chain shortages and volume deleverage. Incremental investments had a 60 basis point impact on margins as well. Please go to slide 9. First quarter revenue for our International segment was $195.4 million, flat to last year and up 7.6% on an organic basis. The organic growth was driven by strength in SimonsVoss, Interflex and Global Portable Securities businesses. The segment also saw solid price realization contributing to the organic growth. The strong organic growth was offset by unfavorable currency and divestitures. International adjusted operating income of $20.4 million increased 13.3% versus the prior-year period. Adjusted operating margins for the quarter increased by 120 basis points to 10.4%. The margin increase was primarily driven by price and productivity exceeding inflation, as well as solid volume leverage, which more than offset currency and the 50 basis point headwind due to investment spending. Please go to slide 10. Year-to-date available cash flow for the first quarter of 2022 came in at $11.8 million, which is a decrease of more than $93 million compared to the prior-year period. The $11.8 million is more in line with historical trends as the business tends to have modest cash flows in the first quarter of a typical year. Last year's spike in cash flow was driven primarily by lower working capital needs due to COVID. The business continues to generate strong cash flow and we remain committed to efficient and effective use of working capital. The amount of available cash generated in the first quarter was as expected and the balance sheet continues to be in a healthy position. We expect to use excess cash generated during the remainder of the year to pay down short-term debt taken on to complete the acquisition of the Stanley Access Technologies business. I will now hand it back over to Dave for an update on our full-year 2022 outlook.

Operator:

[Operator Instructions]. Our first question comes from Timothy Wojs from Baird.

Dave Petratis:

I think as we think about the path forward in terms of order activity, incoming orders, especially in the commercial business, institutional business, extremely robust. And as I've been traveling around the last few weeks, you also get that feel that construction activity across the country, extremely robust. As we look at our macroeconomics, it says, in the commercial, institutional, we're beginning the upcycle, which says we're going to get stronger as we go through the year in terms of product out the door. I would say supply chains remain under pressure, but have improved from the second half of last year. And then, I think you've got to think about res. When I think about res, it probably shows my age a little bit. Residential was extremely difficult in the last decade. And as I think about the under-supply of housing across the nation, I think we're going to continue to bang out 1.2 million to 1.6 million, even with higher interest rates. So, I feel very good about overall demand. I think about that going out four to six quarters and then we'll see.

Mike Wagnes:

Tim, as you think about it, we got off to a decent start. Right? I would say it doesn't move materially from that 60% that we said at the beginning of the year. First quarter was okay or stronger than maybe the original assumption assumed. And so, it could move a percent or so or two, but it's roughly around that 60% that we gave in the beginning of the year.

Mike Wagnes:

I would say as you look at our guide, we raised our guide on the top line, didn't raise the guide on the EPS because that is price realization that is fighting the inflationary pressures. And so, there will be a higher percentage going to price than we assumed in the beginning of the year. So, if in the beginning of the year, we said roughly 50/50, that's going to be higher by the raise of the guide. So, you're going to be looking at that 60% to 65%.

John Walsh:

Nice quarter. Just kind of wanted to understand the change in the sales guidance. So, sounds like it's being driven by price, but what kind of gave you the confidence to take it higher, given that supply chains were still tough. You have the China COVID impacts. I understand that demand is really robust and you have the strong backlog, but kind of what gave you the confidence that you'll be able to get the parts you need to kind of hit a higher top line.

Dave Petratis:

I'd add to it as well. Versus the second half of last year, labor has improved in its availability, freight has improved modestly. And I say modestly, the rise in COVID in China, the lockdowns will have some implications. We've got some exposure, but it's not major. And I think particular on the mechanical inputs to our business, redesign, qualifying second suppliers has really strengthened our confidence. That leaves the electronics element. As we think about going forward and our guide, that's based on allocations. If chip availability gets better across the board, we'll be even stronger.

Mike Wagnes:

John, as you think about Q1, sequential improvement versus what you saw in the fourth quarter, we'll expect to see improvements each quarter sequentially, such that the back half, you start to really see that margin expansion versus the prior year. So, sequential improvement and then expansion in the back half. And then, when you model it, just take into account that there's substantial inflationary pressures. We're driving price to offset it from a dollar amount, but that raises the denominator in the margin calc without raising the numerator from the profit because it offsets it.

Julian Mitchell:

You have Matthew Shaffer on from Julian Mitchell's team. So, you guys mentioned that pricing is expected to beat inflation in 2022. Can you maybe talk to the cadence of the price cost differential through the remaining quarters?

