Allegion plc (ALLE) — Q4 2017 Earnings Call Transcript

Thank you, Keith. Good morning, everyone. Welcome and thank you for joining us for Allegion's fourth quarter and full-year 2017 earnings call. With me today are 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'll refer to in today's call, are available on our website at 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. Please go to Slide number 3. Our release and today's commentary include non-GAAP financial measures, which exclude the impact of restructuring and acquisition expenses, impairment charges, debt refinancing costs, and charges related to U.S. Tax Reform in current year and prior year results. We believe these 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 fourth quarter and full-year 2017 results and provide 2018 guidance, 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, then re-enter the queue. We will do our best to get to everyone given the time allotted. Please go to Slide 4 and I'll turn the call over to Dave.

Thanks Mike. Good morning and thank you for joining us today. In the fourth quarter, Allegion posted strong operational results. With one of the most engaged and safest workforces in the industry; Allegion once again delivered a high level of execution and performance. For the fourth quarter, revenue came in at $623 million, growing 6.1% on an organic basis. Total revenue increased 9.4% over the prior year reflecting strong organic growth and the impact of acquisitions and foreign currency tailwinds. The strong organic growth was driven by all regions. Americas organic revenues grew at 4.8% as the business rebounded nicely from softer performance in the prior quarter. Business continued to see solid price performance and again saw mid-teens electronics growth. EMEIA delivered outstanding organic growth of 7.7% driven across most products and geographies. In particular, SimonsVoss, AXA, and Interflex businesses saw strong top-line growth. Asia-Pacific organic revenues grew extremely well at 16.4% driven predominantly by the China hardware and Milre businesses. Adjusted operating income of $135.4 million increased 32.7% versus prior year. Adjusted operating margin increased by 380 basis points, 260 basis points of the improvement is related to an environmental remediation charge taken in the prior year. The operating performance, excluding the environmental charge, reflected continued price realization and solid leverage on incremental volume which more than offset headwinds from inflation and incremental investments. All three regions saw significant improvements in adjusted operating margins. Adjusted earnings per share of $1.11 increased $0.30 or 37% versus the prior year. This includes the environmental remediation charge in the prior year which had a $0.10 per share impact. Reported earnings per share of $0.10 decreased $0.67 versus the prior year. The decrease is driven by one-time charges related to U.S. tax reform and debt refinancing costs which had impacts of $0.56 and $0.40 per share respectively. These were partially offset by the $0.10 impact of the prior year environmental charge mentioned previously. Overall, I'm extremely pleased with the strong fourth quarter revenue growth and operational performance. Please go to Slide 5. Now I'd like to talk about Allegion's accomplishments in 2017. We continue to have an exceptional occupational and safety record and continue to be a safety leader in our industry. At Allegion, we believe that safety and health is the true north measurement of business excellence. The recognition received from the National Safety Council in January of this year is a reflection of the hard work and importance that our company places on employee safety and health. In December of 2017, Allegion was also recognized as one of the best run companies by the Wall Street Journal. It's my belief that this is a reflection of our highly engaged management team driving a system of continuous improvement that harmonizes with our workforce and makes Allegion a great place to work, as well as a great investment for shareholders. Moving onto revenue, we delivered solid organic growth in all regions. Americas and Asia-Pacific continued their success, while the European region recovered nicely in 2017. We continue to execute on our channel initiatives to drive above market growth and continue to focus on innovation to accelerate new products for the market, increasing our vitality index, and remain a leader in digital convergence. In addition, we've seen continued strong operating leverage and expansion of adjusted operating margins in all regions. We delivered an 18.6% increase in full-year adjusted earnings per share and had another solid cash flow year. Please go to Slide 6. Allegion recently announced acquisitions that demonstrate our commitment to deploying capital to drive shareholder value. We continue to focus on opportunities that fill product gaps, expand our business, and provide new innovative technologies that can be leveraged across the global enterprise and provide solid financial returns. In January, we acquired Technical Glass Products, a leading U.S. manufacturer of advanced fire-rated glass and frames for doors, entrances, and curtain walls. TGP is focused on institutional and non-residential projects, provides a strong path to Allegion's floor business and will leverage the strength of our existing specification writing capabilities to help accelerate growth. TGP customers and distributors will benefit from access to the full range of Allegion's product offerings. At the beginning of February, we formally closed on our acquisition of QMI, which was originally announced at the end of last year. QMI is one of the Middle East's largest manufacturers of conventional steel and wood doors and frames. QMI product offerings are closely aligned with Allegion's core business and specification capabilities and provide customers with full door solutions in the Middle East. All of this supports our strategy to accelerate Allegion's growth in this fast-growing region and EMEIA as a whole. And finally, last week, we announced our intent to acquire AD Systems, a U.S. innovator in door solutions. AD Systems designs and manufactures high-performance interior healthcare door systems specializing in sliding and acoustic solutions. These solutions are seen across the U.S. healthcare and commercial office spaces because of their sleek design that provides acoustic control, privacy, and ADA compliance. AD Systems is a natural fit with Allegion's already strong door and door control brands and will further enable our teams to offer the best full suite solutions to customers. All together, these newest additions to the Allegion family represent leading brands and natural portfolio extensions that leverage our strong spec-writing capabilities and vertical market presence in healthcare and commercial office buildings. As we move forward to 2018, we will continue to use a disciplined approach through strategic acquisitions that drive shareholder value. Patrick will now walk you through the financial results and I'll be back to update you on our full 2018 guidance.

