安朗杰 (ALLE) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegion Q2 2014 Earnings call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Tom Martineau, Director of Investor Relations.

Sir, please go ahead.

Thank you, Nova.

Good morning. Welcome and thank you for joining us the Second-Quarter 2014 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 at Allegion.

Our earnings release, which was issued last night after market close, and the presentation which we will refer to in today's call are available on our website. This call will be recorded and archived on our website.

Please go to slide 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 include non-GAAP financial measures. 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 and the 2013 quarterly information in the appendix of today's presentation for further details.

Our release and today's commentary also reflect the reclassification of our United Kingdom door businesses to discontinued operations. Please refer to our press release and Form 10-Q filing for the quarter in ended June 30, 2014, for additional information.

With that, please go to slide 3. And I will turn the call over to Dave.

Thanks, Tom.

Good morning, everyone, and thank you for joining us today.

In the second quarter, revenues were $531 million (sic, see press release slides, "$531.5 million") up 4.0% on an adjusted basis versus last year and up 2.9% on an organic basis. Adjusted operating income of $101.7 million increased 1.6% versus the prior year. And adjusted operating margin of 19.1% was down 50 basis points versus the prior year. Accounting for a $2.5 million bad debt adjustment in the Asia-Pacific region, adjusted operating margin was flat to prior year.

We delivered reported earnings per share of $0.53, which concludes $0.08 of restructuring and one-time separation costs, resulting in adjusted earnings per share of $0.61.

Organic adjusted revenue in the Americas grew 4.9%, driven by continued strength in our Residential segment. Slightly negative EMEIA revenue growth was consistent with our expectations regarding flat but stable markets, and our decision to access certain product markets that are less profitable, dilute resources, and are not scalable. And although bookings are strong in our China system integration business, the timing of large government-related contracts were the main driver in -12% revenue growth year over year.

Allegion repurchased approximately 600,000 shares for $30.3 million in the quarter. This is consistent with our previously-communicated capital allocation strategy to offset dilution. We are raising the midpoint of our full-year EPS guidance, which is now forecasted to be $2.30 to $2.40 on an adjusted basis and $2.00 to $2.15 on a reported basis. This earnings forecast assumes adjusted revenue growth of 3.5% to 4.5% similar to our previous guidance.

Please go to slide 4.

We continue to prioritize investments to meet the electro mechanical transformation within the security industry. Our ability to provide new solutions that offer innovation and convenience to both our residential and commercial customers is a pillar of our growth platform.

We continue to make progress in Europe. As part of our profitability improvement actions, we announced an agreement to divest our UK Door business to an affiliate of Alcyon Financial Limited, a financial investment firm. The businesses to be sold include Dor-O-Matic branded automatic door businesses, the Martin Roberts branded performance steel door set business, and the UK service organization. This enables us to simplify our portfolio and focus on key strategic businesses and services within the EMEIA region.

I would like to take this opportunity to thank our employees within these businesses for their contributions and continued focus on the customer during this transition and wish them well in the Alcyon family.

Also in the second quarter, we have committed to a plan to restructure the EMEIA organization to improve efficiencies, cost of structure and position for future growth. We remain focused on acquisition opportunities in the emerging markets, emerging technologies and product portfolio expansion. We continue to work to develop our M&A pipeline and are seeing the favorable result of our early acquisitions. As we evaluate future opportunities, we will continue to follow a disciplined process to make sure the deals are aligned with our strategy and that we have confidence that they will create shareholder value.

Before I move on, I'd like to take a moment to provide a status on our transition service agreements. We have eliminated over 75% of the TFAs with Ingersoll Rand, and we remain confident of migrating off all service agreements by the end of the year. This has been made possible by the significant efforts of hundreds of Allegion employees around the globe.

Please go to slide 5

Last quarter, I spoke to you about our innovation pipeline and advancements with regard to technology and development. This quarter I'd like to share some recent examples. Our Schlage Touchscreen Deadbolt with alarm was rated number one in electronic connected locks in June from a leading consumer publication. And our Schlage Keypad Deadbolt was ranked number one in electronic locks.

We are the category pioneer in residential electronic lock category and launched the first connected smart lock to the market. Our connected Touchscreen Deadbolt solution offers best-in-quality durability, best-in-class security, and the convenience of fast and easy installation, with sleek designs and style great for today's home renovations.

Our Open Platform Lock is compatible with leading home automation and monitored security systems. And with Grade 1 security rating, built in alarm technology, and fingerprint-resistant touchscreens, we are leading the evolution to the keyless era.

