Allegion plc

Good morning and welcome to the Allegiant Fourth Quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Pocowinski, Vice President of Investor Relations. Please go ahead.

Thank you, Drew. Good morning, everyone. Thank you for joining us for Allegiant's Fourth Quarter 2024 earnings call. With me today are John Stone, President and Chief Executive Officer, and Mike Wagnus, Senior Vice President and Chief Financial Officer of Allegiant. Our earnings released, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at .allegiant.com. This call will be recorded and archived on our website. Please go to slide two. 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 and the financial tables of our press release for further details. Please go to slide three, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone. Thanks for joining us. Q4 marked the end to another solid year of growth and strong execution by the entire Legion team. We've demonstrated the resilience of our business model, expanded our industry-leading margins, and accelerated capital deployment to invest in our business and return cash to shareholders. I'm pleased with the top-line growth in the fourth quarter and 2024 as a whole, especially in the Americas, where we've delivered -single-digit growth for the past three quarters as comparisons have normalized. Over the past year, we have primed the portfolio and the organization to grow faster, especially as our business continues to benefit from the stability of our institutional base. We accelerated capital deployment in 2024, returning cash to shareholders and growing our business with a creative tuck-in acquisitions. Our strong cash generation, balance sheet, and pipeline of opportunities continue to position as well for future capital deployment to create long-term value for our shareholders. We're encouraged by trends in our Americas non-residential business exiting 2024, and we'll share some additional market perspectives when we discuss 2025 outlook later in the call. Please go to slide four. Let's take a look at capital allocation for the full year. The Legion marked 2024 with meaningful product launches that demonstrate our deep customer understanding and the strength of our R&D effort and market-leading brands. Throughout the year, you heard us speak to a few of these, the Schlage XE360 series, our next-generation commercial electronic lock family that supports the latest credential technologies across multifamily and commercial markets, Schlage's new smart lock integration with Airbnb, which was yet another industry first for our company, and the Schlage Indication a -in-class lock portfolio that allows users to more easily see the locked or unlocked status of a door, specifically designed with K-12 school security in mind. Lastly, the Von Duprin 70 series, a new product line that's leveraging more than a century of expertise in developing high-performance exit devices to meet the safe entry and egress needs of customers today. We're very proud of these and many others that you may have also heard about. Simon's Voss in Germany launched AX2Go, supporting mobile smartphone-based credentials across both iOS and Android phones. And notably in Q4, a Legion became the first security solutions provider to support mobile credentials on Wear OS by Google smartwatches. Look for more announcements like these in 2025 as the Legion continues to build on our legacy and invest for organic growth. The Legion executed M&A amounting to $137 million in 2024. This included five bolt-on acquisitions spanning our core markets. In the Legion International, we added Voss doors and door cuffs to our portfolio, expanding how we go to market and expanding our electromechanical product portfolios. In the Americas, we added Krieger specialty products, unicell architectural, and SawStore hardware, which increased the breadth of highly profitable specialty offerings in our non-residential portfolio. All of these are leveraging the Legion's strengths, like spec writing capability and expertise, our manufacturing distribution scale, and strong customer relationships. We're very pleased with the accretive returns they bring to the Legion. We continue to see opportunity to grow inorganically in 2025 and have entered the year with a very active pipeline. This was recently marked by our acquisition of the Nextdoor Company in the United States and the announcement of our intent to acquire Lamar in Australia. We'll share more on both of these bolt-on acquisitions in our Q1 call. The Legion continues to be a dividend-paying stock, and earlier this month we announced our 11th consecutive increase to our dividend. As we've shared before, you can expect our dividends to grow commensurate with earnings over the long term. Lastly, we made share repurchases in the year amounting to approximately $220 million. We remain committed to balanced, consistent capital allocation with a clear priority of investing for growth. We have an active pipeline that complements our core mechanical and electronics portfolio and leverages our channel strengths. I look forward to updating you as we progress through the year. Mike will now walk you through fourth quarter financial results.

