Q3 2023 Allegion PLC Earnings Call

Good morning, and welcome to the Allegiant third quarter 2023 earnings call.

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 Toby coil director of Investor Relations. Please go ahead.

Thank you Jill good morning, everyone. Thank you for joining us for Legion third quarter 2023 earnings call.

With me today are Johnstown, President and Chief Executive Officer, and Mike <unk>, Senior Vice President and Chief Financial Officer of Allegiant.

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 got a Legion dotcom.

This call will be recorded and archived on our website.

Go to slide number 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.

Please see our most recent SEC filings for a description of some other factors that may cause actual results to differ materially from our projections.

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 three and I'll turn the call over to John.

Thanks, Jeremy and good morning, everyone. Thanks for joining us today.

Current quarter was all about outstanding operational execution from the entire Allegiant team and I'm pleased with our performance.

Electronics demand remains strong with in our opinion, a long runway for further adoption in the quarter, a lesion delivered mid teens organic growth in electronics and software solutions globally led by our Americas, non residential business, which had another robust quarter.

We already have the highest margins in our industry and we're driving additional expansion at the gross and operating margin levels. Despite not having some of the mechanical volume tailwind from a year ago.

Our balance sheet is getting stronger we de levered from the access technologies acquisition quickly and are now building capital to deploy for growth.

Online Allegiant is poised for a record year in total revenue.

Adjusted operating income and adjusted earnings per share as a result, we're raising our guidance for full year adjusted EPS.

Please go to slide four.

So allegiance vision of enabling seamless access and a safer world remains core to our company culture performance and result, securing people where they live learn and work has never been more important.

We are a pure play provider of security and access solutions, we have a great legacy of the strongest brands and the highest margins.

We operate with excellence and are accelerating our year over year productivity with normalized lead times, while still managing the massive SKU complexity that we manage in a made to order environment.

This makes the leads and a partner of choice and we're leveraging that unique position to promote the adoption of open ecosystems that maximize our addressable market.

We're also delivering new value in access continuing our drive to wrap software and services around our hardware solutions.

This is the critical unlock of additional value for our end user customers for allegiance growth and for long term shareholder return.

A great proof point of how our company is living this vision and strategy is the Allegiant ventures announcement, we made yesterday.

Allegiant ventures has made a strategic investment in ambient AI who's cutting edge AI platform utilizes innovative technology to enable seamless access and a safer world. This is the largest investment in the lesion ventures history and it reflects the tremendous potential we see in ambient and allegiance collaboration to deliver new value in.

Access.

Please go to slide five.

I'd like to turn to our capital allocation priorities when I joined the lesion, we had just announced the acquisition of access technologies and over the last year I feel we've done a good job and quickly delevering back to pre acquisition levels, while still investing in our business and returning cash to our shareholders.

Allegiant has an investment grade company and we expect to remain an investment grade company. This is critically important to us.

We will continue investing for above market organic growth prioritizing projects and solutions that drive seamless access and make the world safer.

We're a dividend paying stock and you can expect our dividends grow commensurate with earnings over the long term.

We will also drive growth through acquisitions, considering complementary portfolios like you saw with the access technologies business as well as software as a service related the seamless access like you saw with panel.

High margin recurring revenue businesses and bolt on acquisitions that fill portfolio gaps in the hardware space will remain priorities.

And while we may increase our debt for the right acquisitions, we've demonstrated the ability to quickly delever.

Lastly, with regards to share repurchases at a minimum we will continue to offset it.

Incentive compensation, and we will make additional share repurchases as appropriate.

Mike will now walk you through the third quarter financial results and I'll be back to discuss our full year 2023 outlook.

Thanks, John and good morning, everyone. Thank you for joining today's call. Please.

Please go to slide number six.

As John shared Allegiant 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 five tenths of a percent 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 declines of six tenths of a percent.

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 our highest adjusted operating margin in our history.

I am 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 21 cents or approximately 12% versus the prior year.

Operational performance drove nearly 10 cents 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 $324 million, an increase of approximately $95 million versus last year, driven by higher earnings I'll provide more details on our cash flow and balance sheet a little later in the presentation.

Please go to slide number seven.

This slide provides an overview of our quarterly and year to date revenue. Our reviews are I will review our enterprise results here before turning to our respective regions.

As I just mentioned, we had reported growth of five 4% with a decline in organic revenue of six tenths of percent in the quarter.

As price realization offset pressure on mechanical volumes.

As you see on the top of the slide Q3 is comping against a 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 backlog 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 of <unk>.

Yeah.

On a year to date basis organic revenue was six 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 eight.

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 nonresidential business was up low single digits against a prior year comp, which grew approximately 30% driven by backlog reductions I just mentioned on a year to date basis nonresidential business has grown double digits.

Our Americas residential business is down low teens in the quarter as we continued to see weakness in the residential market as higher interest rates continued to impact new and existing home sales.

Our access technologies business delivered organic growth of mid teens, representing another strong quarter of topline 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.

Yeah.

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.

Americas' adjusted operating income up $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 nine.

Yeah.

Our international segment executed well in a challenging macroeconomic environment.

Revenues of 177 million was up 3% on a reported basis and down two 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 continued to see strength in our electronics and software solutions, which grow loop, which grew low double digits organically in the quarter.

In addition currency was a tailwind this quarter positively impacting our reported revenues by five 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 $324 million up nearly $95 million versus the prior year.

This increase was 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 increase 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 two times as we continued 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 unhealthy position.

I'll now hand, the call back over to John for an update on our full year 2023 outlook. Thanks, Mike. Please go to slide 11.

As I mentioned earlier, our company is on track for record full year revenue adjusted operating income and adjusted EPS in 2023, we're raising our full year outlook on adjusted EPS in affirming our full year outlook on revenue and available cash flow.

We continue to expect the America segment to be 15% to 16% for total growth seven 5% eight 5% organically led by our nonresidential business, which is still expected to grow high single to low double digits organically.

The dental business is expected to be down slightly as markets remain challenged.

For International we continue to expect revenue to be down 1% to flat in total and down 1% to 2% organically.

All in for the company our outlook continues to reflect total revenue growth between 11, five and 12, 5% with organic revenue growth between five five and six 5%.

Based on our strong operational performance in the third quarter, we're increasing our adjusted EPS outlook to the range of $6 80 to $6 90.

Which is approximately 13, 5% to 15% growth over the prior year period.