Thanks, Dave, and good morning everyone. Thank you for joining the call this morning. Please go to Slide number 7. This slide highlights the components of our revenue growth for both the fourth quarter and full-year. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we delivered 9.4% total growth and 6.1% organic growth in the fourth quarter. The full-year delivered total growth of 7.6% with organic growth of 5.7%. I was particularly pleased with the outstanding organic growth from all regions. The strong organic growth reflects the continued execution of the company's growth initiatives, the introduction of new products, and strong growth in our electronics portfolio. Pricing was once again favorable in the quarter closing out a strong full-year performance in all regions as the company remains disciplined in taking necessary pricing actions to help mitigate the impact of rising commodity prices. Foreign currency was a tailwind in the quarter and the full-year, particularly in the EMEIA region; acquisitions also contributed to total revenue growth. Please go to Slide number 8. Reported net revenues for the quarter were $623 million. As stated earlier, this reflects an increase of 9.4% versus the prior year, up 6.1% on an organic basis. Adjusted operating income of $135.4 million and adjusted operating margin of 21.7% increased 32.7% and 380 basis points respectively when compared to the prior year. The margin improvement was driven by strong operational results, with pricing and productivity more than offsetting the impacts of inflation and incremental investments. Included in the 2016 numbers is a $15 million environmental remediation charge which had a 260 basis point impact on the adjusted operating margin in that quarter. Our adjusted EBITDA margin of 24.3% was also a 380 basis point increase versus the prior year, and similar to adjusted operating margin mentioned earlier, includes the impact of the 2016 environmental remediation charge. Full-year adjusted operating margins were 21% and were up 140 basis points versus the prior year. Strong operational performance drove the increase. Margin expansion was also aided by a 70 basis points improvement from the impact of the 2016 environmental charge. This represents record performance in the fourth consecutive year with improved adjusted operating and EBITDA margins, as Allegion continues to execute at a high level demonstrating both strong organic growth and operational margin improvement. Please go to Slide number 9. This slide reflects our EPS reconciliation for the fourth quarter. For the fourth quarter 2016, reported EPS was $0.77 adjusting $0.04 for the prior year restructuring expenses and integration costs related to acquisitions; the 2016 adjusted EPS was $0.81. Operational results increased EPS by $0.18 as favorable volumes, price, operating leverage, and productivity more than offset inflationary impacts. As noted previously, the impact of the 2016 environmental remediation charge drove a $0.10 increase. Next, interest and other income were a net $0.05 increase. This was driven primarily by the reduced interest expense resulting from the company's debt refinancing that took place earlier in the quarter. Share count reductions drove an increase of $0.01. Incremental investments related to ongoing growth opportunities for new product development and channel strategies were a $0.02 reduction. The increase in the adjusted effective tax rate drove a $0.02 per share reduction versus the prior year. Both the fourth quarter 2017 and 2016 effective tax rates benefited from the favorable discrete items recorded in the respective quarters. This results in adjusted fourth quarter 2017 EPS of $1.11 per share, an increase of $0.30 or 37% compared to the prior year. Further, we have a negative $1.01 per share reduction for acquisition and restructuring charges, as well as impacts of $0.56 and $0.40 from charges related to U.S. tax reform and debt refinancing costs respectively. After giving effects to these one-time items, you'll arrive at fourth quarter 2017 reported EPS of $0.10. Please go to Slide number 10. Fourth quarter revenues for the Americas region were $436.1 million, up 6.4% on a reported basis and up 4.8% organically. The organic growth was driven by volume and price as we experienced mid-single-digit growth in both non-residential and residential products. Additionally, the Americas saw another quarter of mid-teens growth in electronics products. Americas adjusted operating income of $123.9 million increased $27.2 million or 28.1% versus the prior year period. $15 million of the increase was due to the 2016 environmental remediation charge