Allegion plc (ALLE) — Q2 2015 Earnings Call Transcript

Thank you, Crystal. Good morning, welcome and thank you for joining us for the second quarter 2015 Allegion earnings call. With me today is Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, 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 in today’s call are available on our website at www.allegion.com. This call will be recorded and archived on our website. Please go to Slide Number 2. 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 SEC filings for a description of some of the factors that may cause actual results to vary from anticipated results. The Company assumes no obligation to update these forward-looking statements. Our release and today’s commentary includes non-GAAP financial measures which exclude the impact of restructuring and acquisition expenses in current year results and restructuring and spin expenses from prior year results. We believe the adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior year periods. Please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will discuss our second quarter 2015 results, which will be followed by a Q&A session. For the Q&A, we would like to ask each caller to limit themselves to one question and then reenter the queue. We will do our best to get to everyone given the time allotted. Please go to Slide 3, and I'll turn the call over to Dave.

Thanks Tom, good morning and thank you for joining us today. It has been an exciting quarter for Allegion. Since the last time we spoke, we've announced three more acquisitions and communicated further steps in our European transformation. But most importantly, we continued to deliver solid results in line with our communicated growth strategy and financial expectations. Revenues of $519 million grew 5.8% on an organic basis. Total revenue declined 2.3%, reflecting the negative impact of foreign currency. The Americas segment grew 7.2% organically, driven by strength in both nonresidential and residential businesses. In EMEIA, market recovery continues to be uneven across countries and organic revenues are relatively flat as expected. In our Asia Pacific region, organic growth of 7.7% was supported with contributions from the hardware businesses and the inclusion of previously announced acquisition of Brio. Adjusted operating income of $101.2 million was relatively flat to prior year. We realized operating margin expansion in all regions for the quarter and improved overall margins by 40 basis points. It is important to remember that we're showing margin improvements while absorbing incremental investments. Investments, predominantly in new product and channel initiatives, created a 140 basis point headwind in the quarter. Adjusted earnings per share of $0.71 increased 16.4% versus the prior year, driven primarily from improved operating performance and a lower tax rate, partially offset by incremental investments in foreign exchange impact. This is our fourth straight quarter with double-digit earnings per share growth. We are raising our full year 2015 adjusted EPS guidance to a range of $2.70 to $2.80 per share. Please go to slide 4. As you are aware, one of Allegion's core strategies is to grow through strategic acquisitions. Our strategy has been focused on opportunities that fill certain product gaps, expand our business geographically, provide new innovative technologies that can be leveraged across the business, and provide solid financial returns. Since the spin, we have been actively building our capabilities, developing our acquisition process, and expanding our pipeline of opportunities. Since the last earnings release, we announced three acquisitions that are an excellent fit with our core business, expand our product and geographical footprint, and provide exciting accelerated growth opportunities. In June, we entered into an agreement to acquire SimonsVoss, a leading electronic lock manufacturer that holds the number one market position in Germany and number two market position in Europe with a track record of innovative product development that complements Allegion's growth strategy. SimonsVoss is not just a forerunner. This company is a pioneer setting standards for connected products like digital cylinders and smart handles. By adding SimonsVoss to the Allegion business, we are expanding our electronic portfolio in the European market as well as strengthening our global technology in electromechanical conversion and miniaturization. Just last week, we made two more acquisition announcements starting with Milre Systek. Milre is the market-leading manufacturer in South Korea focusing on producing high-quality innovative electronic security solutions including mortise, rim, and cabinet locks. Milre has a well-established cadence of operational excellence which is highly aligned with Allegion's growth strategy. Combined with this culture of continuous