April 21, 2017
The Allegion team delivered a strong year in 2016.
Our people drove industry-leading organic growth, and expanded adjusted operating margins in all business regions. We significantly increased our cash flow while providing excellent shareholder returns since our spin-off. In fact, 2016 was our most profitable year as a stand-alone company. I’m proud of our accomplishments, and even more excited about the future. Our industry is on the cusp of major technical changes including new levels of connectivity and convenience. Allegion is at the forefront of delivering forward-thinking solutions that link function, safety and design, in order to keep people, places, and their property secure.
Allegion is a leader in electro-mechanical convergence and innovation, which we believe will drive growth globally for the security industry in the coming years. We complement mechanical security with electronic solutions, creating an optimized balance that helps customers address their unique security needs, codes and cost constraints, while also gaining the benefits of technology. One measure of the success of this strategy is our vitality index, which is an indicator of Allegion’s capability to generate revenue from new product innovations. Since 2013, Allegion’s vitality index has tripled, and we have a goal to hit more than 25 percent by 2019. Electronics and connected solutions are a growing part of our portfolio that are demanded by a connected world.
Allegion’s key strategies
Allegion’s board of directors and management team refreshed our overall business strategy in 2016. Key observations reflect continued industry consolidation, the electro-mechanical convergence, the importance of enterprise excellence, and the critical requirement of disciplined capital deployment. Allegion’s performance since its creation has been noteworthy; we believe our vision, purpose, values and strategic growth pillars are sound. Disciplined capital deployment is demanded by our shareholders and top of mind for our team.
Keys to the future
Looking ahead, I am optimistic.
Fundamentally, overall market conditions remain favorable, and provide opportunities for Allegion solutions around the globe. We see new infrastructure investments in core markets. Institutional demand is strong, both for new construction and retrofit. Our renowned product portfolio and new products, guided by specifying teams, position us for growth. Residential housing construction continues to expand and consumer confidence is positive.
A disciplined and focused approach to key vertical market segments allows us to make targeted investments that drive long-term organic growth and profitability. Allegion has gained market share, and we expect this trend to continue. And with more than a billion secured door openings in the world, Allegion is positioned to leverage the electro-mechanical convergence for decades to come. Our expertise and focus in the complex security market give us a significant competitive advantage.
A track record of success, positive end markets, technological trends and a great team give us confidence in our future.
Team of experts
Our high levels of execution and performance are driven by our most important assets – our people, coupled with a management system that drives continuous improvement. We have a strong team of experts who are committed to our vision to make the world safer, securing the places where people thrive. Our operating system helps us plan for results and holds our team accountable for delivery of our long-term strategy, investments, quality, customer satisfaction, and employee engagement. Our people are a highly focused team driving a great business.
Employee engagement and employee safety are high priorities. We measure employee engagement globally and report our results to the Allegion board of directors. For the third year, Allegion increased the engagement of our workforce. We also continue to have an exceptional occupational safety record and are a safety leader in our industry. Our team’s engagement, commitment to safety, and sense of responsibility to our global communities are the foundations of our culture.
What’s next? The future is bright at Allegion!
We live in an uncertain world. The safety and security of people and property are top concerns of our customers, and leading economies are demanding investment—all of which provide Allegion with opportunities. Our 2016 results delivered growth in organic revenue, adjusted operating margins, shareholder value and the vitality index, as well as significant cash flow; these results show our potential in the years ahead. The ability to perform above the market, while making significant investments in our business, demonstrates that Allegion’s disciplined approach to long-term growth and shareholder value is working.
I love the business and believe in our people. Our culture is developing and strong. Our strategy is clear; we are focused and committed to profitable growth and shareholder returns. Our future is bright, and I firmly believe our best is yet to come. Thank you to our board and the global Allegion team for their commitment to excellence.
Dave Petratis, Chairman, President and CEO
Around the globe, our people are trusted experts in security products that are used for new construction, renovation and smart home solutions. Allegion’s leadership in these areas, as well as specification, is a key factor driving our above-market growth in the security industry. LCN®, Schlage® and Von Duprin® all rank No. 1 in their respective product categories in North America, while our other pioneering brands like CISA®, Interflex® and SimonsVoss® hold strong positions as market leaders in Europe.
