Allegion plc (ALLE) Earnings Call Transcript & Summary

Great. So why don't we get started. Good morning, everybody. Thanks for joining us. I'm Tim Wojs, and I cover building products here at Baird. And we're excited to have the management team of Allegion with us again today at our conference. Allegion is one of the largest global mechanical and electromechanical security providers. From the company, we Dave Petratis, who's Chairman, President and CEO. We have Patrick Shannon, who's Senior VP and CFO. We have Tom Martineau, who's VP of IR and Treasury; and then Kevin Sawyer, who also helps in IR. We're going to start with some prepared remarks from Dave, and then we'll move to Q&A. So with that, the floor is over to you, Dave. And there's also a breakout session with Allegion afterwards.

Tim, thank you. Sounds good. So my 12th Baird conference. We did not anticipate a year ago that we'd be here virtually, but it's great to be with you, again. I think we're operating in interesting times. Allegion is a great business. And the resiliency that, I think, we've shown through 2020 in operating the business really drives to our investment thesis. As you said, Tim, we're a pure play global security provider of solutions. We're early on in the formation of projects, of buildings, hospitals and institutionals. And we're there at the end when they're commissioned. We have legendary brands. Many of our brands are over 100 years with leading market positions, especially here in North America. We have taken a business with industry-leading organic growth and margins and expanded those margins in the downturn, which we feel really good about this. The business is influenced heavily by technology, and the opportunities that we have got to grow Allegion through, what we call, seamless access, the IoT and connectivity, I think, are compelling. And we're in an industry with strong fundamentals. It's discipline. It's the core of, I think, drivers and societies, people want to be safe and secure. We see this vision called seamless access and connectivity that's driving the future of the business, and it really sets the stage, I think, for the next decade of Allegion. Our vision seamless access in a safer world is driven by an overall strategy. Allegion creates value and has created value for over 100 years by securing people, assets. The beauty of that is the security aspects don't go away, in any sense. They become more connected through edge device. It opens up opportunities for what I've described as swim lanes, where we can take this unique position on the door and create connected opportunities that solve problems for customers. Tim, I think you've heard me say this, there's over 40 billion openings in the world. There's only -- less than 10% of those are connected. And as your edge device, your cell phone begins -- is your ticket to access the products of Allegion and the security industry don't go away, they deliver new value and access. They develop new partners with mega techs, building control capabilities, and they develop new business opportunities through seamless access to solve problems, such as visitor management, occupancy management, access control, identity issues in this arbitrator of access that we've really enjoyed for 100 years and new opportunities to drive data and analytics. If you look at the overall business profile, 2019 seems like light years away, but a very strong performance of the company since we debuted at Baird 7 years ago in 2013. But we're clearly a leader in our industry with strong margins, strong cash flow characteristics. What's interesting here is the electronics side of our business continues to grow at low double digits and represents about 20% of what we drive. We're nicely positioned between institutional, commercial and residential markets, and we certainly enjoy a strong new construction environment, but we also are part of the aftermarket. The break/fix that goes on every day in our world, it's a good balance of new and aftermarket. Tim, in summary, I'd say, as I think of 2020, I see the resilience of Allegion that has been there for over 100 years. It's not our first pandemic as a company around the world. In that, I think the company continues to advance our strategies around seamless access. We've done a good job of getting our cost in line. And we'll be one of a few set of companies, our forecast suggests that our 2020 EPS will be in line with 2019. I think, again, it highlights the resiliency and our ability to withstand some pretty strong headwinds and get up and see a bright future here at the company. So with that, I'll turn it over to you, Tim.

Great, great. Thank you for that, Dave. If anybody has any questions, feel free to use the portal on your browser or you can e-mail me directly at twojs@rwbaird.com.

Dave, maybe just to start on electromechanical. Could you maybe, just big picture, kind of where the electromechanical market is today, both on the residential and maybe the commercial side? And I guess, longer term, I always view electromechanical, I think investors think of electromechanical as a resi product, but there are a lot of commercial applications. And so how do you think about the long-term growth of electromechanical within the commercial market, specifically?

So I think -- when I think about commercial institutional, we put it in the same box, it continues to be compelling infrastructure needs around the country. I think there's money on the sidelines that will go to work, and there'll continue to be long-term investment in development. I was down in Houston a couple of weeks ago, was really pleased with the number of bridge cranes and money is being invested into the commercial office complex, multifamily mixed use project, I think, again, driven by the need -- we live, especially in the Americas in an aged-infrastructure market. And I think, as we move forward, that will -- there will continue to be strong investment that goes after specific opportunities, depending on where you're at in the segments, but it's this nagging underinvestment that I think will continue in reinvestment. In yesterday's Wall Street Journal, we saw K malls going belly up, going under, that will be turned. There'll be new investments in there that create that. So I like the long-term infrastructure play. When I think about residential, I see a decade of underinvestment. And I may have used this before with you, Tim, from post-World War II to the housing bubble of 2008, we've built 1.5 million single residential units per year. That was ruptured with the housing crisis. We've been underbuilding them, and now we're in a shortage situation. So I like the position of res for the next several years and think that we're good. Put on top of that the connectivity and seamless access. The pandemic have -- has accelerated. There's been some accelerators that I think will help move our industry towards more connected solutions. So that's kind of how we see some of the drivers. I know you'll have some specific questions for me based on that.