Lastly, we still expect our outlook on available cash flow to be in the range of $500 million to $520 million.

I'm very proud of the work of the entire Allegiant team and our distribution partners over the course of this year and the record results. We are on track to achieve.

Looking forward, we will provide our full 2024 outlook to you during our fourth quarter call as we normally do however, given the uncertainty in the market moving into next year. We wanted to give you some insights into our view of the market dynamics today.

First we expect growth in electronics adoption to continue driven by the convenience and added security that digital identities and mobile credentials leveraging smartphone wallets provide to our end user customers.

Shift from mechanical systems to electronic access control systems with connected hardware provides efficiencies and operating cost savings for buildings and campuses and recent channel checks and recent and user visits in the institutional segment and education and health care <unk>.

Reinforced this trend.

And while small today, our software solutions portfolio is growing and we look to accelerate this growth into 2024 and beyond.

In addition, while the most recent Abi headline dip the institutional segment has been very resilient over the last 12 months and five of the last six months still reading above 50 allegiance context is important here, you'll recall that we're a late cycle business and also rather heavily weighted towards the institutional segment.

We have an auto door business with strong backlogs and a blue chip customer base and our service business that continues to grow our channel is in good shape on inventory and our lead times across the portfolio are now normalized our supply chain has improved to the point, where we can regain market share in the aftermarket space.

Expected headwinds are well known at this point commercial office in major Metro areas is indeed soft it's been soft for several months now.

However that part of our business is only a low double digit percent of our overall Americas portfolio.

Weakness in residential and certain international markets is expected to continue particularly for mechanical products, which we've highlighted for you throughout this year.

We expect.

Productivity and recent cost actions that we've taken to help drive margin expansion into next year.

And before we go to Q&A I'd like to reiterate what I said at the beginning of the call Allegiant is in a good industry and we're well positioned thanks to the strong execution by our team we've navigated industry cycles, very well in the past and with the improvements we've made to our portfolio and operations, we feel confident in our ability to succeed and drive <unk>.

<unk> organic growth and margin expansion with that let's turn to Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Any time your question has been addressed and you would like to withdraw. Your question. Please press Star then two again, please limit yourself to one question and one brief follow up.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Joe O'dea with Wells Fargo. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Hi, So John maybe on that last point I'm not sure you're sort of willing to maybe elaborate a little bit more but just the 24 kind of considerations.

I mean, it seems like if institutional channel checks are constructive a market share gain potential and aftermarket.

Understandable headwinds in commercial office and resi.

Unknown Executive: Good morning and welcome to the Allegion 3rd quarter 2023 earnings call. Our participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing star than zero on your telephone keypad.

But then productivity and cost actions as well.

It seems like it's setting up for margin expansion is it also know today setting up for for topline growth with a mix of those factors.

Yeah, Joe I appreciate the question I'd say again.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star than one on your telephone keypad to withdraw your question. Please press star than two.

The short answer, yes, we see organic growth in the future.

I just keep bringing you back to you know Allegiant is a late cycle business.

We're heavily weighted towards institutional.

Unknown Executive: Please note this event is being recorded.

If you look at Dodge starts if you look at Abi the institutional segment has been very resilient.

Jobi Coyle: I would now like to turn the conference over to Jobi Coyle, Director of Investor Relations. Please go ahead. Thank you, Drew.

The last 12 months or even even longer and so yeah, we feel we feel pretty good about that bolt on.

Jobi Coyle: Good morning everyone. Thank you for joining us for Allegion 3rd 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 you in today's call are available on our website at investor.alegion.com. This call will be recorded and archived on our website.

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 a as you heard and as you've called out the cost actions that we've taken here recently.

Phil well positioned.

Alright, I appreciate that and then also just international and maybe level setting on through your views on where things stand within that cycle, where we've got I think now six quarters of volume declines. It's been I think some time that a lot of that has been on portable security.

Jobi Coyle: Please go to site number 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-GAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.

Electronics has been holding up quite better.

But just where are you where you think you are in that cycle. You know how close you are maybe to a bottom within the international trends.

Yeah, that's that's tough to peg, Joe like where we're at the bottom you know 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 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.

Jobi Coyle: Please go to slide three and I'll turn the call over to John. Thanks, Shelby.

John Stone: Good morning, everyone. Thanks for joining us today. This current quarter was all about outstanding operational execution from the entire Allegion team and I'm pleased with our performance. Electronics demand remains strong with, in our opinion, a long runway for further adoption. In the quarter Allegion delivered mid-teens organic growth and electronics and software solutions globally led by our America's non-residential business, which had another robust quarter. We already have the highest margins in our industry and we're driving additional expansion at the growth and operating margin levels despite not having some of the mechanical volume tail lens from a year ago.

Time to call a bottom.

Definitely flirting with a bottom I would say.

Which could provide.

Small bit of a tailwind into <unk> into next year and beyond but you called out the most important piece and that's that's the continued growth.

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 like the bolt on acquisition of Plano that team came on board and is performing very well integrated very well with with our inner flex team and we see a really.

John Stone: Our balance sheet is getting stronger. We delivered from the Access Technologies acquisition quickly and are now building capital to deploy for growth. Bottom line, Allegion is poised for a record year in total revenue, adjusted operating income and adjusted earnings per share. As a result, we're raising our guidance for full year, adjusted EPS.

Bright future there and then the electronics space, Yeah continued growth and we will continue to drive our investments to drive that growth.

Hey, Joe I might also add if you think about that global portable we've been we've been calling that out all year. So it's gonna be a soft 2023, all four quarters. So if you think about next year, it's not a big headwind I'm, sorry, I think headwind versus the current year, because you do have four soft quarter. So.

John Stone: Please go to slide four. Allegion's vision of enabling seamless access and a safer world remains core to our company culture, performance and results. Securing people where they live, learn and work has never been more important. We are a pure play provider of security and access solutions. We have a great legacy of the strongest brands and the highest margins. We operate with excellence and are accelerating our year-over-year productivity with normalized lead times while still managing the massive skew complexity that we manage in a made-to-order environment.

It is important to understand that dynamic about global portable.

I appreciate the color. Thank you.

Thanks, Joe.

Next question comes from Julian Mitchell with Barclays. Please go ahead.

Thanks, very much good morning.

Just wanted to circle back to the Americas.

Got it.

Sales outlook, so it looks like the fourth quarter implied is organic sales maybe up.