Julian Mitchell:

Just a follow-up for me. Electronics was up low-single digits in Americas Q1 after being pretty weak in 2021. Just curious the expectation is for 2022 growth for electronics.

Operator:

Our next question comes from David MacGregor from Longbow Research.

Mike Wagnes:

If you look at our resi business, we mentioned earlier that it had positive price realization for the quarter, not as strong as non-res. From a unit perspective then, you can see that units would be a little less than the total growth because we did have the positive price realization. More importantly, moving forward, we've taken actions in residential to drive price that has been announced to the marketplace and goes into effect in the second quarter. So, we expect to see better price realization in the second quarter and onward through 2022.

Dave Petratis:

I would say spec writing activity continues to be robust. You can look at the ABI. I think the march ABI was at like a 58. I'd say a good range of projects with strength in the medical and hospital areas, which is good for Allegion. Can't really get into the size of these, but the order activity is good, and I think reflects the strength we're seeing in our incoming bookings.

Brian Rutenberg:

Great quarter. So I'd like to break things down a little bit on gross versus operating margins. So, gross margins were down from fourth quarter and obviously down year-over-year. Do you expect gross margins to increase from first quarter to second quarter and then progress couple hundred basis points per quarter? Is that what you're saying?

Brian Rutenberg:

So, on the operating basis, we'll also see improvement sequentially with that because there's going to be lower SG&A or just increased leverage from the top line and more gross profit.

Dave Petratis:

Volume is a very beautiful thing in this business. And as we go through the second half, the business leverage quite nicely.

Unidentified Participant:

You have Sabrina Abrams [ph] on from Andrew Obin's team. I understand that you mentioned you're sort of expecting them, but in the past month, have you been seeing worsening supply chain impacts from the COVID-related China shutdowns and from the Russia-Ukraine conflict?

Unidentified Participant:

I understand that you're raising the revenue guide and maintaining the EPS range on inflation. But I guess I'm curious, you guys had a strong EPS beat in 1Q and are maintaining that guide. Are there any other headwinds we should be thinking about besides inflation in the remainder of the year?

Operator:

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to David Petratis for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

00:05 Good day and welcome to the Allegion’s Fourth Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 00:24 I would now like to turn the conference over to Tom Martineau. Please go ahead.

Dave Petratis:

02:00 Thanks, Tom. Good morning and thank you for joining us today. Please go to Slide number 4. Q4 was tough for Allegion and although we achieved the expected results, we discussed last quarter, I was disappointed that we were unable to fully meet the market opportunity presented. 02:22 The strength and demand, particularly in America’s non-residential end markets continued. And as I said last quarter, this trend began softly in Q1, accelerated in Q2, and continued throughout the back half of the year. 02:40 Leading indicators like specs written for Allegion America’s, ABI, and Dodge new construction indices, retail point of sales, and macroeconomic indicators in our Allegion International segment all remained positive. These indicators suggest continued strength in all end markets for the foreseeable future. 03:02 However, with supply chain challenges, we continue to experience difficulty converting that demand into revenue. Typically, we’d be able to gear up our supply base in short fashion, but the accelerated increase in demand occurred during an unprecedented time when suppliers where experiencing labor, raw material, transportation, and electronic component shortages creating tremendous global disruption. 03:32 What we typically resolve in a quarter is now taking much longer. We are making good progress on product redesigns and alternative sourcing, which should alleviate some of the supply chain pressure, but we do expect revenue to continue to be constrained in the near-term. 03:53 Even with the supply chain improvements we are making, it’s important to note that the pressures in electronic components are expected to continue throughout 2022. Looking at price versus cost, we continue to experience high inflationary impacts for material cost, labor, and freight. The pricing that we put in place last year is currently lagging inflation. That coupled with productivity challenges is a major contributor to margin declines in Q4. 04:25 We implemented additional price increases during the fourth quarter and have already announced another price increase for Q1 2022 that goes into effect this month. We are aggressively pursuing price across all products and in all channels to offset unprecedented inflation and expect price to exceed inflation in 2022. 04:52 I do want to highlight our Allegion International business, which had another good quarter and closed out a strong year. The segment delivered robust organic revenue growth and solid margin expansion in 2021. 05:09 Looking forward, the increased demand and supply chain shortages have led to record backlog in our American non-residential business and coupled with the progress we are making on redesigns and alternative sourcing, we expect solid revenue growth in 2022 and into 2023. 05:30 As supply chain pressures ease, operational efficiencies will improve, which along with accelerated pricing will allow us to expand margins in 2022 and exit the year on a glide path back to peak performance. 05:47 Now, let's turn to the quarter’s performance for more details. Please go to Slide 5. Revenue for the fourth quarter was 709 million, a decrease of 2.5%, compared to last year. Organic revenue declined 1.4%. The organic revenue decline in the quarter was driven by Allegion Americas, which experienced continued supply chain pressures that led to electronic and other component shortages. 06:17 Also embedded in the decline is a tough comparable to last year. During the fourth quarter of 2020, we had a large residential channel loading that was necessary to catch up from the shutdowns experienced earlier that year. The Americas volume declines more than [offset] [ph] the sequential improvements in price realization and the growth that the Allegion International segment delivered. Patrick will share more details on the business segments in a moment. 06:50 Adjusted operating margin decreased by 610 basis points in the fourth quarter. Continued inflationary pressures, productivity challenges, and volume de-leverage drove most of the decrease. Incremental investments for future growth cost 80 basis points of the decline. 07:10 Adjusted earnings per share of $1.11 decreased $0.38 or approximately 26% versus the prior year. Lower operating income was partially offset by favorable share count, year-over-year tax rate reduction, and other income. Available cash flow for the year came in at 443 million, which was flat to 2020. 07:36 Slightly lower adjusted earnings were offset by slightly lower capital expenditures. The cash flow impact of working capital was nearly neutral as well with increased inventory offset by other components of working capital. 07:52 As I think about the road ahead, I firmly believe our vision strategy and support of our seamless access is more relevant than ever. I also believe we have the right team and an engaged workforce that will respond to the challenges we face today. 08:09 We are bullish on construction and DIY markets for 2022 and continue to expect the IoT trends of electronic adoption and smart buildings to fuel growth for many years. Allegion’s future is bright and we will return to the peak performance and profitability that you expect. 08:30 Patrick will now walk you through the financial results and I'll be back to discuss our 2022 outlook.