In 2016, our investments spanned both our electronic and mechanical product lines, allowing Allegion to not only create new, innovative products, but also make continual improvements to proven solutions. For example, we began leveraging our new Schlage Everest 29 SL Cylinder to increase our commercial business, which seamlessly allows multiple key systems to be brought into one unified, restricted key system. We also leveraged our ENGAGE™ Technology to offer multi-family residents the convenience of using a smartphone or smart credentials to control their doors with the Schlage Control™ Smart Interconnected Locks.
By challenging the status quo, Allegion is creating further competitive differentiation and added customer value. Our teams are addressing the customer experience and driving growth in distinct channels through market segmentation, as well as the specified portion of our business.
With these activities and others, we led the security industry in overall organic growth. Allegion President of the Americas Tim Eckersley says this performance is, in part, a reflection of a transformation that’s taking place – “attacking new ways of doing the things we do.” In the Americas, a combination of innovation, channel-based initiatives and a segmented approach is driving new opportunities.
In Asia Pacific, we benefited from our portfolio transformation and large-scale projects. EMEIA saw expansion in its commercial segments like hospitality, and investments in technology and demand creation have strengthened the business. “Our brands’ strong European heritage, paired with an increased focus on end users, is increasing our presence in both new construction projects and large renovations, where we create demand by helping customers adhere to codes and security standards,” Allegion President of EMEIA Lucia Veiga Moretti notes.
Our employees value curiosity, making innovation central to our efforts to secure the places where people live, work and thrive.
As a true pioneer in the security industry, Allegion leads in electro-mechanical convergence, the integration of electronics into mechanical products. Electronic solutions are used to complement and enhance mechanical security. We recognize that a full range of solutions is needed to match the right level of security for customers’ networks and budgets.
In electronic solutions, we embrace open protocols, making it very easy to integrate our products with other systems – a value-add benefit for both customers and security integrators.
Allegion spearheads the adoption of connected security in the Internet of Things (IoT) across global markets. We currently have a major emphasis on innovation in wireless connectivity and are making significant progress in energy efficiency, which reduces power consumption and extends battery life. As a trusted expert in security, we always work to carefully deploy the best technology the right way, in the right environments.
In 2016, we innovated in both mechanical and electronic product categories, optimizing the balance of our customers’ physical security needs and unique applications that are secure, cost-effective and convenient to use. Globally, we launched more than 20 products including the following, among others.
Schlage Control™ Smart Interconnected Locks represent the next generation of multi-family electronic access, with cloud-based mobile app control for facilities managers and phone credential capabilities for residents.
Schlage SEL-320C offers the Asia-Pacific market a new residential electronic lock that can be opened with a fingerprint, password or key.
Von Duprin Field Sizeable Concealed Cables offer educational, healthcare and commercial facilities a patent-pending cable system that is protected from use and abuse as well as provides improved aesthetics.
SimonsVoss MobileKey® is our new app-based access control solution for small to medium buildings that can control up to 20 doors and assign access to 100 users at a time.
Milre MI-460S draws on the latest residential market design trends to offer homeowners a sleek mortise lock with keyless entry via a smartcard, password or digital key opening.
Briton 571 EL and CISA eFast are new commercial exit devices that integrate with electronic access control systems, meaning they offer panic exit functionality and can be monitored remotely.
AXA Oyster® is a first-to-market innovation that offers the functionality of window fasteners and a window-stay in one product.
The Kryptonite Street Light Series opened a whole new product category for Kryptonite and gives riders six models with multiple high-quality light configurations to choose from.
As a result of our focus on innovation and investing in new product development, we increased our vitality index from single digits in 2014 to high teens in 2016, and have a goal of more than 25 percent in 2019. Allegion now holds more than 600 global patents.
Allegion continuously evaluates opportunities to enhance the strategic core of our business, grow in regions where we have a foothold and expand the technology and products we offer. We see consolidation as a trend in the security industry – and we have a disciplined approach to evaluate how candidates strategically align with our overall business objectives and offer opportunities for success and profitability.
With nine acquisitions since we became a stand-alone company, we’ve strengthened our electronics portfolio and created segmented growth opportunities for our portable security brands. Acquisitions play an important role in driving long-term growth and expanding our regional market leadership positions – and contributed to 2016 being our most profitable year to-date.