John Stone: This makes the Legion a partner of choice and we're leveraging that unique position to promote the adoption of open ecosystems that maximize our address possible market. We're also delivering new value and access, continuing our drive to wrap software and services around our hardware solutions. This is the critical unlock of additional value for our end user customers, for a Legion's growth and for long-term shareholder return.

Mid single digits.

Year on year in Q4, and sort of down mid single digits.

Sequentially.

So just wanted to sort of make sure that's roughly correct and any color within that on non res E. This is rosy dynamics and well.

When we look at that plus mid single digits entry rate into 2024.

John Stone: A great proof point of how our company is living this vision and strategy is the Allegion Ventures announcement we made yesterday. Allegion Ventures has made a strategic investment in Ambient AI, whose cutting-edge AI platform utilizes innovative technology to enable seamless access in the safer world. This is the largest investment in the Legion Ventures history and it reflects the tremendous potential we see in Ambient and Allegion's collaboration to deliver new value and access.

And the fact that your guidance from the Investor Day was plus mid single digit for the Americas market.

We are assuming that that kind of run rate can can sustain into early 'twenty four.

Yes, Julian if you think about that.

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 and mechanical that continued into Q4 last year.

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 and mechanical that continued into Q4 last year.

John Stone: Please go to slide 5. I'd like to turn to our capital allocation priorities. When I joined the Legion, we had just announced the acquisition of access technologies and over the last year I feel we've done a good job in quickly delivering back to pre-acquisition levels while still investing in our business and returning cash to our shareholders. The Legion is an investment-grade company and we expect to remain an investment-grade company. This is critically important to us.

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 nonresidential, certainly is healthier or stronger than the residential end markets.

So as I think about a full year.

John Stone: We will continue investing for above-market organic growth, prioritizing projects and solutions that drive seamless access and make the world safer. We're a dividend-paying stock and you can expect our dividends growth commensurate with earnings over the long term. We will also drive growth through acquisitions, considering complimentary portfolios like you saw with the access technologies business as well as software as a service related to seamless access like you saw with Plano. High margin, recurring revenue businesses and bolt-on acquisitions that fill portfolio gaps in the hardware space will remain priorities.

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 didn't say relatively that this year, whether it's down slightly or relatively flat all year. So you do have a dynamic where res.

John Stone: And while we may increase our debt for the right acquisitions, we've demonstrated the ability to quickly deliver. Lastly, with regards to share repurchases, at a minimum, we will continue to offset incentive compensation and we will make additional share repurchases as appropriate.

He is little weaker as we've been saying in the non res led by institutional is hanging in there.

But prior year comps do impact the year over year quarterly growth rates.

That's helpful. Thank you and it it sounds like you're fairly confident that that inventory destock process by our customers and channel partners is is largely.

Done.

Maybe just sort of help us understand the conviction level around that and you know when you're looking at your sort of.

Michael Wagnes: Michael now walk you through third quarter financial results and I'll be back to discuss our full year 2023 outlook. Thanks John and good morning everyone. Thank you for joining today's call.

Forward looking indicators aren't you mentioned backlog down a bit but.

But maybe any color on sort of the spec writing for the Americas business overall.

Michael Wagnes: Please go to slide number six. As John shared, a Legion continued to execute at a high level. We delivered another quarter of solid performance with strong electronic growth, sustained margin expansion and healthy cash flows. Revenue for the third quarter was 917.9 million in increase of five tenths of a percent compared to 2022. We continue to see favorable price realization along with strength and electronics and access technology. Of course, I'm going to pressure on our residential business paired with a challenging prior year comparable resulted in organic revenue declines of 0.6% of a percent.

How does kind of the the order patterns change have you seen any evidence of project push outs that type of thing.

Okay that does it.

About five questions in there Julien well done I'd say alright.

I'd say on that.

The channel Destock, we feel pretty good there you know I think our commentary in Q2.

Indicated we didn't view this as a real long term issue and.

Channel checks kind of prove that out.

Don't think it's it's still.

A big headwind at this point, we've we've met with our 25 largest distributors in the past few weeks and then that would confirm that so again, there's there's still certain metro areas that are a little bit soft there still suburban areas that are quite strong quite robust aftermarket et cetera.

Michael Wagnes: Adjusted operating margin and adjusted EBITDA margin in the third quarter both increased by 110 basis points. Pricing productivity and excessive 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.

So overall feel pretty good along with the comments that Mike just shared.

Let's see what else too.

Tim mentioned, there I think.

With respect to the spec activity yeah spec.

<unk> activities still remains solid.

Michael Wagnes: Our operating model and strong execution have positioned us well for future margin expansion. Adjusted earnings per share of $1.94 increased 21 cents or approximately 12% versus the prior year. Operational performance drove nearly 10 cents 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.

It's still hanging in there.

So we would expect that institutional heavy business to be driven by it. That's the spec engine that we have to still remains solid as we move forward. So expect activity still remains strong for us.

That's great. Thank you.

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

Alright, Thanks, good morning, guys.

Good morning.

Hey, Joe.

Michael Wagnes: Year-to-date available cash flow is 320.4 million and 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.

So can we maybe just following.

Following up on that on the mechanical business bottoming comment to your portfolio as you.

You know it 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 businesses today, what's the kind of right run rate that that could be bottoming, whether that's on a quarterly basis or an annual basis any color around that would be helpful.

Michael Wagnes: Please go to slide number seven. This slide provides an overview of our quarterly end year-to-date revenue. Our reviewer, I will review our enterprise result here before turning to our respective regions. As I just mentioned, we had reported growth of 5 cents per percent with a decline in organic revenue of 6 cents per cent in the quarter, as price realization offset pressure on mechanical volumes. As you see on the top of the slide, Q3 is copying against a prior year quarter with organic growth of more than 18%.

I would share this with you Joe if you looked at our revenue growth starting in Q3 last year, we started shipping those past due orders serving our customers that continued if you recall Q1 this year.

Real large growth that we had so you could think of that as a kind of a three quarter burn through that backlog type challenge in the customers adjusting toward need new lead times.

Michael Wagnes: 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. Current seed growth some favorability in the quarter bringing total reported growth to 5 cents. On a year-to-date basis, organic revenue was 6.1% overall with America's at nearly 9% driven by strength in our non-residential business. Our international business is down about 3% year-to-date.