improvement and technical innovation, Milre offers superior quality digital products and creates lasting relationships in the industry that will enhance Allegion's portfolio in South Korea and other Asian markets. And finally, last week we announced the acquisition of Axa Stenman, a leading European residential and portable security provider headquartered in the Netherlands. Founded in 1902, Axa manufactures and sells a branded portfolio of bicycle locks and lights and a wide variety of window and door hardware. Joining the Allegion family will enhance Axa's deep local heritage and create more meaningful growth opportunities through innovative product development across Europe and globally. Axa's portable security portfolio is highly synergistic with our Kryptonite business, allowing the two brands to leverage one another's extensive customer and channel relationships and product development. Axa Stenman also provides a highly profitable position in the residential security arena in the Dutch market with opportunities to expand into Poland and Germany. In 2015, Axa is expected to generate double-digit revenue growth. All of these transactions are expected to close in the third quarter, subject to customary closing conditions and regulatory approvals. We're very excited to welcome these businesses, brands, and employees to the Allegion family. Please go to slide 5. Allegion is on the cutting edge in the security sector with the Internet of Things. We recognized early that the smartphone would be a disruptive innovation in security and have certainly become an essential part of creating a responsive environment and managing access. As TechWatch recently noted, the connected term really took hold when Schlage entered the market with its keyless Schlage link lock in 2009. We followed up in 2014 with the launch of Engage Technologies for the commercial market. And in the first quarter of this year, Allegion availed Schlage Sense solution for Apple HomeKit while in the second quarter, we announced Schlage Control for managing multifamily buildings. All these connected solutions make Schlage locks a prevalent entry point for home and office automation. Consider these results. We have the leading security position in retail with channel players like Home Depot, Lowes, and Meyer. We are anticipating selling 1 million electronic locks in 2015. A leading consumer publication recently ranked Schlage locks number one in both keyless locks and connected locks. Allegion is a clear thought leader with a strong share of voice on security solutions in the Internet of Things. What's driving these results? We believe three unique advantages drive our success in this space. First, Allegion has key partnerships in place with companies like Apple, Chamberlain, Seaboard, and iDevices among others. This collaboration expands our footprint and expedites the adoption of security products. Second, our leading position across residential, multifamily, and commercial markets in the U.S. gives Allegion the experience and vision to recognize trends and customer needs very early. We moved very quickly to adapt technology and spread it into new markets, new businesses, and new applications. Third, thanks to our worldwide engineering and operations, we continue to invest in development and support global platforms and open standards. This gives us extraordinary flexibility and adaptability to meet and exceed expectations of both industry professionals and consumers alike. Allegion had an early commitment to the Internet of Things and today we see dividends from our leadership in this dramatic high-growth space. Before I turn the call over to Patrick, I want to provide some comments with regard to our European transformation. We have seen positive results from the work done by our team in the region under the leadership of Lúcia Moretti. The transformation is changing the way EMEIA does business. The team is focusing its efforts on developing comprehensive solutions for verticals, enhancing specific capabilities across the region. This approach creates demand and additional customer value. There are also efforts to simplify and streamline systems and processes to better service customers and become a more agile organization. Lastly, the EMEIA team is optimizing its assets to drive enterprise excellence. In the second quarter, Allegion announced its intention to implement a restructuring plan in CISA's Italian operations. The objectives of this plan, in line with the region's overall transformation, are to improve CISA's competitive position, ensure long-term viability, and enhance the customer experience. Negotiations are currently underway and we are working to find the best possible solution for the people affected in accordance with the social parties involved. Patrick will now walk you through the financial results and I'll be back to discuss our full year 2015 guidance.