Acquisitions drove the creation of our Global Portable Security business. Today, with the 2016 addition of Trelock® to our portfolio – complementing our Kryptonite® and AXA® brands – Allegion is poised to become a world leader in portable security solutions with both a comprehensive product offering and broad distribution capabilities. Lucia Veiga-Moretti, Allegion’s president of the EMEIA region, strongly believes that, “Going forward, collaboration between these three brands will drive competitive advantage in a relatively fragmented marketplace.”
The Americas will benefit from the early-January 2017 acquisition of Republic Doors & Frames. This acquisition expands our U.S. distribution center network and also complements the Steelcraft portfolio.
Early investments in innovative brands are also driving organic growth for Allegion and helping our team of experts meet ever-growing customer needs.
SimonsVoss® continues to be a technology leader in the rapidly growing market for digital locking and access control systems.
Milre® is pushing the boundaires of innovation, and has launched 11 products since it was acquired.
Zero International® is leveraging synergies with our other businesses, leading to new delivery capabilities and increased specification in 2016.
FSH® and Brio® are contributing to our strong performance in Australia and New Zealand.
Moving forward, we will continue taking advantage of a consolidating industry, and examine acquisition opportunities as part of our overall corporate strategy in to expand the value we bring to our customers.
Our Senior Vice President of Global Operations & Supply Chain Chris Muhlenkamp defines it well: “Enterprise excellence is a process that supports the Allegion business system, by connecting all parts of the value stream to take out waste and improve workflow and quality. Our goal is to create satisfied customers who want to return to Allegion and buy more of our products.”
At Allegion, continuous business improvement is a priority. Whether it’s enhancing the customer experience, making processes more efficient, leading the industry in workplace safety or using lean principles to improve corporate functions, our people take pride in driving enterprise excellence globally.
Regions and corporate functions are equally focused on customers. In the Americas and corporate functions, value-stream analysis is driving customer productivity. Also in the Americas, Allegion’s focus on enterprise excellence drove teams to evaluate their approach to sales processes and business opportunities in 2016. Our new “Wrapped Around Our Customers 360” approach aims to provide a seamless system for data sharing with customers – meaning increased transparency and better evaluation of the quality we provide.
EMEIA continues its business transformation with an increased emphasis on end users. This allows the region to better understand, meet and anticipate customer needs as well as become trusted advisors across a growing number of vertical markets.
Allegion is prioritizing manufacturing excellence and the implementation of new operating systems in our facilities. We know that to continue delivering best-in-class products and solutions, we must evolve. Our teams embraced changes to our legacy systems and the benefits for our customer experience.
“Be safe, be healthy” is engrained in our workplace culture. Yet again, Allegion leads its peers in safety results, including a 15-percent improvement in our Total Recordable Incident/Injury Rate (TRIR) for 2016. Our Asia-Pacific region alone recorded 1,430 safety production days in 2016 with zero lost-time incidents and zero recordable injuries.
And – because we know that enterprise excellence depends on the full strengths and capabilities of our people – we continue investing in employee engagement. In 2016, training for front-line leaders built the basis for empowered problem-solving, while hundreds of rapid improvement events at Allegion facilities across the globe provided opportunities for employees at all levels to get involved in business process improvement.
Allegion is taking the strategic actions necessary to add value for our customers and achieve profitable growth in emerging markets, including investing in localized products and supply chain capabilities.
In 2016, Asia Pacific saw growth and solid margin expansion from exiting unprofitable businesses and focusing on key vertical markets in South Asia. Growth in countries like China is benefiting from innovation in the electro-mechanical convergence. Brands like Milre®, Schlage® and CISA® are leading the way, launching a number of new residential and commercial locks in 2016 that are both strong and smart.
As a result of advancements we’ve made to our specification capabilities and tools used in the Middle East, our business in the region has a growing project pipeline within our target markets – institutional (healthcare, education and transportation), commercial (offices and hospitality) and residential (single- multi-family homes). Our team in the Middle East can now market and specify the full Allegion portfolio of products and services including Briton®, Schlage®, Von Duprin® LCN®, Brio®, CISA®, Normbau®, SimonsVoss® and Zero International® to create tailored solutions that meet the needs of our customers, serving as a model for geographic expansion.
In Latin America, we are investing to fuel organic growth. In 2016, this included strengthening our position in Mexico, creating an export market in Colombia and expanding distribution capabilities in Chile. We have increased our portfolio for the traditional residential channel in Mexico with our Schlage® and Falcon® brands, while expanding our light commercial product lines in Latin America.