I think from that point on where kind of a more normalized rate we talked in Q2 about that item. So I feel that thats behind us. It's those three quarters, where you do have that more challenging comparable on the nonresidential mechanical business, we talked about.

Okay, Great I appreciate that Mike and then and then maybe my follow on John.

Michael Wagnes: Please go to slide number eight. Our America's segment continues to deliver strong operating results in the third quarter, expanding margins despite lower volumes. Revenues of 740.9 million were found slightly on a reported basis in flat organically, as favorable pricing was offset by reduced volumes. Let me disaggregate the components further. The America's non-residential business was up low single digits against a prior year cop, which grew approximately 30%, driven by backlog reductions I just mentioned.

You talked about the balance sheet getting back I.

Into investment grade good shape, you Delever now that two turns.

I'm I'm curious there are some fairly sizable assets that are out there potentially on the security side as youre thinking about deploying capital how are you thinking about.

M&A and particularly like bolt on versus maybe some more transformative type deals.

Great Great question, Joe and I think our teams perform very very well cash flow has improved very well this year and we did delever quite well and I think I'm happy with where we're positioned in.

Michael Wagnes: On a year-to-date basis, non-residential business has grown double digits. Our America's 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 at mid-teens representing another strong quarter of top-line growth and demonstrating the stability that this business provides us. Demand for our electronic solutions remains strong in the Americas.

Again as in the prepared remarks bill.

Building capital to deploy for growth.

And I think for US you can look for us to be acquisitive, you can look for us to.

Look to fill portfolio gaps with with bolt on hardware solutions like we did with access technologies.

Or.

SaaS businesses like we did with Plano as long as things are the right strategic asset the right.

Michael Wagnes: We deliver 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, the Cannibal Vimes 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.

Leadership team our business model, a culture that fits with the Legion and is in the sandbox of security and access solutions, you can look for us to be acquisitive.

Certainly not right to comment on any particular transaction, but we do expect to grow through acquisition and building capital to do just that.

Okay. Thank you.

Michael Wagnes: Our America suggested operating income of 210.6 million increased 5% versus the prior year period. While adjusted operating margin and adjusted EBITDA margin for the quarter, we're up 140 and 150 basis points respectively. Pricing and productivity exceeded inflation and investments driving substantial margin expansion, demonstrating the resiliency of our America's business model.

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

Hi, Good morning, All Hey, Brett Hey, Brett.

Just wanted to dig in on the complexion of the marketplace and really thinking about the softer commercial pockets versus the institutional resilience is is there any good way to think about the locker access content per building between those two verticals I think you can get multiples of the wallet share.

Michael Wagnes: Please go to slide number nine. Our international segment executed well in a challenging macroeconomic environment. Revenue of 177 million was up 3% on a reported basis and down 2.8% organically. Price realization was more than all set 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 strengthen our electronics and software solutions which grow which grew low double digits organically in the quarter.

School or a hospital versus a retail front, but any any insight there would be helpful.

Brett when you think of our business the more complex the business of building rather there Richard the mix for us. So if you think about a higher Red School hospital. Those are really good for us the K through 12 school theirs.

Doors frequently and openings frequently per square foot.

If you think about <unk>.

Open floor plans like commercial office, there is clearly less openings on a commercial office floor plan. Then there is an institutional business door or a warehouse or warehouses, absolutely. So warehouse has been awful over the last 12 months from a starts but we really don't have any openings in a warehouse. So when you look.

Michael Wagnes: In addition currency was a tailwind this quarter possibly 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.

At our business that institutional heavy aspect of our portfolio gives us a richer mix and gives us more opening openings to address so thats a net positive for us.

John.

Yeah got it and then just shifting back over to residential download teens, you will be lapping your first destock comp in the fourth quarter of 'twenty. Three here could you just characterize where you see those categories in their destocking phase and any visibility you have on the sellout trends within some of those resin channels.

Michael Wagnes: Please go to slide number 10. As I mentioned earlier year-to-date available cash flow came in at 324 million up nearly 95 million versus the prior year. This increases 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.

It's so.

I think Rajiv mechanical you know when we see our own results and we see some other industry participant results.

It's a tough end market, let's just say, it's I don't know that I necessarily attributed just to destocking, but it's.

Michael Wagnes: 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 two times as we continue to successfully deliver following the access technology's acquisition. We repaid the final 39 million on a revolving credit facility in the quarter completing our replacements 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.

Soft end market with mortgage rates going up.

House churn, if you will or resale is certainly a bit depressed.

Permits and starts you may be if you look through a rose colored lands, you'll see some some green shoots of hope for the future, but I think that that overall market is still depressed when we think about our comps I would you know just just come back to there was a peer.

Of time in 2022, where we just couldnt ship, our electronic locks even in the resi segment and so the restocking phase.

John Stone: I'll now hand the call back over to John for an update on our full year 2023 outlook. Thanks Mike, please go to slide 11. As I mentioned earlier, our company is on track for record full year revenue, adjusted operating income, and adjusted EPS in 2023.

Still going on until rather recently and now you could say, it's a more normal point of sale driven business on the HELOC side. The mechanical side I think it's just end market is depressed.

John Stone: We're raising our full year outlook on adjusted EPS and affirming our full year outlook on revenue and available cash flow. We continue to expect the America segment to be 15 to 16% for total growth, 7.5 to 8.5% organically led by our non-residential business, which is still expected to grow high single to low double digits organically. Residential business is expected to be down slightly as market for main challenge. For international, we continue to expect revenue to be down 1% to flat and total, and down 1 to 2% organically. All in, for the company, our outlook continues to reflect total revenue growth between 11.5 and 12.5% with organic revenue growth between 5.5 and 6.5%.

Yeah makes sense, thanks, a lot.

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

Thank you I wanted to ask you on the Americas business into Q4.

So if we look at it and if my maths right, but if you kind of look at the Q4 or full year organic guide pegs Q4 revenues in the Americas anywhere from lot sequentially, 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 seven into Q4, so it's calling for better than normal seasonality can you just maybe talk about what's driving that.

John Stone: Based on our strong operational performance in the third quarter, we're increasing our adjusted EPS outlook to the range of $6.80 to $6.90, which is approximately 13.5 to 15% growth over the prior period. Lastly, we still expect our outlook on available cash flow to be in the range of 500 to 520 million. I'm very proud of the work of the entire Legion team and our distribution partners over the course of this year and the record results were on track to achieve.