mentioned earlier. Even after excluding the impact of the charge, Americas saw strong operational performance as adjusted operating income increased due to incremental volume leverage, price, and productivity more than offsetting the impacts from inflation, incremental investments, and unfavorable mix. Adjusted operating margin for the quarter increased 480 basis points; 370 basis points of the improvement was driven by the impact of the prior year environmental charge. The remaining strong operational increase demonstrates excellent performance and execution by the entire Americas team. For the full-year, the Americas region delivered an adjusted operating margin of 28.8%, continuing to expand our industry-leading margins. The region continued its strong operational performance. The full-year impact to the Americas region from the prior year environmental charge was 90 basis points. Please go to Slide number 11. Fourth quarter revenues for the EMEIA region were $150.8 million, up 16.5% and up 7.7% on an organic basis. The reported revenue growth was driven by the impact of a strong organic growth along with currency tailwinds. Organic growth was attributed to growth across most business units and geographies with particular strength in SimonsVoss, AXA, and Interflex. EMEIA adjusted operating income of $24.8 million increased 24.6% versus the prior year period. Adjusted operating margin for the quarter increased 100 basis points reflecting continued operational improvements driven by the benefits of price and volume leverage more than offsetting the impact of inflation and unfavorable mix. Full-year adjusted operating margin came in at 10.2%, an increase of 90 basis points over the prior year. At the time of the spin-off, adjusted operating margin for those businesses was approximately 1%; we had a stated goal of reaching 10%. Reaching that goal is a significant achievement and highlights the hard work and success of the entire EMEIA team. Please go to Slide number 12. Fourth quarter revenues for the Asia-Pacific region were $36.1 million, up 19.1% versus the prior year. Organic revenue was up 16.4% and was driven by strong performance across most geographies and product portfolios with the Milre business acquired in 2015 and our business in China leading the way. Favorable currency impacts also benefited total reported revenue. Asia-Pacific adjusted operating income of $4.7 million was up 104.3%. Adjusted operating margin for the quarter was up 540 basis points reflecting leverage on the incremental volume along with productivity more than offsetting inflation and investment impacts. The full-year adjusted operating margin for Asia-Pacific was 8.4%, an outstanding performance by the entire Asia-Pacific team representing an increase of 240 basis points as Allegion leverages strong organic growth into strong margin expansion. Please go to Slide number 13. Available cash flow for 2017 was $297.9 million versus $335 million in the prior year. The decrease in year-over-year available cash flow was attributable to the $50 million discretionary pension payment made earlier in the year, partially offset by higher net earnings. Working capital as a percent of revenues in the ratio for the cash conversion cycle increased slightly in 2017. Please go to Slide number 14. As you are aware, the U.S. Federal Government passed tax reform late last year. The legislation reduced the federal statutory rate in the U.S. from 35% to 21%, while at the same time limiting certain deductions in various other aspects of the tax bill. As a result of the new legislation, we recorded a $53.5 million charge in the fourth quarter of 2017 results primarily related to revaluation of deferred tax assets due to the reduced future statutory rate and uncertainty around our ability to realize deferred tax assets that were previously recorded. In addition, the tax reform included a repatriation tax on foreign earnings. However, as Allegion is an Irish-domiciled company, we only incurred a minimal cash repatriation tax. As we evaluate the impact on 2018 and beyond, we expect our long-term tax rate to remain in the mid-to-high teens with an estimated tax rate of approximately 16% in 2018. In addition, we expect to see increases in our 2018 cash taxes as a result of tax reform inclusive of one-time payments. Finally, the law is complex and future interpretation of the legislation is expected from the U.S. government and regulatory agencies, which may result in future discrete impacts on our tax rate primarily related to the one-time charge of $53.5 million mentioned earlier. I'll now hand it back over to Dave for an update on our full-year 2018 guidance.