Yes, yes. I guess, on the resi side, I mean, we get a lot of questions from investors around competition in electromechanical and things like that. So can you just maybe talk about your brands, your kind of product placements in various channels and how that gives you a leg up relative to competitors?

So we've got the 100-year Schlage brand. It's the most -- it is the preferred replacement lock. It also has had many first in terms of its electronics and connectivity. First, meaning the first lock to be Siri activated, which I did several years ago at the Baird conference, "Hey, Siri, open the lock." The Schlage Encode is the top-rated lock on Amazon.com, with thousands -- it's got a 4.5-star rating. It's because of the built-in features, it's because it's online, it's because it's got the longest battery life in the industry for an online lock. So the brand, the styles, features and its availability puts it in a leading position. I'd say maybe more fundamental to that, I believe in this time of COVID, we have a superior supply chain, and the performance of the residential business has been extremely robust. It continues. And I think the simplicity of our supply chain is serving Allegion and its customers well today.

Okay, okay. Yes. It is a good supply chain, I'll tell you that. I guess, maybe on the commercial side, when you think about electromechanical, what's the opportunity to add a level of recurring or service-type revenue? Is that -- are those types of revenue streams -- I mean, can Allegion win those revenue streams? Or how do you think about having a little bit more of a service or recurring revenue-type model there?

Well, today, I have no examples of recurring revenue. I do have a business that's 20% driven by electronics, and I believe there are segmented opportunities for us to go in and create those ecosystem. Examples would be around identity, flow control, data and analytics, seamless access, visitor management, I may have said that before. But think about a world that Allegion is connected to the registrar's office at the university in Milwaukee, Wisconsin or Marquette, let's say we're connected in that. Today, if you go on the Marquette campus, a building could be up in 16 hours a day, I would challenge why. And then the second is Marquette probably manages 10,000 to 15,000 credentials, which could be keys, cards, FOBs. Why do you need to be in that business? Our unique position on the door and this connectivity allows us to go in and offer Marquette University. If Tim Wojs has a class at 10:00 in the morning, let's allow him access from 9:30 to noon, and the building remains secure. So there's, I think, several swim lanes because of the growth of connectivity in our smart devices that gives this business the ability to develop recurring revenues and value streams that will help us grow.

And kind of dovetailing on that, Dave, there's a question here from the audience. Would you be partnering with existing vendors in those types of areas or building those solutions organically?

Both. It depends on where you're at in the segments and the problems that we're working to solve, but we think partnership is an important aspect. Partnerships with the mega techs like Apple, and Siri's ability to open the lock. The mega techs, Amazon, Google, Apple, key players. You move down the food chain, you've got the building integrators that are important. You've also got these capabilities that we've used our venture arms with small bets to be able to expand Allegion's capability to move faster. Those would be things like Pindrop, which is voice authentication, important in an Amazon world that they believe the home will be voice controlled. Is it your voice, Tim? Or is it my voice? A second example would be Openpath that allows seamless access. A third would be VergeSense, which is occupancy management. Partnership is an important part of how we see the future. Some of those technologies will move ahead and on. Others will partner with to expand our specification capability and grow the business.

Okay, okay. Great. Maybe just on that specification point, Dave, could you just elaborate on what the specification advantage you have is? I think it's a big deal, and it's probably -- it's more maybe qualitative than quantitative. But can you just talk about that advantage with specification, how difficult that is to replicate in the U.S. and and, I guess, globally?

So -- well beyond my time, over 20 years ago, Ingersoll Rand made a great move to bring in-house our specifying capability across North America. It's a competitive engine. It would look like Schneider's or Square D's in the electrical space. It's different from like the lighting space, where those are independent reps. Our 200 specifiers are company-owned assets that are some of the best experts on the continent. The -- it's a clear pillar of the company. We have made significant investments in a couple of areas to augment that. One is in configurators that help us to swiftly put in data and produce a bill of material. The second is with the product that we rolled out 2 years ago, a digital product called Overtur that connects architects and our spec writers to be able to deliver a spec like the new LA football venue. I don't -- I can't remember the name of the -- where the Rams and the Chargers play, but...

SoFi Stadium. There you go, SoFi.

Yes. So SoFi Stadium, there's 3,000 openings there. That was all -- that entire project was put together in a digital format that we developed ourselves called Overtur with our spec writing. So the strongest spec writing team in our industry has been aggressive. Allegion has been aggressive in its investments. It's digitized, and SoFi would be a great example of how it works. Now not only does it help our customers and our spec writers, our salespeople to drive the efficiency, they can get to more work, but Overtur manages those 3,000 openings for over the site. So an architect would typically deliver a big binder, hard copy prints, "Here's what's hanging on the doors." That lives in a digital world today. So if Allegion has to go out and look at that opening or a service technician or a partner, you bring it up what's hanging on that door. So it's -- we've taken the strength in specification writing that is partnered with some of the largest architects in the world, have digitized it, and we think it's a competitive strength that will continue to help us as we go into the next decade.