I remember when technology.

No Chris if you remember on an organic basis in the summertime, we talked about hey, we're burning through this channel destock and we said it will be a little flatter this year than historically, so what you saw we did get through that in the third quarter, which is what we expected now as you think about.

Q4 sequentially, we normally downward just not down as much as historically, we may have been on the.

A more normal wise no channel.

John Stone: Looking forward, we'll provide our full 2024 outlook to you during our fourth quarter call as we normally do. However, given the uncertainty in the market moving into next year, we wanted to give you some insights into our view of the market dynamics today. First, we expect growth and electronics adoption to continue driven by the convenience and added security that digital identities and mobile credentials leveraging smartphone wallets provide to our end user customers.

And order pattern challenges that we had in the current year. So think of it as working through that channel item. We discussed in the second quarter call and I think Chris. This is John I heard just squeeze in a mention of access technologies in there.

And you're right I mean this this is now considered in the organic part of the portfolio.

And that business is performing very well again, you've got strong backlogs blue chip customer base and a very healthy service business. There. So yes, they've been performing well.

John Stone: A shift from mechanical systems to electronic access control systems with connected hardware provides efficiencies and operating cost savings for buildings and campuses. And recent channel checks and recent end user visits in the institutional segments in education and health care reinforce this trend. And while small today, our software solution portfolio is growing and we look to accelerate this growth into 2024 and beyond. In addition, while the most recent ABI headline depth, the institutional segment has been very resilient over the last 12 months and five of the last six months still reading above 50.

Very happy with that acquisition.

Yeah definitely saw the organic growth I'm, sorry, this quarter, there I guess.

Maybe if I could follow up I think you've kind of said earlier.

When you talk to your time apartments. It sounds like the Destocking is largely in the rearview if I heard that right.

Like what does that assume for the cycle does that assume like the cycle is kind of flattening out.

Are we through the destock, even if the cycle kind of is.

Go lower from here because it does feel like the amount of inventory in the channel.

John Stone: Allegiance context is important here. You'll recall that we're a late cycle business and also rather heavily weighted towards the institutional segment. We have an auto door business with strong backlogs and a blue chip customer base and a service business that continues to grow. Our channel is in good shape on inventory and our lead times across the portfolio are now normalized. Our supply chain has improved to the point where we can regain market share in the aftermarket space.

What's the outlook for the cycle. Thank you.

Yeah, I think the way I would see that as similar to what what Mike said given the.

The rather dramatic volatility in an upheaval that the entire industry experienced.

With the ramp in inflation and the pretty acute supply chain challenges in the latter half of or actually all of 2022.

John Stone: Expected headwinds are well known at this point. Commercial office and major metro areas is indeed soft. It's been soft for several months now. However, that part of our business is only a low double digit percent of our overall America's portfolio. Weakness and residential and certain international markets is expected to continue particularly for mechanical products which we've highlighted for you throughout this year. We expect productivity and recent cost actions that we have taken to help drive margin expansion into next year.

No parts in the first half two.

Work overtime, six days, a week et cetera, and in over ship in second half.

That is at least in our view normalizing and I think you could see.

As we progress on through another 234 quarters that cycle.

Cycle, Allegiant seasonality et cetera starts to look more normal or our lead times are across the portfolio are back to a more normal level.

So with the <unk>.

John Stone: And before we go to Q&A, I'd like to reiterate what I said at the beginning of the call. Allegion is in a good industry and we're well positioned thanks to the strong execution by our team. We've now navigated industry cycles very well in the past and with the improvements we've made to our portfolio and operations, we feel confident in our ability to succeed and drive continued organic growth and margin expansion with that.

Nine month or sold construction backlog a lot of work still out there.

The book and ship business like Mike said on a spec engine thats running all the time.

Yeah, I'd say, we feel just normalizing as maybe the word that I would use Chris and and that's what it starts to feel like and again our channel checks recently would indicate the same.

Unknown Executive: Let's turn to Q&A. We will now begin the question and answer session to ask a question you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two. Again, please limit yourself to one question and one brief follow up.

Thank you.

The next question comes from Tim Weiss with Baird. Please go ahead.

Hey, guys good morning, nice job Tim.

Maybe just a couple of just kind of modeling questions but.

I guess, when you're thinking about raw material inputs.

Steel copper zinc banks I mean, what are you seeing in terms of your purchases today and how do you think about.

Unknown Executive: At this time, we will pause momentarily to assemble our roster.

John Stone: The first question comes from Joe O'Day with Rose Fargo. Please go ahead. Hi, good morning. Thanks for taking my questions. Hi, John. Maybe on that last point, I'm not sure you're sort of willing to maybe elaborate a little bit more but just the 24 kind of considerations. I mean, it seems like if institutional channel checks are constructive market share gain potential and after market, understandable headwinds and commercial office and resi, but then productivity and cost actions as well.

Inflation versus deflation on a kind of a go forward basis on the raw side.

Yes, Tim.

Great question.

You think of our business if you remember pure raw mats, let's call that maybe 15% of our Cogs.

And.

The remaining 35% you could get have some element of metal in it from a source component.

We would expect to see.

See some favorability as you've seen we have had some tail winds in commodity prices versus previous peaks.

However, I would caution you there has been significant inflation that we've experienced over the last few years in other elements of the cost base. So that we're still in an inflationary environment, but you are getting some relief from the previous highs of the commodity costs.

John Stone: I mean, does it seems like it's setting up for margin expansion? Is it also today setting up for for top line growth with the mix of those factors? Yeah, Joe, appreciate the question. I'd say again, short answer. Yes, we see organic growth in the future. I just keep bringing you back to a legion as a late cycle business. We're heavily weighted towards institutional. If you look at dot starts, if you look at ABI, the institutional segment has been very resilient.

So.

Hopefully that kind of gives you some color for you to factor in.

Okay. Okay. No that's helpful and then just.

On pricing, if I kind of take a three years kind of stacked price and in Americas.

John Stone: The last 12 months are even even longer. And so, yeah, we feel we feel pretty good about that both on the 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 fill well position. I appreciate that.

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 mixed dynamic kind of go into there gets you guys did you guys put through more price.

Yes, Tim as you know we've put.

Price increases in over the last 18 months, because we felt so much of that inflationary pressure right. We manage this equation price plus productivity to cover the inflation and the investments.