Thanks, Dave, and good morning everyone. Thank you for joining the call this morning. Please go to slide number six. This slide depicts the components of our revenue growth in the second quarter as well as our growth by regional segment. As indicated, we delivered 5.8% organic growth in the second quarter, supported by incremental volume that reflects improving market fundamentals, price improvements, and early traction on our key organic growth investments in products and channels. We've realized good growth across most product segments and continue to experience favorable traction on our electronic products portfolio which improved more than 20%. As expected, currency rates continue to be a headwind to revenue growth noted by the negative 9.3% decline. All reporting segments were impacted, most notably, the weaker euro in EMEIA, softer Canadian dollar and Venezuela Bolivar devaluation impacting the Americas results. In Asia-Pacific, the impact of weaker Australian and New Zealand dollars were offset by acquisitions in the region. As a result of unfavorable exchange rates, reported revenue decreased 2.3% compared to the prior year period. Please go to slide number seven. Reported net revenues for the quarter were $519.5 million. This reflects a decrease of 2.3% versus the prior year, but up 5.8% on an organic basis. Americas revenue grew 0.3%, up 7.2% on an organic basis. U.S. nonresidential and residential segments provided balanced growth. EMEIA revenues were down 17.1% driven primarily by currency headwinds. Asia-Pacific revenues were up 13.2% with good traction in residential electronic locks and contributions from acquisitions. Adjusted operating income of $101.2 million was essentially flat compared to the prior year. Incremental volume leverage compensated for increased investment spending. Adjusted operating margin of 19.5% reflects an increase of 40 basis points versus the prior year. Incremental investments made in the areas of new product development, channel and market expansion, and certain infrastructure programs had an impact of 140 basis points on the quarter. The impact of incremental investment comparisons gets easier in the second half of the year, particularly in the fourth quarter. We are in the early stage of new products and channel initiatives and are encouraged by the early feedback from the market. We continue to navigate the currency headwind, but still expect margin rates to improve in all regions for the full year. Please go to slide number eight. This slide reflects our EPS reconciliation for the second quarter. For the second quarter 2014, reported EPS was $0.53. Adjusting for prior year one-time separation and restructuring expenses of $0.08, the 2014 adjusted EPS was $0.61. Operational results increased EPS by $0.11 as pricing, productivity, and favorable operating leverage more than offset inflation. As noted on the chart, this includes a favorable $0.01 per share related to a reduction in year-over-year bad debt adjustments in the Asia-Pacific region. The decrease in adjusted effective tax rate of 22.3% drove a $0.09 improvement versus the prior year. Interest expense improvements from the credit facility amendment in 2014 added a penny, and other net items were a $0.02 reduction primarily due to unfavorable currency exchange losses and related expenses. Next, incremental investments related to ongoing growth opportunities for new product development and channel management as well as corporate initiatives tied to our strategy specific to taxes and IT investments were a $0.05 reduction. Lastly, the net year-over-year impact of Venezuela at current exchange rates is a core cent reduction. This results in adjusted second quarter 2015 EPS of $0.71 per share. Continuing on, we have a negative $0.05 per share reduction for restructuring and acquisition expenses. After giving effect to these one-time items, you arrive at the second quarter 2015 reported EPS of $0.66. Please go to slide number nine. Second quarter revenues for the Americas region were $402.1 million, up 0.3%, or an increase of 7.2% on an organic basis. Higher volumes, pricing, and contribution from the acquisition of Zero compensated for unfavorable currency movements in Canada and Venezuela. The higher volumes reflect balanced organic growth in both residential and nonresidential markets as well as electronics growth exceeding 20%, with strong contributions from both residential and nonresidential products. This reflects better than market performance driven by new products and channel initiatives. Americas' adjusted operating income of $11.9 million was up 0.9% versus the prior year period. Adjusted operating margin for the quarter increased 10 basis points while absorbing incremental investment spending that created a 70 basis point headwind in the quarter. Please go to slide number ten. Second quarter revenues for the EMEIA region were $83.9 million, down 17.1%, and down 0.3% on an organic basis. Currency headwind continues to be a challenge in the region due to the softening euro and the Russian ruble, which impacts Eastern European sales. Slightly lower organic volume was offset by favorable pricing and net acquisition contributions. Electronics growth was also strong in the region. EMEIA adjusted operating income of $4.3 million was up $2.2 million or 104.8% versus the prior year period on revenues that were down more than 17%. Adjusted operating margin for the quarter increased 300 basis points primarily due to favorable pricing and productivity that more than offset inflation, investment, and unfavorable foreign currency exchange rate movements. Our EMEIA results continue to improve and we continue the transformation work that not only reshapes and resizes the business, but also scales the business for strategic acquisitions. The company continues to target an operating margin of 10% for the base business in 2016 through ongoing cost reduction and productivity initiatives, specific customer and market pricing actions, and the elimination of unprofitable business. Please go to slide number eleven. Second quarter revenues for the Asia-Pacific region were $33.5 million, up 13.2%. Improved residential electronic lock growth, pricing, and the impact of acquisitions more than offset unfavorable currency exchange rate movements. Asia-Pacific adjusted operating income of negative $1.4 million was up $1.9 million or 57.6% versus the prior year. Adjusted operating margin improved 690 basis points due to incremental pricing, productivity, and acquisitions, which offset inflation and currency exchange impacts. Results also reflect a year-over-year improvement in bad debt adjustments of $1.2 million. Please go to slide number twelve. Year-to-date available cash flow for 2015 was $14.8 million, a reduction of $24.6 million compared to the prior year period. The reduction in year-over-year cash flow is due to increased operating cash requirements offset by increased earnings and reduced capital expenditures. As you know, available cash flow for the business is very seasonal and the majority of our available cash flow is generated in the second half of the year. We continue to operate with an effective working capital structure and have realized a year-over-year improvement in working capital as a percentage of revenue since the spin. In addition, our cash conversion cycle continues to improve with more than a 20% reduction in the second quarter of 2015. We continue to guide full-year available cash flow to 95% of net earnings from continuing operations, which reflects some one-time tax-related cash expenditures. I will now hand it back over to Dave for an update on our full-year 2015 guidance.