Thank you, Patrick. Please go to Slide number 15. We continue to see favorable trends in our primary end markets in 2018 and it is our expectation that the organic investments, combined with our ability to execute, will again drive better than market growth. We also believe the electronics business will continue to outpace mechanical, which will benefit our growth as we are well-positioned to continue to take advantage of this industry trend. In the Americas, we see positive indicators in the key verticals within the non-residential and residential businesses and expect both markets to remain solid and grow in the low-to-mid-single digits. If there is relief in the labor constraints and the supply chain, we would expect better market growth as underlying macro trends are expected to remain strong. Consolidating the market outlook, we project organic revenue growth in the Americas up 4% to 5% and recorded revenue growth of 10% to 11% reflecting the inclusion of the acquisitions of TGP and AD Systems. For the EMEIA region, we anticipate growth in core markets to be low-single digits as the markets in the region continue to rebound. General macro-economic indicators such as manufacturers' confidence, consumer confidence, and unemployment rates continue to be positive. For the region, we project organic growth of 2% to 4%. When combining that with the impact of currency and the acquisition of QMI, we project reported growth of 13% to 15%. The Asia-Pacific markets continue to show strength in China and North Asia with a more modest growth outlook for Australia and New Zealand markets. We expect to drive above market growth as we continue to focus our efforts on key vertical markets where we are strong. Organic growth in the region is estimated to be 6% to 8% and total revenue growth is estimated to be 8% to 10% reflecting benefits from currency tailwinds. All-in, we are projecting total growth for the company at 10.5% to 11.5% and organic growth at 4% to 5%. We anticipate continued price realization across all regions to help mitigate inflationary pressures in 2018. Please go to Slide 16. Our 2018 outlook for adjusted earnings per share ranges from $4.35 to $4.50, an increase of approximately 10% to 14%. As indicated, the earnings increase is primarily driven by revenue growth and operational improvements, a lower effective tax rate, tailwinds from currency, and the benefit of acquisitions, partially offset by investments in the business. Incremental investments are anticipated to be slightly lower than the prior year and will continue to focus on accelerating new product developments and channel initiatives which we believe enable us to deliver above market growth and enhance our vitality index as demonstrated historically. Our guidance assumes a full-year effective tax rate of approximately 16% and outstanding diluted shares of approximately $96 million, reflecting the company's goal to at least offset share dilution with repurchases. The guidance also includes a $0.15 per share impact from restructuring charges and acquisition-related costs during the year. As a result, EPS is $4.20 to $4.35. We are projecting our available cash flow for 2018 to be in the range of $380 million to $400 million. Please go to Slide 17. We are very pleased with our 2017 results that delivered organic revenue growth of 5.7% and increased our operating margin by 140 basis points and by 70 basis points after excluding the impact of the prior year environmental remediation charge. The growth of both revenue and margin, while making investments in our business, demonstrates continued execution of our strategy, along with a disciplined approach to managing our business. We continue to make progress on our vitality index with new and innovative products while we also continue to consistently generate strong cash flow. We are executing on our flexible capital allocation strategy, as evidenced by our recent acquisition announcements, along with the increase in our Q1 dividends. As we look to 2018, we expect to drive continued organic growth above market and expect the impact of acquisitions to help drive robust top-line growth. We look to achieve another double-digit increase in adjusted earnings per share and expect to generate substantial available cash flow. We have an excellent team in place that's committed to our vision to make the world safer, securing the places where people thrive. Thank you to the Allegion Board of Directors and the Global Allegion team for a great 2017. Here at Allegion, our best days are ahead of us. Now Patrick and I will be happy to take your questions.