If you think about pricing moving forward think of us as a more normal business, which does our annual price increase in the kind of the beginning of the year based on an expected inflationary level.

John Stone: And then also just international and maybe level setting on to your views on where things stand within that cycle where we've got I think now six quarters of volume declines. It's been I think some time that a lot of that has been on portable security. Think electronics has been holding up quite better, but just where where you think you are in that cycle, you know, how close you are maybe to a bottom within the international.

No more of the multiple price increases a year I think that's behind us because inflation has moderated from the previous significantly elevated levels that you saw a year plus ago.

And so just moving forward, just think of us price plus productivity versus inflation and investment and most importantly.

John Stone: Trans. Yeah, that's, that's tough to peg. Joe, like we're, we're as a bottom, you know, 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 price for value in the market that we provide our customers.

Okay. Okay very good I appreciate guys.

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

Yes, good morning, everyone.

I Wonder if you could just hey, good morning, John could you just talk a little bit with the.

Mid teens organic growth in the.

The electronics and software solutions business I don't know if.

To what extent you might be able to open that up for us and help us with you know price versus units of residential and non res or Americas international Pos versus inventory build but any sort.

John Stone: We're, we're definitely flirting with a bottom, I would say, which could provide, you know, a small bit of tailwind into, uh, into next year and beyond. But you called out the most important piece. And that's, 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, like the, uh, the bolt on acquisition of, uh, Plano, that team, uh, came on board and is performing very well, integrated very well with, with our interflex team.

Sort of granularity around that would be helpful.

I think.

John Stone: Um, and we see a really bright future there. And, and in the electronics space, yeah, continued growth, and, and we will continue to drive, uh, investments to drive that growth. Hey, Joe, I might also add, if you think about that global portable, we've been, we've been calling that out all year. So it's going to be a soft 2023 all four quarters. So if you think about next year, it's not a big headwind. I'm sorry, a big headwind versus the current year because you do have four soft quarters. So I think it's important to understand that dynamic about, uh, global portable. I appreciate the color. Thank you. Joe.

In aggregate mid teens organic growth in electronics and software solutions globally.

Quite proud of those numbers, you know between new product launches and just good execution by the team.

You know I'd say the the end user demand is still strong.

Again recent end user visits continue to reinforce this I've 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.

We're still just scratching the surface one University was hey, I've got you know I haven't even started on the dorms, yes, I've just been doing classrooms in an event buildings and things like this and.

As budget comes next year I'm, putting it straight to ilan for the dorms that I mean, thats sample size of one, but it's indicative of what we're hearing.

In the end user base, particularly education.

John Stone: The next question comes from Julian Mitchell with Barclays. Please go ahead. Thanks very much. Good morning. Um, maybe just, um, wanted to circle back to the Americas, organic, uh, sales outlook. Um, so it looks like the fourth quarter implied is, um, organic sales may be up mid single digits, um, year on year in, in Q four, and then sort of down mid single digits, sequentially. Um, so just wanted to sort of make sure that's roughly correct and, and any color within that on non-resie versus, resie dynamics.

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 Simmons Baas team.

John Stone: And when we look at that plus mid single digits entry rate into 2024, um, and the fact that your guidance from the investor day was plus mid single digit for the Americas market, uh, we assuming that kind of run rate can can sustain into early 24. Yeah, Julian, if you think about, uh, the current years, so much of the current year, uh, growth rates are driven by comps in the prior year.

Just and then the plateau acquisition, you know, adding a bit of inorganic growth into that space as well and it's a space will continue to invest in.

Very proudly, it's a tiny amount, but our solution for multifamily in the United States the central platform.

Very simple electronic access control platform designed specifically for our multifamily applications is now a revenue generating product for allegiance. So you know a cloud based SaaS revenue as a reality, it's very small we're just getting started but we do expect to accelerate that growth.

Thank God that end user economic benefits of electronics adoption is important and it's real and I think the.

The smartphone wallet in this mobile credentials in that convenience and the personalized security you get out of that we will continue to drive end user demand I'd say, that's the main trends David I wouldn't 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.

John Stone: So if you think about Q three, we, uh, last year really started to ramp our plants up as we got rid of that excess backlog in mechanical that continued into Q four last year. So this year, obviously, back half does have lower growth rates than first half. Uh, with respect to the two businesses, I, I think it's fair to say that non-residential certainly is healthier or stronger than the residential and markets.

End user demand driven.

Right right. Okay. Thanks for that and this is my follow up.

We're looking at a relatively strong U S. Dollar here I'm just wondering what impact that has on your business why you're drawing more imported product into the marketplace.

John Stone: So, as I think about a full year, I think a 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 a prepared remarks, which is, we can say relatively that this year whether it's down slightly or relatively flat all year. So you do have a dynamic where Reggie is a little weaker as we've been saying. And the non-res led by institutional is hanging in there, but prior your comps do impact the year over year quarterly growth rates.

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.

It tends 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. Yeah, I would add just one comment there.

John Stone: That's helpful, thank you. And it sounds like you're fairly confident that that inventory, destruct process by your sort of customers and channel partners is largely done. You know, maybe just sort of help us understand the conviction level around that. And, you know, when you're looking at your sort of forward looking indicators, I think you mentioned, you know, backlogged down a bit. But maybe any color on sort of the spec writing for the America's business overall, how does kind of the order patterns change?

David some of our flagship products like the von <unk> exit devices like the LCN Closers I mean, these are very proudly manufactured in the United States.

Got it thanks, very much and good luck.

The next question comes from Andrew <unk> with Bank of America. Please go ahead.

Hi, yes, good morning.

Congratulations on a strong quarter. Thank you so question on Europe.

You know sort of the margins in Europe can you just give us a sense of what interim flex has been doing it right because I know, it's one of the.

Higher profitability businesses, just trying to understand how much the mix is at play here or if it's not in for Fox just you know.

John Stone: Have you seen any evidence of project push out that type of thing? Okay, that's about five questions in there, Julian. Well done. I'd say on the channel destock, we feel pretty good there. You know, 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 proves 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 the performance in Europe has continued to surprise despite the headwinds from the sort of the bike lock business.

Just sort of more insight as to what's driving the structural improvement in margins there.

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.

John Stone: So, again, you know, there's still certain metro areas that are a little bit soft. There's 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, yeah. Spec activities still remain solid, and it's still hanging in there. And so we would expect that institutional heavy business to be driven by that's the spec engine that we have to still remain solid as we move forward. So, spec activities still remain strong for us.