Thank you, Patrick. Please go to slide 13. Looking at full-year revenue guidance, we are increasing our growth expectations for the year by a full point. We are increasing total revenue expectations in the Asia-Pacific region by 3%, reflecting the inclusion of the Brio acquisition, partially offset by additional currency headwinds in Australia and New Zealand. In the Americas, we are improving total revenue by 1% supported by first half organic growth and favorable contributions from new product and channel initiatives. We continue to project year-over-year improvements in the U.S. markets. Institutional markets continue to grow slowly with improvement in higher education markets, while K-12 education continued to lag driven by modest state funding increases. Our outlook for institutional recovery remains favorable, although we are watching labor availability that may struggle to meet demand in the midterm. Residential construction markets continue to grow as inventory continues to tighten. Foreclosure rates are at their highest since 2006 and mortgage rates continue to remain low. However, builders are facing challenges with land availability and labor shortages. Our revenue outlook remains unchanged for the EMEIA region. I would characterize the market as stable overall, but uneven across countries. We see growth in the U.K. and Spain, flat performance in Italy, and offset new construction and continued weakness in France. The Russian ruble depreciation is driving negative revenue growth for our Eastern European business as imports into that region have declined considerably. In Asia Pacific, we continue to expect favorable growth across the region and see China slowing due to excessive debt and an industrial capacity glut and ongoing real estate recession. Australia's residential construction market has been positive, but commercial construction continues to lag expectations. Market growth for the overall Asia Pacific region will remain in the low to mid-single digits for the year. Inclusive of the revenue update, we are updating our full-year adjusted EPS from continuing operations to a range of $2.70 to $2.80 and the reported EPS of $2.51 to $2.63, which incorporates the first quarter Venezuelan devaluation incurred, acquisition expenses in the second quarter, and full-year estimated expenses related to the announced restructuring plan in Italy. The guidance does not reflect announced acquisitions not yet closed. Please go to slide 14. The second quarter results were very strong and represented solid growth with a 5.8% organic revenue increase, a 40 basis point margin expansion, and EPS growth of over 16%. Our markets are essentially as we expected at the beginning of the year and we continue to make progress on new product introductions in our channel initiatives. Our results demonstrate alignment with our strategic growth pillars and we continue to expand our acquisition capability as indicated in our recent announcements. Now Patrick and I will be happy to take your questions.