Hi, good morning. This is actually John Walsh on for Jeff. So, as we think about, well first, solid quarter, and then, as we think about the 4% to 5% you're looking for in the Americas in 2018, that 5% is that still like a cap or meaning we've heard in the past around constraints around the market, labor, things like that? Or do you think that if the macro comes in a little bit better there is actually an ability to drive that higher from a market perspective?

I like our opportunities to be stronger. I think we have to be realistic in the labor constraints that I see and have identified for the last year. If those labor constraints work themselves through, we will exceed the market growth. I always believe, and we believe here at Allegion, that if the market is better we will do better than our share. We've also been mindful in the projects that we're quoting and bidding. There are good projects and there are bad projects out there that go on time, trying to pick the right horses, if you will. I would say this, John, we've got data out there that says general construction backlogs are at all-time highs, and the opportunity for us to excel in that environment I think is positive.

Hey, thank you for that. And then, I guess just as we think about the investment spend going forward, I would suspect we should continue to model incremental growth but maybe at a slowing rate; is that the way to think about that?

So, as we indicated for 2018, the incremental spend year-over-year is up, but down relative to the prior year. So, we look at it relative to opportunities in the marketplace, and as Dave indicated, we're really looking at continuing to expand our channel initiatives, market segmentation, driving demand creation particularly in electronics, as well as accelerating new product development. We like the opportunities there and believe to date the investments have provided a good return on those investments. To some extent, it does come down to management capacity to be able to execute on some of those opportunities. But each year we look at separately, and it doesn't mean, for example, in 2019, if there are some opportunities that we see in identifying the marketplace that could accelerate growth faster than the broader market that we could step-up those investments. So I would just say it's dependent upon market situations, opportunities, and what else is going on in the business relative to the incremental spend year-over-year. But thus far I've been very pleased with the results we've gotten in terms of driving incremental revenue growth relative to the market.

Just a question on European operations, you sort of highlighted brands that are growing; you did not highlight CISA, can you give us a sense as to what's happening in Italy, Spain, and what's happening with production moves to Eastern Europe, if you could highlight the growth rates associated with that and efficiency associated there?

CISA and Italy was part of the growth we enjoyed in the quarter and the year. The supply chain under pressure all year got better every quarter. We continue to develop that capability and improve customer satisfaction. So I think we're in a good position to take advantage of better Italian markets and regions that CISA serves in 2018.

And what about your channel initiative, I know that you guys sort of tweaked the channel going after new projects, are we seeing any outgrowth related to that and I'm speaking about Europe?

Yes, our channel initiatives that we pioneer here in the Americas have been expanded to Asia-Pacific and in Europe. We're in the throes of some channel analysis right now in Europe. And I think as we understand more intimately our opportunities, I think it's reflective in our growth; I think it's reflective in our acquisitions. We're extremely well-positioned in the Middle East; QMI adds to that, and this belief that we can drive granular growth through better channel initiatives, Andrew, is part of the success you’re seeing in 2017 that will extend to 2018.