Increasing productivity expanding margins without a volume tailwind, giving them operating leverage to lean on and they've been doing extremely well I would say.

Unknown Executive: That's great.

Unknown Executive: Thank you.

Sure.

The inner flex in particular, we're not going to call out.

Specific margin or a P&L for them, but that's a very strong business, let's just say and you know what.

Uh huh.

We talk about them together with the other electronics portfolio in Europe double digit growth for us and has been for a while.

<unk> margin performance as well.

And you know.

I think we put our money where our mouth is with the plateau acquisition and while that was.

Rather small the growth potential is quite large the margin is very attractive in the customer value delivered there between Plano and then reflects together is very compelling and enter flex is another one of those very special businesses like in this call. We mentioned access technologies has a blue.

Joseph Ritchie: The next question comes from Joe Richie with Goldman Sachs. Please go ahead. Thanks.

Michael Wagnes: Good morning, guys. Good morning. What's the kind of overall level of where the mechanical businesses today? What's the kind of right run rate that that should be bottoming, whether that's on a quarterly basis or an annual basis? If any color around that would be helpful. I'd share this with you, Joe. If you look at our revenue growth starting in Q3 last year, we started, you know, shipping those past due orders, serving our customers.

Chip customer base and reflects really has a blue chip customer base and we.

Take pride and delighting those customers with a good solution and good service.

And that business continues to grow very positive for us.

Excellent.

And just maybe a follow up question you know I think your predecessor, when his Florida.

Just to talk quite a bit about discretionary retrofit market in North America being a source of outgrowth.

And then we sort of stopped talking about it.

Can we just talk about where we are there and what's the remaining opportunity for continuing to increase your market share there or have you taken a closer look at it just maybe an update on this business because he used to be a big source of outgrowth.

Michael Wagnes: That continued, if you recall, Q1 this year, real large growth that we had. So you could think of that as a kind of a three-quarter burn through that backlog type challenge and the customer is adjusting to our new lead time. I think from that point on we're kind of more normalized, right? We're talking Q2 about that item. So I feel that that's behind us. It's those three quarters where you do have that more challenging comparable on the non-residential mechanical business we talked about. Okay, great. Appreciate that, Mike.

Andrew It's a hugely important point.

You know when the supply chain challenges hit and orders started piling up in backlog started piling up your your 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 back seat to whatever you know three or four months worth of backlog. That's just sitting there in orders that you've already got a Phil.

John Stone: And then and then maybe my follow on John. You talked about the balance sheet getting back into investment grade, you know, good shape. You've delivered now the two turns. I'm curious. There are some fairly sizeable assets that are out there, potentially on the security side. As you're thinking about the polling capital, how are you thinking about, you know, M&A and particularly like both on versus versus maybe some more transformative side deals?

For project business and other things, so I would say.

I would feel like.

You know when the supply chain challenges were at their worst we definitely lost some aftermarket share to competitors that allegiant typically doesn't and shouldn't lose share too.

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 get into lead times back to where they ought to be.

John Stone: Yeah, great, great question, Joe. And I think teams perform very, very well, cash flow has improved very well this year. And I mean, and we did deliver quite well. And I think happy with with where we're positioned. And again, as in the prepared remarks, building capital to deploy for growth. And I think for us, you can look for us to be acquisitive. You can look for us to look to fill portfolio gaps with with both on hardware solutions like we did with with access technologies.

Get into 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.

Right answer thanks, so much.

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

John Stone: Or SaaS businesses like we did with Plano as long as things are the right strategic asset, the right leadership team, a business model of culture that fits with the Legion and is in the sandbox of security and access solutions. You can look for us to be acquisitive. Now, certainly not right to comment on any particular transaction, but we do expect to grow through acquisition and building capital to do just that. Okay, thank you.

Well, thanks, everyone for a great Q&A and just to wrap up the main themes that I hope you heard today.

Allegiant 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.

<unk> operating income and adjusted EPS results in 2023, we will continue to drive organic growth and margin expansion as we mentioned in.

Brett Linzey: The next question comes from Brett Lindsay with Mizzouho. Please go ahead. Good morning, all. Hey, Brett. Hey, just wanted to dig in on the complexion of the marketplace and really thinking about the softer commercial pockets for the institutional resilience. Is there any good way to think about the lock or access content per building between those two verticals? I think you get multiples of the wallet share in a, you know, school or hospital versus a retail front, but any any insight there to be helpful.

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 in seamless access.

Thank you be safe be healthy have a great day.

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

Brett Linzey: Yeah, Brett, when you think of our business, the more complex the business of building rather, the richer the mix for us. So if you think about a higher ed school, a hospital, those are really good for us. So K through 12 school, there's doors frequently and opening 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. Then there is an institutional door for a warehouse or a warehouse, absolutely.

Okay.

Yeah.

Okay.

[music].

Brett Linzey: So a warehouse has been awful over the last 12 months from the starts, but we really don't have any openings in a warehouse. So when you look at our business, that institutional heavy aspect of our portfolio gives us a richer mix and gives us more opening openings to address. So that's a net positive for us. John. Yeah, got it.

Brett Linzey: And then just shifting back over to residential, down low teens, you will be lapping your first deep.com in the fourth quarter of 23 here. Could you just characterize where you see those categories in their destocking phase? And, you know, any visibility have on the sellout trends within some of those Rezzy channels? If so, I think Rezzy Mechanical, you know, when we see our own results and we see some other industry participant results, it's a tough end market, let's just say.

Brett Linzey: 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, you know, house churn, if you will, or resale is certainly a bit depressed. Permits and starts, you may be, if you look through a rose-colored lands, 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, you know, just come back to, there was a period of time in 2022 where we just couldn't ship our electronic locks, even in the Rezzy segment.

Brett Linzey: 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 eloxide. The mechanical side, I think it's this end market, is depressed. Yep, makes sense, thanks a lot. Thank you.

Christopher Snyder: The next question comes from Chris Snyder with UBS. Please go ahead. Thank you. I wanted to ask on the America's business into Q4. So if we look at, and if my math's right, is it kind of look at the Q4, or before your organic guide, it kind of pegs Q4 revenues in the Americas, anywhere from last sequentially to maybe down 4% sequentially versus Q3. And then when we look at all the pre-Tovid years, it seemed like Americans was typically down, you know, anywhere from 4 to 7 into Q4.