Thank you. You talked about and you stressed several times your commitment to open standards. Not everybody in the industry is taking that tact. And I'm wondering where you think you have competitive advantages, and perhaps some admitted disadvantages in opening up your APIs, as well as sticking to NFC 111 form of wireless as opposed to going out and spreading your wings and doing about three or four others?

So Jeff, we've got major competitors that you know who have formidable positions in the marketplace with technology. We think moving into the market with open platforms helps us to grow more quickly. We also, as we listen and survey customers, customers in the security space as well as the electrical space that I come from do not want to be handcuffed by legacy systems. And as we can integrate more open protocols, we think it's a better way to grow, and ultimately it will end up that way. So that's our perspective. Our technical people have more insight to it, but in my view, if technology advanced in some of the years, open platforms, I think enhances our opportunity for growth.

Okay, one follow-up question. In Europe, you basically laid out three bullet points for how you're going to grow, basically enhancing specialist capabilities, looking at verticals and optimizing your assets. Could you elaborate on that, give a little more detail on what you are going to do, what you are doing in Europe and where you think you're in terms of numbers which you can gain out of that over the next 18 months toward the end of 2016 when you have that goal of 10%?

So, we continue to be committed to the base business of 10%, I think hopefully we're building credibility with you in terms of where we came from. The trajectory has been good. Second, a core opportunity for us is to get our structure right in our announcements in Italy and our work with the union processors in that direction. Third is around targeted segmented markets; we're doing well in electronics and hospitality—that's part of our overall 20% growth in electronics and we think the addition of SimonsVoss and AXA helps us to drive that. SimonsVoss I'll comment on in particular, has done extremely well in Germany and the Germanic areas, the influence markets. We think our positions in Italy, Spain, U.K., and France open doors to that and can help us to take a market that we think is going to be difficult from a macro standpoint to grow and improve.

Is SimonsVoss a platform for you, for these others to work off of given their reputation or are you continuing to build a portfolio? In other words, what is the base and what's the portfolio here?

I believe SimonsVoss allows us the opportunity to walk into a specifier and drive a spectrum in technical discussions and will allow us to pull through more of our historical product strengths, exit devices, closers, whatever. We blacked that and it really changes the game.

All right, great, and thank you very much and congratulations on these acquisitions and gradually to Franklin over there.

We are proud of him.

Thank you. Good morning, gentlemen.

Good morning.

So, just coming back to M&A, I really strategically get and understand SimonsVoss. It looks like you can do a lot with that, but thinking about bicycle locks and locker locks and things like that, I mean maybe that makes sense financially given where your multiple is and maybe that's just where your head is, but how do you really make anything strategic out of those type of acquisitions?

So, I'm confident you're aware of our position with Kryptonite. We like that business. We had to grow Kryptonite. Especially in Europe, we are going to have to make investments to grow that in some of the markets that Axa brings. As I think about portable locking, it will again move into a keyless environment in a percentage of those locks. We like that transition and you know, I like to drive our teams here. Can we be a global leader in portable locking? This is a bigger market than you may anticipate. So the movement with Axa Stenman complements that and that would be some of our thinking in terms of that acquisition.

I mean, do you have an active pipeline in that area then from this point forward?

Our pipeline across the business is active. You know, that would include portable locking, that would include further electronics and geographical expectations. I think what we showed with the three announcements is, really starting with the Dorma acquisition pipeline, this $30 billion mechanical market remains fragmented and there are opportunities for us to move and complement our portfolio that we enjoy today.

Great, thank you.

Hey guys, good morning.

Hi Tim.

I guess, so my question, it's a couple parts, but it really focuses on the acquisitions. So, I guess first just a piece of acquisition seems to be accelerating, I guess is that emblematic of just how robust the pipeline is or was it just really kind of chalked up to timing? And then, based on our math, I mean you're increasing your revenue base in Europe by probably 50% and you're doing some restructuring there, so just how confident are you in your ability to tie together two larger deals plus, kind of perform the restructuring in Europe? And then lastly, just any sort of financial update on the acquisitions in terms of how we should think about annualized EPS accretion or margin profiles of the businesses you're acquiring?

Yes, so three questions there. I'll try to take them in order. You know, in terms of the pipeline, as Dave mentioned since the spin, it's been all about building capabilities, getting resources focused on building the pipeline. I think we've done a pretty good job at that and have been able to complete some transactions here. You know, I think the last three announced transactions in the last 30 days or so are more a factor of just kind of availability, two of which were auctioned assets and so those come and go and add some flows and that type of a thing, but we continue to build the pipeline and we like what we see. We think there are some more opportunities that we would like to pursue and we are going to continue to do that. In terms of our confidence relative to the integration of the acquisitions, yes the team there is working on a lot of things, not only the transformation of the business but also staffing up to integrate the acquired businesses. I like our opportunities there. I think we got a great team in place there as well as the employees that we've acquired from the businesses. From an integration perspective, we've got a fairly disciplined process. We are going to hire external assistance, a third-party provider that will help us accelerate the process to really focus on the value drivers and the synergies attached to the acquisitions. We've got teams in place and we're beginning to work on the necessary activities to integrate the businesses. So, I feel pretty good there.