On the acquisitions that have been completed, how should we think about the margins here for the business? The businesses acquired look like they're a bit below what you would expect, at least when you look at the Americas piece. I know doors in general tend to carry lower margins, but anything you would note there in terms of cost synergies or revenue synergies which do you think are more important for the various deals?

So like all of the transactions, I believe good product portfolios, brand positions, and very good market position in the respective areas. I like the growth prospects predominantly as we look at opportunities to leverage our specification writing capabilities, as well as getting more throughput through our distribution. I think we'll see that across all of those acquisition opportunities. So like the upside relative to the revenue and top-line. From the margin profile, as you know, we have industry margins across the globe and these transactions will be dilutive; they are lower than our overall margin profile, but nonetheless still strong contributors in terms of operating performance. So continuous improvement in margins across the globe, but this will dilute, if you will, the overall margin profile of the company in 2018.

Rich, I would add that the spec-driven nature of these products, AD Doors and TGP, would be in the upper end; a few benchmark door manufacturers have those margins in the upper tier. There is clearly a performance basis that drives a premium in the market versus the door side.

Okay. So it appears like revenue synergies are more tangible, maybe that cost synergies in the next couple of years?

So for 2018, we would anticipate that we would continue to offset or be above the commodity cost pressure. As you know, the commodity costs have continued to increase particularly in the backend of 2017 and the first part here in 2018, but we would expect to continue to remain fairly aggressive to recover that cost increase. So we see it as a net positive for 2018; maybe not to the extent we saw in 2017. You may recall we were out pretty early with price increases during the course of the year and got really good price realization across the board; but nonetheless, it's still going to be a net contributor to margin expansion for 2018.

Hi. Could you provide more details on your successful partner programs globally? You mentioned that Europe and Asia-Pacific are following the lead of the Americas. I'm curious about your goals for this year to improve channel efficiency and whether there are any opportunities for direct engagement as well.

So I give one example that we'll be in the second year here in the U.S., and it's our project-based business. We think with labor constraints in the marketplace there are opportunities to streamline the specification process, provide total packages which would include door offerings with ourselves and partners, hardware packages that will reduce cycle times in light commercial and multi-family. A second example would be partnering with architects and our spec writers in an investment we called Chorus, which automates specifications and the take-off capabilities against shortening lead times and hopefully helping us grow in the marketplace, so a couple of examples. We've extended project-based examples to Europe; we think the addition of QMI helps us there. Jeff, I don't know if you've ever been to the Middle East, but you get off the airport there, you see our strengths in U.S. specified products. We believe we're in a unique position to service both European and U.S. specs that is being done with partnerships here with our spec writers in North America, so a couple examples of what we're doing.

Yes, good morning. Thanks for taking my question. I guess a question on Europe. First of all, congratulations on achieving that 10% adjusted operating margin; you inherited not so great a situation and you've accomplished a lot there. I guess the question is where can you take it from here? What are the capital requirements in order to do that and how should we think about the timeline?

David, as you said, really good progress since the spin; I’m very pleased with the team and reaching the objective we set when we first spun out as a company. As we've talked about previously, there aren't any significant step-ups relative to margin enhancement going forward. I think what you'll see as a basis of our 2018 guidance is continuous improvement. So we'll continue to push on the price-cost equation, continue to drive productivity, lean out manufacturing efficiencies where we can, and those type of things. So I would look at it from a perspective of just continuous improvement, given our current business profile there in Europe.

Hey, I just wanted to clarify the earlier comment about price-cost being a net positive; is that price plus productivity net of all inflation or just some incremental color there?

Yes, so that would be our price cost, so pricing would exceed material inflation clearly. Price productivity together would offset any inflation including merit and those normal things that occur in the course of the business.