We recently announced our new wireless lock with engage technology used for commercial applications. Designed to be the easiest electronic to install, connect, manage and use, this new product reduces the owner's cost of ownership and we believe will accelerate the adoption rate of electronic locks in the commercial market. It offers the same Schlage quality and durability commercial business owners have come to rely on, plus it comes with Web and mobile app tools to help building owners manage access. It's ideal for interior office doors, common area doors and sensitive storage areas.

And you've heard me discuss the complexity of our industry, including navigating the requirements of codes and standards. A great example of this is our new Von Duprin AX Series Exit Device. Developed to provide the market with a solution that meets recent California building code enhancements that established a 5-pound minimum force on operational hardware for accessible openings. Our AX product provides the first UL-certified exit device meeting the new requirements. while incorporating the rigorous standards for our durability, use and functionality that are synonymous with Von Duprin.

Patrick will now walk you through the financial results. And I'll be back to update you on our full 2014 outlook.

Thanks, Dave.

Good morning, everyone. Please go to slide number 6.

Reported net revenues for the quarter were $531.5 million, reflecting an increase of 0.05% versus the prior year. Adjusting prior periods for a previously =-discussed order flow change with our consolidated joint venture in Asia, net revenues increased 4% versus the prior year. Organic revenue growth, which excludes the impact of our recent acquisitions and foreign exchange rate fluctuations, was up 2.9%. We realized mid double-digit growth in residential Americas driven by the builder, e-commerce and Venezuela segments.

The commercial business had modest growth, reflecting continued softness in the institutional markets. EMEIA revenues were consistent with our expectations regarding flat but stable markets. And although bookings are strong in our China system integration business, the nature of the timing of large government-related contracts drove a large variance in the quarterly growth rate.

Adjusted operating income increased by 1.6% compared to the prior year. Adjusted operating margins were 19.1% in the quarter. The results include a $2.5 million bad debit adjustment within the Asia-Pacific region. Excluding this item, operating margin was flat compared to the prior-year period.

The Company continues to invest in future growth platforms, including incremental engineering to accelerate new product development, as Dave highlighted earlier, and incremental channel development expenditures to accelerate growth in underserved vertical markets.

Please go to slide number 7.

This slide reflects our EPS reconciliation for the second quarter. For the second quarter of 2013, reported and adjusted EPS was $0.64. Operational results increased EPS by $0.04, as pricing and productivity more than offset inflation. Note that pricing actions were taken in the quarter to offset increased inflation, particularly in Venezuela. The operational results also include an unfavorable $0.02-per-share impact related to the bad debt adjustment from the Asia-Pacific region.

The decrease in the adjusted effective tax rate to 29.8% drove $0.06 per share in improvement versus the prior year. The decrease in our effective tax rate is due to favorable changes in the mix of pretax income and continued leverage of our tax structure.

The next item reflects a reduction of $0.08 per share related to the incremental interest expense incurred as a result of additional indebtedness associate with the spinoff from Ingersoll Rand.

Next, incremental investment and ongoing growth initiatives were a $0.03 reduction. Increased non-controlling interest in a higher number of weighted average diluted shares outstanding each represented a $0.01 reduction in EPS. This results in adjusted second-quarter 2014 EPS of $0.61 per share.

Continuing on, we have an $0.08-per-share reduction for restructuring and spin-related expenses to arrive at the second quarter 2014 reported EPS of $0.53. The reduction is driven by one-time separation costs in the quarter of $6.9 million, as well as EMEIA restructuring and other charges of $5.1 million.

Please go to slide number 8.

Second-quarter revenues for the Americas region were up 5.3% on an adjusted basis and up 4.9% on an organic basis. Removing the impact of Venezuelan price increases, revenues were up 2.4% on an adjusted basis. Venezuela pricing, higher volumes, and the acquisition of Schlage to Colombia in 2014 offset unfavorable currency movement in Canada.

North America residential revenue growth reflected strength in the builder and e-commerce channels. In addition, we continue to see strong growth in residential electronic locks, as this category increased over 20% compared to the prior period. Commercial organic revenues were up slightly in the quarter as commercial vertical compensated for weak institutional markets.

Adjusted operating margins for the quarter were down 140 basis points. The decrease was primarily attributable to incremental investment and unfavorable business mix related to the higher growth of residential revenue compared to commercial revenue. These headwinds were partially offset by favorable pricing and productivity. We continue to see improved year-over-year residential margins, which partially offset the unfavorable business mix.