I would step in here too. You know, I really challenge myself, three acquisitions in the quarter, are we ready? If you think about the last 18 months, we spun out a $2 billion company, have established credibility with due systems processes. I'm confident we can handle these acquisitions that we've announced this quarter and future opportunities that may come based on what we've done and delivered over the last 18 months.

Your last question Tim, on the financials, our first focus obviously is to focus on getting the transactions closed, subject to regulatory approvals. The Milre deal hopefully will close here in the next week or so. The other ones we need to hear back from the regulators, hopefully before the end of this quarter, and from an accretion perspective, I would anticipate slight accretion for this year and then for 2016, obviously we'll come back to you with more specific guidance when we come out of our full year plan attached with those acquisitions.

Okay, great. Thanks for all the color, I appreciate it.

Thanks and good morning guys. I know you've talked about M&A a lot, but just maybe one more clarification will be helpful which is just in aggregate I know you can't do it by deal, but in aggregate what's the earnings multiple, forward earnings multiple that you have paid for these?

Yes, so kind of low double digits, you know in aggregates. The other thing I had mentioned to you as well is that, if you kind of look again in aggregate, all five transactions, those that have been closed and announced, strong EBITDA margins, more of our industry-leading position in aggregate, strong cash flow characteristics i.e. low working capital CapEx requirements. So these fit into our core market-leading financial characteristics and we think they all provide excellent growth opportunities, particularly leveraging both of our strong distribution networks.

And that's EBIT is low double digit EBITDA multiple, forward EBITDA multiples when you mention that, right?

Yes.

Okay, and then on strategy for China and Asia Pacific, just thinking about the improvement we saw in this quarter there, what's the go-forward path there in terms of commitment, what are you seeing, and to make that a more meaningful contributor, how long do we have to wait for that?

So, first priority is to grow our mechanical core business in the region. Second is, as we are acquiring, you see it's more of a Pacific rim that doesn't mean we wouldn't be interested in a Chinese based asset. We just think there's some sorting out there, the markets had some difficulty, but we are opportunistic in the region, it's around our core business. We think it's key and then integrate the electronics. They will also, the Milre acquisition what we're doing globally, the electronics is going to move there and be opportunistic in terms of that.

Okay, I'll pass it on. Thanks.

Hi, good morning guys.

Hey Josh, good morning.

Just a follow up on the accretion question, I know that obviously you are going to have some true-ups when these things close, you're timing, you're still waiting for approval and some things, but just to back into some of the numbers you threw out relative to your margins and prices paid, it seems like on an ongoing basis after close we're talking about $0.15 to $0.20 of accretion, just using the math you gave in the next year and throwing Europe on top of that, maybe more like $0.30 of kind of self-help before organic growth, is that an unfair way to think about it or there's some other weeks in that that we're not aware of, is this part of the deal or part of the restructuring?

No, I mean I think that characterizes it fairly good. You know, on the M&A stuff, you would think kind of mid-single digit accretion next year which is kind of in the bandwidth of what you indicated. You know a lot can be dependent upon the final outcome of the purchase price allocation, but that's certainly within the realm of possibility.

Great, and if I can just ask one follow-up on…

Let me just follow-on comment, just so everyone is clear on that. So that would exclude acquisition and integration-related expenses. So to the extent we incur additional one-time related costs, i.e. expenses for third-party assistance, while it be integration or a third-party cost to help complete the transaction, those costs will be excluded from those accretion numbers.

Understood, that's helpful. And if I can just follow up on something else you said earlier on price and productivity offsetting inflation this quarter in the Americas, presumably with metals coming in that should be more of a tailwind in the second half, both on actual inflation as maybe both of those turn positive, is that how you guys are seeing it in your build materials these days or is there some other timing issue, that's not apparent?

So raw material commodities represent maybe 10% of our purchase material and obviously we see that from components from other suppliers. We don’t see the immediate effect of reduction in commodity prices because we inherited supplier locks that hedge our cost kind of going out on a 12-month basis. Some of that is unhedged. So we see some, but not the immediate impact, but as we kind of look at the numbers for this year, deflation has helped us and we would expect that to kind of continue for the balance of the year.