Hey guys, nice job. I want to revisit the Americas, specifically regarding margins. Considering you ended the year at around 28.8%, with new investments and some dilution from the deal, what is the best way to evaluate the Americas margins in 2018 compared to 2017?

So I think the way to think about it is like the other regions of the globe on a base business ex-acquisition, continuous improvement; again continue to get pretty good leverage and pull-through margin on incremental volume, positive contribution on price-cost inflation etc. But the margins on the acquisitions, good businesses, but the margin profile isn't at the 28.8% referenced. And so you're looking at, when everything is said and done, kind of flattish to slightly up margins for 2018, all inclusive of the M&A activity.

Just a follow-up. I guess more broadly on some of the M&A announcements here recently, Dave. I think when you first went out, there was a bit of a push to get kind of a focus more on the hardware, less on the door, and the last few deals have certainly been specialty type products but have included a bit more door-centric stuff; is this a change in philosophy? Should we expect this to continue within some of these niches or how do you view that assessment? Because I know that was a big difference between yourselves and your largest competitor there initially?

So first of all, think about it as my own maturity and understanding of the business. We think we have a powerful asset in our spec writing capability and when we can come in and write a total turnkey spec, especially including specialty equipment and features, we think that's a good place to be. We also looked at the competitive landscape and clearly saw where we were disadvantaged, particularly around our steel door offerings with steel craft, and, for example, the Republic acquisition that we made last January gives a better geographical capability to serve customers locally. These businesses have laid adaptation capabilities, and it's really just thinking that through. In the Middle East with QMI, we were actually winning jobs and shipping steel craft doors from Cincinnati, Ohio. So it's just I think a refinement of our understanding of the market and the points in capital that we think helps our top-line and bottom-line growth.

Got it. And then on some of these labor shortages that were impacting last quarter, I mean clearly the Americas' volume growth accelerated. I guess I don't know exactly what price contributed but probably not much compared to that bigger number in 3Q; is that a sign of some of those shortages working themselves out? Or is it just, hey, in the fourth quarter where seasonally things are slow and there is a bit more slack in the system, maybe help us understand that dynamic a bit better?

As we reflect on Q3, particularly as we concluded it, we noted a lack of flows in the supply chain as projects are under pressure to finish by year-end, which resulted in some slack in the system. This is an issue we will need to navigate as we move into 2018 and 2019. Labor constraints remain an identified challenge. I mentioned the high backlog of construction orders, which we believe will create market shocks and demand fluctuations going forward. Despite this, we are evaluating our value streams to determine how we can invest to better position the company and develop incentive structures to facilitate improved and consistent flows. We are making progress, but we don't have all the answers yet.

Yes, so mix may be a little bit more favorable given the growth in residential relative to the non-residential is weighing on that contribution margin. Other than that, there isn’t really any other significant items that would be weighing down that margin percent.

Thank you very much. Maybe just trying to stick to one question; it was really on the electronics business. I think you enjoyed mid-teens growth there in Q4. Maybe give us an update on what proportion of your total revenue now is coming from electronics? And also, what you’re expecting the growth to be in 2018 and whether you're broadly happy with your organic position and there shouldn’t be a need for a big M&A deal in that segment of the market for you?

Yes. So again, really good growth in our electronics portfolio across both non-residential and residential products; really like what we're seeing there. As you know, there's still low penetration particularly in the residential markets, a lot of room to continue to grow there. The overall portfolio in electronics is mid-teens as far as our global business and that varies a little bit by region. But we'd expect the electronics to continue to outgrow the mechanical products, so that percentage will continue to increase. And as we've talked about previously, this is a good trend for Allegion; higher price points, similar margin profile means more EBIT dollars. And we will continue to drive that particularly as we look to make investments whether it would be demand creation or new product development to ensure that we can be a leader as far as that development in electromechanical convergence.

Thanks, Keith. We'd like to thank everyone for participating in today's call. Please contact me for any further questions and have a great day.