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    Allegion PLC (ALLE)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$128.19Open (Feb 20, 2024)
    Post-Earnings Price$128.19Open (Feb 20, 2024)
    Price Change
    $0.00(0.00%)
    • Margin Expansion Expected in 2024: Allegion anticipates further margin expansion in 2024 due to increased efficiency and productivity, continuing the trend from 2023. The company plans to accelerate productivity, which should provide tailwinds for margins.
    • Stable Nonresidential Growth Projected: The company expects low to mid-single-digit growth in its nonresidential business for 2024, driven by strong institutional markets and a large installed base. Allegion believes it can deliver organic growth despite limited market tailwinds, leveraging the stability of late-cycle institutional verticals.
    • Strengthening International Segment: Allegion's International segment has shown significant margin expansion, becoming a much healthier portfolio. The company sees good growth potential in its International, Electronics, and Software Solutions businesses, which are contributing positively to margins and top-line growth.
    • Reliance on price increases for growth amid flat or declining volumes, especially in the residential segment, suggests potential limitations in driving future revenue growth.
    • Margins may face pressure without volume growth, as further margin expansion could be challenging without significant improvements in market conditions, particularly in non-residential sectors where the company expects low to mid-single-digit growth and acknowledges volatile vertical mixes.
    • Normalization of backlog levels reduces potential upside, as the backlog has returned to normal lead times, indicating that any pent-up demand has been fulfilled, and with residential markets remaining soft, the company does not foresee significant upside from this segment.
    1. Operating Margin Expansion
      Q: What's driving the year-over-year margin expansion in 2024?
      A: The company expects margin expansion in 2024 driven largely by price productivity exceeding inflation and investments. Pricing will be the biggest growth driver at the midpoint of the top-line guidance. Actions have already been taken, including announced pricing in the nonresidential Americas business and cost actions in Q4 2023, positioning the company well to achieve this outlook.

    2. Non-Residential Growth Outlook
      Q: Can you unpack the nonresidential growth outlook by vertical?
      A: The institutional verticals, making up about 45% of the Americas business, are stable with positive data on starts. Commercial verticals are mixed: office new construction is soft and expected to continue so, multifamily is slowing, but data centers show strength with demand for high-end electronic products. The aftermarket, representing 50% of Allegion's exposure, remains stable across all verticals. Overall, the company anticipates low to mid-single-digit growth in nonresidential.

    3. Electronics Growth Expectations
      Q: What's the outlook for electronics growth in 2024?
      A: Electronics have been a strong growth driver, with around 20% growth in 2023. Long-term, electronics are expected to contribute high single to low double-digit growth. Despite tough comps, demand remains strong due to the migration to electronic access control. The company continues to invest, with new products like XE360 offering flexibility and interoperability, and plans a steady stream of product launches moving forward.

    4. Organic Growth Cadence
      Q: How will organic growth cadence look in 2024, given tough Q1 comps?
      A: The first quarter of 2024 will present the most challenging comp, due to backlog burn in Q1 2023. While the company doesn't provide quarterly guidance, it expects a more back-half loaded top line in 2024, returning to more normal seasonality compared to 2023.

    5. Residential Volume Outlook
      Q: When will residential volumes bottom out in North America?
      A: It's tough to call, but the current outlook assumes a flat to slightly down end market for residential. The company remains cautious, noting that meaningful changes in interest rates could spark secondary home sales, but no significant rebound is anticipated at this time.

    6. International Margins Improvement
      Q: What's driving the strong margin expansion in International despite negative growth?
      A: The International segment has shown impressive margin expansion, with over 100 basis points increase in Q4 despite negative organic growth. This is due to a healthier portfolio focused on electronics and software businesses, improved productivity, and pricing excellence brought from the Americas to International. The team is executing well, with businesses like SimonsVoss and Interflex driving growth and margins.

    7. Backlog Levels and Upside Potential
      Q: How does the backlog heading into 2024 compare to normal years, and where might upside come from?
      A: The company has returned to normal lead times and book-and-ship business, unlike the extended backlogs in 2021 and early 2022. If there's upside, it could come from a better-than-expected performance in residential markets, where the company can leverage its strong Schlage brand.

    8. Volume Expectations
      Q: Are volumes expected to be flat or negative this year?
      A: While not providing specific volume guidance, the outlook at the midpoint is price-driven, based on actions already announced. If markets perform better than expected, the company can participate in volume upside.

    9. Free Cash Flow Conversion
      Q: Is the cash flow conversion rate expected to return to historical levels?
      A: On an adjusted net income basis, the cash flow conversion rate is at 90%, which is roughly in line or slightly better than historical performance. The company improved working capital in 2023 and expects continued focus on inventory efficiency in 2024.

    10. Education Vertical Outlook
      Q: What's the outlook for the education vertical?
      A: Education, part of the institutional vertical that makes up 45% of the Americas business, remains stable. K-12 and higher education have been consistent, with ongoing investments in safety and security products. The outlook aligns with low to mid-single-digit growth consistent with market indicators.

    11. Ongoing Investments in 2024
      Q: Are there any changes to investment levels in 2024?
      A: The company will continue to invest in its portfolio to drive organic growth, especially in software and electronics. This ongoing commitment to investment is consistent with past practices and is expected to continue.

    12. Pricing Stickiness
      Q: Has pricing been stickier than expected earlier in the year?
      A: Pricing has remained sticky, as the company prices for value. The industry implemented price increases due to significant inflation over multiple years. Pricing tends to lag inflation dynamics but remains in list prices over time.

    13. Non-Res Growth Deceleration
      Q: Is the deceleration in non-res growth due to channel destock?
      A: The channel destocking was a temporary phenomenon caused by supply chain disruptions, now mostly past. Vertical mix volatility, with stable institutional but variable commercial sectors, influences growth rates. The company anticipates low to mid-single-digit growth in non-residential for 2024.

    14. Americas Margins Sustainability
      Q: Can Americas margins continue to expand without volume growth?
      A: While volume growth is important long-term, in 2024, the company expects to operate more efficiently and accelerate productivity, providing tailwinds for margins. Margin expansion is not solely dependent on pricing but also on improved operational efficiency.