Got you. Thanks guys.

Okay.

Hi guys.

Hi Charlie.

Just maybe change gears a little bit, just a question on European restructuring, just to know how the process was progressing, obviously if you could give an update on that? And then also just in the EMEIA region, I know that divestments of low-margin businesses are a part of the path to get to the 10% target; would acquisitions like SimonsVoss presumably have 20%-plus margins, will that potentially be accretive or better than that 10% target? I am just wondering if that was part of the prior plan or is that kind of all new?

So the labor negotiations are really government labor negotiations in Italy are going as planned. I think we have done a good job to follow the process and then been inclusive with the important officials that are critical to make a process like this go correctly. Those are active; that’s as far as I want to go with that. We want to make sure that we respect the institution and people and put the business in a comparative position long-term.

And your question related to the operating margins; the target has always been 10% base business kind of flat volume, that's still the objective. We’re marching towards that. We have some more things that we need to execute. And relative to the acquisitions, yes they are accretive to the EMEIA, EBIT margins and you will see that come through when the transactions are consummated and particularly next year.

I'll just reinforce that our commitment is to 10% with the base, and I'm really proud of the progress we’re making towards that.

Good morning guys. This is Phillip following, and I am on the call for Rob today. So my first question is on the pricing in Americas if you can comment on the pricing environment, the pricing improved from 0.3% to 0.6% and what’s included in your 5% to 6% outlook?

Yes, so pricing has improved year-over-year sequentially improved a little bit particularly in the commercial segment, saw a little step up there. We anticipated that to carry through for the balance of the year. It is the residential side of the house that’s been a little bit under pressure in a discontinuance of certain products and rotating in some of the electronic products that we talked about, so a little pressure there on the pricing. I would anticipate for the full year pricing to be little under 1% is kind of what we’re anticipating for the full year guidance.

Okay, great, and then if you can comment on the expense to with the strong double-digit growth in electronics contributed to the Americas' margin in 2Q?

The strong residential growth if you remember, we want new products D&D with Engage Technology, Schlage Sense. There is interest in residential to the mid and upper market, the want connected locks and we are in the position there, so that drives it. And then as we have invested in new technologies, whether it’s in the educational sector in dorms with our NDE, these markets are growing. I think we said early on they would be at 6% to 8% growth for electronics and that adoption is happening and we've got good products and technical application ability to be able to position it and we like our position.

Yes, from a margin perspective, as we outlined, really good growth there, and like the progress that we’re seeing, both on the residential and commercial side of the house. Margin standpoint, I would say it is very similar, but what we do see is higher selling point price, and of course that would contribute to higher arrive dollars. So the trend in terms of growth rates in electronics versus mechanical is a good one, and one that we want to continue to spend.

Great, thank you, guys.

Thanks. Good morning. It's really good to hear about that the 20% growth in the electronics portfolio. Obviously, you've had major product launches here. So it looks like you’re seeing good traction. I wonder if you could help us understand what would be good long-term growth assumptions for that part of your business say, one or two years out; I mean the 20% number is probably not sustainable a year out, or correct me if I’m wrong.

So, it’s interesting to ponder the future convergence here. I think you have to go back to the macro forecast of 6% to 8% globally, but let’s not underestimate there is 1 billion locks in the world. And the transformation because of mobile credentials is going to happen over the next five to ten years globally, and the market opportunity for us is very good. So I think you’re right in your assessment 20% year-over-year is not going to happen, but that we should be north of that 6% to 8% global is certainly realistic and complementary acquisitions like Milre, Systek and SimonsVoss I think enhance our position. This strategy on open protocols I think will also complement us over time.

Thanks. That’s helpful. And going back to acquisitions, congratulations on these deals, it’s good to see you signing these. Your main competitors made some interesting comment around the current M&A environment. Obviously they’ve done a lot of deals over the years and it looks like they’re getting worried about prices. So I wonder if you could give us your perspective on prices for asset sales; you sound like you have a still very active pipeline here and probably going to pull the trigger on a few more. So your commentary here would be welcome.