Dave Petratis:

17:29 Thank you, Patrick. Please go to Slide 11. Before I get into our outlook for the year, I want to highlight actions we are taking to mitigate constraints and drive growth and profitability in 2022. 17:47 Our expectation is to fully cover inflation with price. We are in the midst of executing aggressive pricing actions across the globe in all product categories and all channels. We will remain vigilant during the year and we will not hesitate to pull the pricing lever if inflation headwinds increase further. 18:12 With regard to timing, we expect net margin pressures during the first half with the price versus cost dynamic improving sequentially throughout the year and turning positive in the middle of the year. 18:26 Our product redesigned and alternative sourcing work is expected to be completed by the end of Q2. This will help alleviate the supply chain pressures related to our mechanical business and provide access to additional electronic component solutions. However, electronic chip allocations will continue to be choppy throughout the year. As the supply chain normalizes, we will continuously improve our lead times and reduce our record backlog. 18:58 Our greatest strength lies in the people of Allegion. With broad tightness in the labor market, we are protecting our labor pipeline. We have implemented pay increases and are not flexing labor to the degree we normally would. This is operationally inefficient in the short-term, but when supply chains pressure ease, we want to be sure we have the labor in place to move product out of the factories and reduce backlogs. 19:30 We expect return to margin expansion this year. Second half margins are anticipated to perform stronger than first half, and we will exit the year on a path back to peak margin performance. We continue to invest in R&D and software development that progresses our seamless access strategy and to build critical talent capabilities and innovation. 19:55 Please go to Slide 12. For the 2022 outlook on revenue, the Americas is expected to strengthen our non-residential businesses with the continued recovery in those end markets, particularly education, healthcare, and commercial. All leading indicators are positive and the level of institutional specification for our business had continued to be strong. 20:22 Residential indicators are positive as well and we expect that business have continued growing in 2022. The under supply of single family homes continues to be corrected and the builder channel and retail point of sale has been strong for quite some time. Electronic and smart home adoption continues to be long-term growth drivers. 20:48 As underscored earlier, we are aggressively pursuing pricing in all channels, products in the Americas, and around the globe. Given the supply chain challenges that persist, we expect the revenue performance to be better in the second half than in the first, but still project organic revenue growth in all quarters. 21:09 With the strength in non-residential constructions, continued growth in residential, our expectation for electronic chip allocation and redesign work to ease supply chain pressures, we project total organic revenue in the Americas to be up 8.5% to 10% in 2022. 21:29 In the Allegion International segment, we expect growth, but we are starting to see some electronic supply chain issues in that region as well. Currency headwinds are projected to offset organic growth. 21:44 For Allegion International, we project total revenue to be in the minus 1% to plus 1% range with organic growth of 3% to 5%. All in for Allegion, we are projecting total revenue to be up 6% to 7.5% and organic revenue growth of 7% to 8.5%. Our 2022 outlook for adjusted earnings per share is $5.55 to $5.75. Timing [warrants] [ph], we expect to realize approximately 60% of the adjusted EPS in the second half of the year. 22:24 As indicated, adjusted operational earnings are expected to increase 14% to 18% driven by volume leverage and price exceeding inflation. Incremental investments continue to be a priority as we remain focused on accelerating electronics and seamless access growth in support of our vision and strategy. These incremental investments predominantly relate to added R&D and engineering to further develop, enhance, and accelerate new product development and software capabilities. 