Christopher Snyder: So it's calling for better than normal seasonality. Can you just maybe talk about what's driving that? Or is it in there? No, Chris, if you remember on an organic basis in the summertime, we talked about, hey, we're bringing through this channel de-stock, and we said it will be a little flatter this year than historically. So what you saw, we did get through that in the third quarter, which is what we expected.

Christopher Snyder: Now as you think about Q4, sequentially, we normally down. We're going to ignore normalized, no channel and order pattern challenges that we had in the current year. So think of it as working through that channel item we discussed in the second quarter call.

John Stone: And I think Chris, this is John. I heard you squeeze in, you know, 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've got strong backlogs, blue chip customer base, and a very healthy service business there. So yeah, they've been performing well. David MacGregor, David MacGregor, David MacGregor[inaudible] David MacGregor, David MacGregor David MacGregor, David MacGregor David MacGregor, David MacGregor, David MacGregor David MacGregor, David MacGregor David MacGregor, David MacGregor, David MacGregor[inaudible] David MacGregor, David MacGregor David MacGregor, David MacGregor So hopefully that kind of gives you some color for you to factor in.

Michael Wagnes: Okay, okay, another helpful and then just on pricing, if I kind of take a three years kind of stacked price in America's, 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 next dynamic kind of going in there? Did you guys, did you guys put through more price? Yes, and as you know, we put price increases in over the last 18 months because we felt so much of that inflationary pressure, right?

Michael Wagnes: We managed this equation price plus productivity to cover the inflation and the investments. If you think about pricing moving forward, think of us as a more normal business, which does our annual price increase in the kind of the beginning of the year based on an expected inflationary level, no more of the multiple price increases a year, I think that's behind us because inflation has moderated from the previous significantly elevated levels that you saw a year plus ago. And so just moving forward, just think of us price for productivity versus inflation and investment and most importantly, you know, we price for value in the market that we provide our customers.

Unknown Executive: Okay, okay, very good, appreciate you guys.

David Macgregor: The next question comes from David McGregor with Longbow, please go ahead. Yeah, good morning, everyone. I wonder if you could just, hey, good morning, John, could you just talk a little about the mid teens organic growth in the electronics and software solutions business? I don't know, to what extent you might be able to open that up for us and help us with price versus units or residential versus non-raz or America's versus international or POS versus inventory bill.

David Macgregor: Any sort of granularity around that would be helpful. Yeah, I think in aggregate, you know, mid teens organic growth in the electronics and software solutions globally, quite proud of those numbers, you know, between new product launches and just good execution by the team. And, you know, 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, you know, the electronics adoption for a couple of years, they're still scratching the surface.

David Macgregor: You know, one university was, hey, I've got, you know, 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, I'm putting it straight to elapsed 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 healthcare. I would say our electronics and software business in Europe is doing very well.

David Macgregor: Blue chip customer base, great value prop on the electronics cylinder with the Simmons lost team. Just, and the Plano acquisition, you know, adding a bit of inorganic growth into that space as well. That's a space we'll continue to invest in very proudly. It's a tiny amount, but our solution for multi-family in the United States, the Zentra platform. It's a very simple electronic access control platform designed specifically for multi-family applications. Is now a revenue generating product for a legion.

David Macgregor: So, you know, 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 the personalized security you get out of that will continue to drive end user demand. I say, that's the main trend. David, I wouldn't, I'd encourage you not to get wrapped around the axle about channel build or restock destock, anything like that.

David Macgregor: It's really, this is end user demand drift. Thanks for that. And as my follow-up, we were looking at a relatively strong U.S, dollar here. I'm just wondering what impact that has on your business by drawing more imported content into the marketplace. You know, 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.

David Macgregor: 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. Yeah, I would add this one comment there. David, you know, some of our flagship products, like the Von Duprin, exit devices, like the LCN closures. I mean, these are very proudly manufactured in the United States. Thank you very much. Good luck.

Andrew Obin: The next question comes from Andrew Oben with Bank of America. Please go ahead. Hi, good morning. Hi, morning. Congratulations on a strong quarter. Thank you. So question on Europe and, you know, sort of the margins in Europe. Can you just give us a sense of what interflex has been doing right because I know it's one of the higher profitability businesses just trying to understand how much the mix is at play here.

Andrew Obin: Or if it's not interflex, just, you know, as I said, the performance in Europe is continuing to surprise despite the headwinds from the sort of the bike heart business, you know, just sort of more inside as to what's driving the structural improvement in margins now.

John Stone: Yeah, 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 PNL for them, but that's a very strong business. Let's just say.

John Stone: And, you know, we're, we talk about down 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, you know, 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.

John Stone: And, you know, 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. Thank you. Take pride in delighting those customers with good solution and good service. And that business continues to grow. Very positive for us.

Andrew Obin: Excellent. And just maybe a follow up question. You know, I think your predecessor when he started used to talk quite a bit about discretion and retrofit market and North America being a source of outgrowth. And then we sort of stopped talking about it. Can we just talk about where we are? Are there and what's the remaining opportunity for continuing to increase your market share there? Have you taken a closer look at it? Just maybe an update on this business because it used to be a big source of outgrowth.

John Stone: Yeah, Andrew, it's a hugely important point. You know, when the supply chain challenges hit and orders started piling up and backlog started piling up, you're 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, you know, three, four months worth of backlog that's just sitting there in orders that you've already got to fill for project business and other things.

John Stone: So I would say I'd feel like, you know, when the supply chain challenges were at their worst, we definitely lost some aftermarket share to competitors that a legion 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.

John Stone: And I think that's a real opportunity for us that has been a long time coming, but get in the lead times back to where they ought to be, get in the delivery performance up and getting our internal productivity better now, put us in a better position to get out and win more of that business. Great answer.

Unknown Executive: Thanks so much.

Unknown Executive: This concludes our question and answer session.

John Stone: I would like to turn the conference back over to John Stone, chief executive officer for an opposing remarks. Well, thanks everyone for a great Q&A and just to wrap up the main themes that I hope you heard today. A legion continues to operate at a high level. Strong execution drove these Q3 results that include mid teams, organic growth and electronics and software solutions, continued margin expansion and a healthy balance sheet and cash flow, giving us good momentum going into next year.

John Stone: 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.

John Stone: Thank you. Be safe. Be healthy. Have a great day.

Unknown Executive: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [inaudible]