So I think the market, we too made some obvious observations, the price of businesses are high today, you have to judge that versus your strategy. Does it make sense, can I fold this in and make it go? Second, the market leaders have been extremely successful in the roll-up of the industry in some cases they are landmarked. They have got positions that preclude them from making moves. That doesn’t mean that we can’t, and because our positions are different. There is still opportunity in all areas of the world for Allegion to grow through acquisition and organically. The market leader has been on a path of 15 years where they run into some of these challenges. So we think it is a good space. I continue to expect this industry to consolidate and that is an opportunity for us.

Thanks very much. I appreciate it.

Yes good morning everyone. Dave, I wondered if you could just talk about progress this quarter with the like North American light commercial channel and just, you said you were able to gain share there, just what that maybe behind those share gains?

So we've identified light commercial R&R in the channel as an opportunity early. I’m pleased with our execution on that. I think there has been some analysis by firms on the phone our organic growth not only this quarter, but back over several quarters as lead our industry and the development in the light commercial R&R is fueling that. I would say we are continuing on our earlier – we are in the early innings of that acquisition and I’m pleased with the outcomes that it’s adding to our growth.

Do you see any change in the willingness of dealers to stock your product?

Maybe too early there. If you understand some of the drivers of our programs, I think we’re making early gains, short lead times, in-stock availability in our factories, and that’s part of what I call the advancement of that program. For us to be very successful, I want our inventory on the shelves of our committed wholesale partners, and then I’ll back that up with the superior lead time capability in customer service that we’ve got.

Got it. And then my second question is about Europe. Could you provide an update on the progress of building your staff?

Still in its early infancy, there has been a lot of moving parts in progress made in Europe, but we’ve made one or two incremental adds, but implementing the overall strategy to drive at the targeted segments we have got more work to do.

Are there targeted pricing initiatives planned for Europe in the second half?

Our focus has really been the elimination of profitable business. Europe is going to be a difficult pricing environment. We’ve got to use outstanding customer service. We have dramatically improved on-time delivery in Europe and it will help us. At the addition of SimonsVoss so that we can have a spec-driven discussion I think will lead for us to see some price realization versus straight price increases.

Yes, I would just add to Dave that I think the team is part of this transformation and the focus on the front end of the business also. The market segmentation and looking at what pricing we can get on a customer by customer basis has really helped and if you look at the results, I mean you are seeing some incremental pricing come through even in kind of a flat low inflation environment.

Great, great. Last question is just wondering if you could discuss the pace of investments in the second half versus the first half and how that will show up in your margins?

Yes, so I would anticipate again the comps get a little bit easier particularly in Q4, but the level of investment, Q3 would be similar to what you saw here in Q2 in terms of year-over-year and then Q4 there is a pretty big drop in terms of the increase in incremental expenditure relative to the prior year.

Great, thanks very much.

Thank you.

Thank you. Just a follow-up on small business-related items, are you with the first half with your Engage Technology, now you have, there is technology out there obviously from your competitors that purports to either mimic, be better or at least parallel Engage, how do you, when you go to market, because this clearly is a first mover product for you, an important product for you, how do you differentiate this product from what else is out there and as obviously going to become out there from other competitors?

So, I think our greatest advantage is to be able to leverage and continue to drive that technology into our full portfolio, not only beyond Schlage cylindrical lock, center mortise, and the Von Duprin AX devices but potentially the closures and the over-access environment. I think that’s going to be very difficult for a competitor to overcome. If that mechanical strength leverages this communication protocol, I think really puts water in the mold.

Okay and so essentially you're in the communication protocol and Engage is the major differentiating factor because it can interact with all of the other pieces of your puzzle.

Yes, and we've got work to do bringing the rest of that puzzle into the connected pipeline but we’re going to make it happen over the next 36 months and it builds on the legendary strengths that we had Von Duprin, LCN, Schlage, CISA; I like our opportunity.

Hey, but right now you are saying it is still in infancy?

From a continental perspective, yes. We've got our pockets of strength in Italy and in the Middle East of all places because of fancy driven specs that are moving in there, but we want to build on it. We see this as an opportunity. SimonsVoss will complement them.

All right, great. Thank you very much.

All right thanks Jeff. All right, thanks everybody. We'd like everyone to participate. For participating in today's call, please contact Tom Martineau if you've got any further questions. Have a great day.