23:01 The combination of interest and other expenses is expected to be a headwind as some of the more favorable items that we experienced in 2021 are non-recurring. Our outlook assumes a full-year adjusted effective tax rate of approximately 13%. It also assumes outstanding weighted average diluted shares of approximately 88 million. 23:23 The outlook additionally includes approximately $0.05 per share for restructuring charges during the year. As a result, reporting EPS is projected to be $5.50 to $5.70. We are expecting our available cash flow for 2022 to be in the $465 million to $485 million range. 23:45 Please go to Slide 13. In summary, end market demand remains strong in the fourth quarter and we expect that to continue. The supply chain issues we are experiencing have hindered our ability to meet that demand, and as a result, we have built record backlogs that will support growth in 2022 and 2023. 24:10 The product redesigns and alternative sourcing should begin to alleviate some of the supply chain pressures by mid-year, primarily on the mechanical side of the business. We are projecting solid organic revenue growth of 7% to 805% in 2022, even with the expectation that chip allocations will continue to be tight. 24:33 We expect year-over-year growth in electronics and acceleration in that growth throughout the year. We are aggressively going after price across the globe and in all products and channels. For the calendar year, pricing will exceed inflation. This will help Allegion to deliver margin improvement, which we expect will progress as we go throughout the year. 24:58 Please go to Slide 14. A final note on some key leadership announcements before we move into Q&A. Mike Wagnes, who leads the Commercial Americas strategic business unit will be transitioning to the role of Chief Financial Officer on March 1. He succeeds Patrick Shannon, who will be retiring later this year. 25:22 As CFO, Mike brings significant financial experience and a deep understanding of our global business in the markets we serve. He has been with Allegion for 15 years and many of you know him from his time as Treasurer and leading Investor Relations. The Board of Directors and I have the utmost confident that he is the right person to step into this important role. 25:46 Dave Ilardi has been promoted to Senior Vice President of the Americas Segment effective March 1. Dave currently leads Allegion Home and is responsible for the flagship Schlage portfolio of residential solutions. He been at the company for 20 years and is highly respected, an industry veteran with extensive knowledge of our customers, channel partners, and vertical markets. We are thrilled to welcome him to the senior leadership team. 26:16 Allegion is equally fortunate to have a strong bench of talented leaders throughout the globe. They are well prepared to execute on our strategy and capitalize on growth opportunities as we emerge from the pandemic. And I want to thank our entire team for their commitment and dedication. 26:34 Last, a few remarks for Patrick Shannon. It has been a privilege to work alongside Patrick, who has been a partner, a friend for me, and an outstanding business leader. And as a family member of the leadership team, Patrick has been instrumental in refreshing our business strategy, building a world-class finance organization, and creating a strong foundation that will serve us well in the years ahead. I speak for all of the employees of Allegion, when I say that it has been an honor and a pleasure to [serve with] [ph] Patrick Shannon. 27:11 We'll now take your questions.

Unidentified Analyst:

27:41 Hi, good morning all and congrats to Patrick.

Unidentified Analyst:

27:45 Good. A strong outlook overall. I'm just curious what level of price are you expecting within the guide for the full-year? And any directional color you can give us between how you're thinking about the residential and non-residential piece within the Americas business for 2022?

Unidentified Analyst:

29:09 Okay, great. And then just to come back to the electronics, you noted growth year-over-year on a full-year basis, I'm just curious, what's the pacing look like through the year? Is it really Q3 until that turns positive again or does it happen earlier? Just curious what’s your planning processes looks like there?

Unidentified Analyst:

29:50 Okay, great. I'll pass it along. Thanks.

Operator:

29:54 The next question comes from Julian Mitchell from Barclays. Please go ahead.