Thanks John, and good morning everyone. Thank you for joining today's call. Please go to slide number five. As John shared, our Q4 results reflect solid performance from the Legion team, delivering another quarter of margin expansion with -single-digit top line growth. Revenue for the fourth quarter was $945.6 million, an increase of .4% compared to 2023. Organic revenue increased .5% in the quarter as a result of favorable price and volume. We saw strength within our America segment with international organic revenue down slightly in the quarter. Q4 adjusted operating margin increased by 10 basis points, driven primarily by volume leverage and favorable mix. Price and productivity net of inflation and investment was a slight headwind in Q4, but strong for the full year. I am pleased with the 70 basis points of operating margin expansion for the full year of 2024. Adjusted earnings per share of $1.86 increased 18 cents or .7% versus the prior year. Operational performance, favorable tax, and a creative capital deployment more than offset a slight headwind from interest and other. Finally, full year 2024 available cash flow was $582.9 million, which was a .9% increase versus last year. We continue to effectively manage working capital and generate strong cash flow. I'll provide more details on our balance sheet and cash flow 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 our respective regions. Organic revenue grew .5% in the quarter, which included volume growth of .9% and price realization of 0.6%. Price realization stepped down about a point in the fourth quarter versus Q3, largely due to timing of rebate accruals in the Americas business compared to prior year. For the full year, the enterprise had solid price realization of 2.4%, and as we think about 2025, we expect continued price realization. Acquisitions drove two points of growth in the quarter, and currency was a slight headwind, bringing total reported growth to 5.4%. Please go to slide number seven. Our America segment delivered strong operating results in Q4. Revenue of $750 million was up .4% on a reported basis and up .6% on an organic basis. Organic growth included both favorable price and volume in the quarter. Reported revenue includes .9% growth from acquisitions and a slight currency headwind. Our residential business was up high single digits in the quarter. The quarter was stronger than expected, as some of our residential customers pulled in purchases ahead of inflation and tariff uncertainty. We believe underlying residential markets likely grew more in line with the previous couple of quarters. As a result, Q4 revenue was benefited by approximately mid single digit millions of dollars. Our non-residential business increased mid single digits organically in the quarter. As institutional end markets remained stable, we did not have pull ahead within our non-residential customers. Electronics revenue was up low single digits compared to Q4 last year. As we discussed on prior calls, electronic comparisons in recent years have reflected the timing of supply chain disruptions in prior years. America's adjusted operating income of $205.1 million increased .9% versus the prior year period. Adjusted operating margin was up 70 basis points as a result of favorable volume leverage and accretive acquisitions. Price and productivity, net of inflation and investments was a slight headwind in Q4, but strong for the full year. Please go to slide number 8. Our international segment had a tough fourth quarter driven by a challenging macroeconomic environment, particularly in Germany, which is our largest market internationally. Revenue of $195.6 million was up .5% on a reported basis and down .7% organically. Acquisitions were a tailwind this quarter, positively impacted reported revenue by 2.4%. Currency was a slight headwind in the quarter versus prior year. China was also a headwind to international organic growth. We took additional steps in the quarter to exit our already small operations there. In total, we had approximately $5 million of revenue in full year 2024, which represents a slight headwind to 2025 organic growth. International adjusted operating income of $30.9 million decreased .3% versus the prior year period. Adjusted operating margin for the quarter decreased 100 basis points. While price and productivity exceeded inflation and investments, margin declines were due to lower volumes. Please go to slide 9 and it will provide an overview of our cash flow and balance sheet. 2024 available cash flow came in at approximately $583 million, up $66.5 million versus the prior year. This increase is driven by higher earnings and improvements in working capital, partially offset by higher capital expenditures. Working capital as a percent of revenue improved as we continue to focus on working capital efficiency to convert earnings to cash. We saw improvements in both inventory turns and DSO this year, which drove the improvement. Finally, our balance sheet remains strong. Our net debt to adjusted EBITDA is at a healthy ratio of 1.6 times. 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.

Thanks, Mike. Please go to slide 10. Last quarter we provided some initial market commentary for 2025. Today I'd like to focus specifically on our institutional markets to provide more perspective on what's one of the main drivers of our business. Allegiant holds an enviable position in the industry here with strength in our sales footprint, our specification capabilities, and our relationships with channel partners. We win business by solving complex problems for end users and working closely with architects with whom we've had decades-long relationships. As we start off 2025, we continue to see indications of stable growth in our key market segments. A key source of funding, as indicated by new municipal bond issuance, remains healthy following a very strong 2024. And you can expect these bonds will be spent over the next several years. Dodge institutional indicators also support volume growth as square-footed starts have been in positive territory. The institutional markets are still growing, partially offset by known pockets of softness like commercial office and multifamily. Please go to slide 11 and let's walk through our outlook for 2025. We expect total Allegiant revenue growth to be 1 to 3 percent and organic revenue growth to be 1.5 to 3.5 percent. Total growth includes approximately one point of acquisitions, which is largely carryover from 2024, and approximately one and a half points of headwind from foreign currency, primarily in Allegiant International. In the Americas, we expect organic revenue growth to be low to mid-single digits, with growth coming from both our non-residential and residential businesses. For Allegiant International, we anticipate that organic revenue will remain relatively flat. As Mike mentioned earlier, macroeconomic conditions in our international markets, particularly in Germany, continue to be weak. We're estimating an adjusted earnings per share outlook in the range of $7.65 to $7.85. This represents growth of approximately one and a half to four percent over the prior year period, inclusive of a significant headwind from tax rate, which is estimated to be 17.5 percent in 2025 at the midpoint. You can find more details in the appendix. Lastly, our outlook on available cash flow is 85 to 90 percent of adjusted net income. We are committed to balanced, consistent, and disciplined approach to capital deployment, and this outlook assumes $86.7 million in average diluted shares outstanding, inclusive of anticipated share repurchases in 2025. Allegiant's M&A pipeline is active, and we anticipate allocating additional capital to acquisitions this year. However, this outlook does not account for any further acquisitions beyond the recent announcements we've shared on Nextdoor Company at Lamar. One more item of interest that I'd like to cover, given the evolving headlines in recent weeks, is tariffs. Our guidance includes the currently enacted tariffs on imports from China, and at the enterprise level, we import less than 5 percent of our cost of goods sold from China. We're taking a combination of pricing actions and sharing those costs with our suppliers to minimize the impact. Our guidance does not include potential tariffs that may be enacted on Mexico. We source approximately 20 to 25 percent of cost of goods sold from Mexico, primarily related to our residential business in the Americas. Should tariffs go into effect, we anticipate taking pricing actions to cover the higher costs, and expect to offset the dollar impact at the operating income and earnings per share level. Please go to slide 12. In summary, Allegiant delivered a record year in 2024, a year marked by consistent execution, solid margin expansion, and balanced capital deployment. These results are a testament to our team of highly engaged experts who, together with our distribution and channel partners, solve complex problems for our end user customers and work tirelessly to make the world safer. We expect 2025 will be another opportunity to showcase the strength of this team, and with the consistency and discipline we have in investing for our future, Allegiant is primed for more growth. With that, we'll be happy to take your questions.

Drew, we can open up the line for questions. Drew, we can move to Q&A.