Joe Ritchie: Makes lot of sense. Thank you.
Operator: The next question comes from Jeff Sprague with Vertical Research Partners. Please go ahead.
Jeff Sprague: Hi, thank you. Good morning.
John Stone: Good morning, Jeff.
Jeff Sprague: Hey, good morning. My question actually kind of picks up a little bit on some of that last point, John. Can you actually see kind of stimulus flowing into those institutional markets or kind of anything else that gives you maybe more visibility than you would typically have at this point in time?
John Stone: Yes, that’s a good question. And I think it’s always tricky to see. When we sell through distribution, you’re not quite sure the source of the project, the source of the financing. We’re – like – anyway, I’d say you see stimulus in airport terminal renewals, that was a big part of the Infrastructure and Jobs Act. You know there is funding going to higher ed through the emergency relief fund back from the COVID days to help with contactless, touchless, which goes very well into seamless access and electronic locks and credentials, etcetera. So I think, certainly, that’s flowing. I think there is still stimulus dollars left. Those tend to take a long time to work their way through the system. I would say, again, the leading indicators for our non-res industry still read positive.
Our spec writing activity is quite robust. Our quoting, bidding activity in the channel is still robust. And given the fact that mechanical supply chain has improved, we are back to the book and ship, we are back to made to order there. Sell-through on the channel has been pretty strong. And so I think at least now, we would just still continue to reiterate, we feel good about non-res through 2023.
Jeff Sprague: Great. And then not to steal the thunder from next week, but have people walking out of their next week, what – if they took away one thing from the meeting that maybe they didn’t know or understand about Allegion or was important to accentuate what would that be?
John Stone: Yes. I appreciate the prelude to that question, Jeff. It’s good. No, I would say let’s hold the fireworks around the strategy and the technology and all that for now. What I am really excited about is getting all of you over here. You can come in and see what we are doing, see what we are all about and get some more time with this new leadership team. That’s important to us. We just appreciate the chance to spend some time with you and share with you what we are working on.
Jeff Sprague: Thanks a lot.
Operator: The next question comes from Joe O’Dea with Wells Fargo. Please go ahead.
Joe O’Dea: Hi. Good morning.
John Stone: Good morning Joe.
Joe O’Dea: I wanted to start on Americas margin, excluding Access Tech. This looks like, I think maybe the strongest first quarter ever and seems like a faster recovery in those margins than you anticipated earlier this year. So, could you talk a little bit about the factors that contributed to that this quarter? And I think then moving forward, anything unusual about the quarter that wouldn’t persist as we continue to move through the year?
Mike Wagnes: Yes. Joe, if you look at the first quarter, we had an extremely strong non-residential revenue quarter. As you know, that is our strongest margin business. So, we had positive mix there and a very elevated revenue number versus what we were in the previous Q1. So, we had both combinations working in our favor. As we move through the year, the one item I do want to highlight, we are ramping up that new manufacturing facility in Mexico. Q1 doesn’t have any real cost there. But as we move through the year, there is investment in start-up costs that are going to be a headwind to margin rate that’s in the assumed guide. And obviously, we are going to be conservative when you think about start-up costs of the new plant so that we are adequately prudent in that guidance.
But in general, I would say the factors that drive margin expansion, the productivity that is accelerating from what it was last year, the pricing actions which we feel good about, I think the activity we are driving is sustainable and should be a long-term margin expansion driver for the business.
Joe O’Dea: And maybe just a clarifying point on that, I think given seasonality, the first quarter margin tends to be one of the lower of the year, but given the sort of Mexico factory considerations, is it still reasonable to think about just kind of volume seasonality where we would see margins improve or are those costs such that we wouldn’t?
Mike Wagnes: Yes. I would say if you think about the margin percentage in Q1, historically, less. However, if you look at that dollar amount of revenue for commercial, you would not have the same size of margin uplift delta versus Q1 than maybe historically you have seen. And then the investments – think of the investment for the plant, you could see 10 basis points, 20 basis points full year impact from that level of investment.