Dave Petratis:

30:46 I think you've got to call our second half as of is. Number 1, markets are incredibly strong. Number 2, our loss in opportunity by the company, because of supply chain difficulties. Our supply chains tend to be in region. They perform incredibly well giving high inventory turnover, high return on invested capital when they're working well. 31:16 The pandemic, especially as we move through 2022 was severely impacted by chips and labor shortages that affected our very complex supply chain within region. And when I say complex, you've heard me say Julian, complexity is our friend at Allegion, but when you throw that – those challenges in supply chain, you're really working a variety of issues, which I'd say stabilized as we ended December and will get sequentially better as we go on. 31:57 I would also say, some of the moves that we made pre-pandemic to vertically integrate actually helped us. And I think, I'm confident that we'll get the mechanical side of the Americas business straighten out its things like investing, investment capping that make the Von Duprin exit device what it is. And as we move through the year, the pacing item will be electronics. 32:30 We build our plan based on the allocations that we believe that we will get, and I believe in the electronics, the supply chain disruptions there have pulled demand forward and will benefit in the secondary markets that will help us exceed our plan in 2022, if that in fact impacts. So, a lot into that answer. I hope that gives you some color.

Julian Mitchell:

34:08 Thanks a lot. That's very helpful. And then just one very quick follow-up. Just [on kind of] [ph] final point on the, sort of the price volume split within the organic sales guide for total company 2022, is this the sort of rough assumption that the organic sales growth is split sort of 50/50 price and volume?

Julian Mitchell:

34:49 Great. Thank you.

Joe O'Dea:

34:57 Hi, good morning. First, just a cadence question. You gave some helpful details in terms of how you're thinking about the back half of the year, but I think with the fluidity of the current environment, just anything that you're able to talk about in terms of the first half? I think, first quarter EPS tends to be maybe a high teens percentage of the full-year. Just trying to understand based on the visibility you have on supply chain, what kind of progression we should be thinking about, kind of as we go first quarter and the second quarter if you're able to talk about that?

Dave Petratis:

36:12 I would just add, seasonally, Q1 normally our weakest quarter from a revenue perspective and earnings. The year-over-year decline in margin not as pronounced. Obviously is what you saw in Q4, but yet margin down relative to Q4 just from a seasonal perspective, that's kind of normal course of business, but as we progress throughout the course of the year, the price cost dynamic, you will see continuous improvement beginning in Q1, relative to Q4, and that will progress throughout the course of the year, as we get more price realization and our assumption is, on inflation that, we've kind of plateaued where we are and actually steel is, if you kind of look at on a [cold role] [ph] per ton basis has come down a little bit, maybe a little opportunity there. But margin expansion really back-end loaded where that price cost dynamic becomes very favorable. 37:20 And obviously, we have easier comps, back half of this year, compared to 2021. So, that's kind of how we see it playing out sequentially.

Patrick Shannon:

38:03 So, we certainly filtered through the macroeconomic indicators, which we feel all positive all levels. I think as you travel around the country, you see the strength in construction markets. You've got stimulus coming from the top, you also are working through the backlog of work that was disrupted by the pandemic. So, as I think about [K through 12] [ph] hospitals, multi-family, and the overall res, which drives expansion, I feel very good about the next couple of years.

Joe O'Dea:

39:35 Thank you.

David MacGregor:

39:43 Good morning, everyone. Just a couple of quick ones, maybe Dave, you could talk about the backlogs and in the past, you've indicated a disinclination to want to put through pricing on backlogs as you protect some of the spec business that you've [booked] [ph]. I'm just wondering if that's changing now as you think about becoming more aggressive on pricing into 2022? And then obviously great results from Europe under some pretty difficult circumstances there as well, clearly Tim and his team are executing well there. Can you just talk about one of the biggest pieces of the 2022, 2023 margin progression opportunity in Europe? Thank you.

Patrick Shannon:

42:00 Yes. So, David, on the pricing associated with the backlog, keep in mind, industry standard normally when you give a quote, on a project based job or and/or you have an order in-house prior to the price going into effect, you kind of honor that. 42:24 So, normally, there's a time lag between when you announce a price increase and the realization and that could be, we'll call it on average, 90 days to 120 days type of time timeframe. And so, that's why relative to the price increases, we've already implemented and are executing. You don't get to a full run rate realization that we'll call at Q3, but normally you don't go back and reprice quotes and backlog. 42:55 Okay. That's a consistency, kind of in our industry. Now, we have looked at other parts of the business and doing that, but predominantly it’s protected.

Patrick Shannon:

43:16 So, it exceeded or increased compared to Q3, just kind of given the surge and order activity. Now, some of that and it's difficult to characterize would be a pull forward from 2022 activity when customers are just trying to get to orders at and get in-line for the products, but increased and I would say, if you're, kind of looking at the full-year revenue impact on Allegion north of 100 million would be how to think about it.

Patrick Shannon:

43:55 Thank you.