John Stone: Yes. I would add, I think looking at Allegion’s historic seasonality, both for volumes and then obviously resulting margins and operating leverage and whatnot, given how the supply chain disruptions of late ‘21, early ‘22, somewhat moved sales volume from one quarter to the next. I think we have got to be a little bit careful on applying just direct historic seasonality. But that being said, we feel confident in the guide and feel confident that we are in a position to continue to expand margins, like Mike said, 50 bps to 100 bps, and continue to do that in future years as well.
Mike Wagnes: And Joe, just to clarify that number for the plant, that would be closer to 20 basis points.
Joe O’Dea: Got it. And then, John, maybe on your point, just as we think about sort of backlog that you have to burn and you have supply chain improving, but on top of it sounds like sort of underlying demand conditions remain pretty healthy. And so how do we sort of combine all those factors as we do think about seasonality and we would think that as you go into the middle of the year, you do improve, given what should be a pretty solid backlog in this underlying demand? But I just want to make sure that you think about those factors all correctly.
John Stone: Yes. I think that’s why we took the organic growth guide up, the total growth guide up, EPS guide up that we do feel like we got off to a really good start. We do feel that non-res demand is robust. And I think again, quarter-to-quarter looks different just because of the comps last year. But full year, we feel good about the guidance.
Joe O’Dea: Great. Thanks a lot.
Operator: The next question comes from David MacGregor with Longbow Research. Please go ahead.
David MacGregor: Yes. Good morning everyone. Congratulations on the results. Great quarter.
John Stone: Thanks David.
David MacGregor: I wanted to ask about pricing in the non-res business and specifically in your spec writing business because this is a business that at least as I understand it doesn’t rely as much on MSRP as much as it’s a negotiated price. And obviously, very strong price realization there. Is it just a more competitively rational space right now and that’s really facilitating the price realization, or maybe just talk about what you are seeing competitively in that spec writing space?
Mike Wagnes: Yes. David, if you think about the non-res business, new construction tends to be quoted work where it is bid. Historically, it is an industry where everyone competes on value or the market leaders, I should say, compete on value, not price. And so as there is inflation, market participants drive pricing actions to cover inflationary pressures. And since there is a higher inflationary pressure, we are able to get more pricing. But the key takeaway on this industry is everyone competes on value. It’s not a race to the bottom on pricing in the non-residential business. It tends to be a very complex configured offering and that allows everyone to compete on the value of their portfolio.
David MacGregor: Yes. I mean I think that’s always been the case. It just seems like right now, it’s a more rational space and maybe your – there is just enough business to go around that everybody doesn’t have to compete whereas hard. But I don’t know if you can comment on that or not.
Mike Wagnes: I would just say for us, and our perspective, I don’t want to talk about anyone else. It’s the inflationary pressures that we felt the last 2 years and the pricing is catching up to some of those pressures. And so you really have to look at it over the last few years, and we have been able to mitigate some of those pricing – I am sorry, the inflationary pressures that we felt end of ‘21, ‘22 and into early ‘23.
David MacGregor: Okay. Great. Second question, just on the distribution channel. In terms of sort of the commercial two-step distributors, are they restocking at this point? Was that a contributing dynamic this quarter?
John Stone: Yes. We do field visits all the time. And I think – again, let’s divide this a bit between electronic products and mechanical products. So, on mechanical products, most of our lead times would be back to a normal level, which puts us in our distribution channel and kind of a made-to-order book and ship type model. And so destocking, restocking is not really a dynamic we see in the majority of the channel. In some of the two-steps, some of the large wholesalers, perhaps. But I think the evidence that we have seen and the anecdotal evidence, at least is demand is pretty robust, sell-through is pretty rapid. And again, as lead times normalize, ordering behavior adjusts and adapts back to that more normal lead time.
There are – some of our electronic products, our commercial electronic products, like we said, still elevated lead times, elevated backlogs and that we are just working hard with the supply base and our redesigns and new suppliers are coming onboard just to catch up to demand and get that part of the business back into this book and ship normal lead time space. We are just – we are not quite there yet.
David MacGregor: Thanks very much.
Operator: The next question comes from Brian Ruttenbur with Imperial Capital. Please go ahead.
Brian Ruttenbur: Yes. Thank you very much. Let me talk a little bit about pricing plans for the rest of the year and what you have built into your guidance. It sounds like there is less pricing increases, trying to read the tea leaves here, in the second half of 2023 in your guidance. Is that correct?