Although operating margins declined in the quarter, we are still projecting margin improvement for the full year as a result of higher volumes; improved pricing; and, to some extent, an easier comparison in the fourth quarter.

Please go to slide number 9.

We are pleased with the ongoing progress in EMEIA, as reflected in the second-quarter results. As we discuss our operational performance, please keep in mind our UK Door businesses have been removed to discontinued operations in the financial results. The combined businesses have revenue of approximately $24 million and an operating loss of approximately $3 million for 2013.

Second-quarter revenues for the EMEIA region were up 3%, and down 0.3% on an organic basis. Market indicators continue to suggestibility in the Southern region, but with minimal growth. The organic revenue decline was driven by lower volume reflecting actions to selectively exit unprofitable markets partially offset by price improvements.

Adjusted operating margin for the quarter was 2%, up 320 basis points compared to the prior-year period. The favorable improvement is driven by price and carryover 2013 restructuring benefits, as well as management's initiatives to exit certain unprofitable markets segments. We remain on target to reflect a 300-basis-point improvement in operating margin for the full year. The restructuring actions taken in the quarter will further lean out the cost structure with benefits realized in the second half of 2014.

Please go to slide number 10.

Second-quarter revenues for the Asia-Pacific region were down 9.2% and down 12% on an organic basis. Declines in system integration revenue were partially offset by strong double-digit hardware growth in most regions. Our system integration revenue is dependent on large government contracts that can have large quarterly variations in the timing of project awards. When evaluating the performance of this business, we monitor full-year growth as the best indicator of success. We exited the second quarter with a higher backlog and strong project pipeline, and are still expecting high single-digit growth for the full year.

Adjusted operating income for the quarter was down $2.5 million, driven by a one-time bad debt adjustment of the same amount in the current quarter. Excluding this impact, operating margins would have been in line with prior-year's favorable pricing, productivity and the FSH acquisition offset the system integration volume decline in investments. We continue to expect operating margins to improve for the full year as revenue increases with the seasonality of the business.

Please go to slide number 11.

Turning our attention to available cash flow, you'll see that we've generated $39.4 million of available cash flow year to date. The decrease in available cash versus 2013 reflects spin and restructuring expenses and incremental capital expenditures for new systems, new product development, and productivity investments.

We continue to manage our working capital effectively in order to improve the velocity of asset turnover. Resulting in improvements in working capital as a percentage of sales, as well as a reduction in our cash conversion cycle. We are still targeting available cash flow for the year to approximate 100% of net earnings continuing operations.

I will now hand it back over to Dave for an update of our full-year 2014 guidance.

Thanks, Patrick.

Please go to slide 12.

If we turn our attention to end markets in the Americas, we see a shift in growth between residential and non-residential markets as compared to our prior guidance. The non-residential markets will continue to recover at a slow pace. Availability and cost of labor continues to be a challenge, and any weather-related carrier over from the prior quarter appears to have been modest. We now forecast non-residential 2014 growth in the low single-digits, mostly driven by the commercial segments of the markets. We expect the institutional markets to be flat to negative low single-digits for the year.

When we look at the ABI index and long-term indicated for Allegion, we note the Institutional sector for ABI has been recovering at a much slower pace than the commercial sectors. And June marks the first time the Institutional index has reached positive territory since August of 2013. We see the growth in traditional commercial segments, such as retail office and hospitality, as opportunities to redirect efforts to drive more share of discretionary business coming through those channels. This remains a critical component in our ability to expand in our core markets.

The Residential multifamily segment continues its strong pace of growth, driven by affordability, mobility, and uncertainty in the job market. And although we are still below normal levels, the single-family residential markets continued to show solid improvement driven by continued recovery in single-family construction. As housing prices continue to increase and inventory is reduced, we see increases in renovation activity, which will drive demand in our retail channels. With our residential product portfolio and new, innovative products, we are well-positioned to support stronger residential renovation activity.

Our outlook for European 2014 growth remains subdued, and we continue to forecast Allegion's third markets to be flat. France and Italy construction markets, two of Allegion's larger mechanical markets, are forecast to be slightly negative for the year. The ongoing recovery in this market will proceed at a very slow rate. And we still view recovery to normal levels to occur after 2015.

We expect mid-single-digit growth in the Asia-Pacific region driven by to growth in China. Of note, we are seeing pressure in China in the Residential segment with increased inventory and reduced home values, while non-residential construction growth remains strong. We also see annual growth in the System Integration segment as safety investments in China continue to ship from first-tier to second- and third-tier cities.

Please go to slide 13.

Our full year adjusted year-over-year forecast remains up 3.5% to 4.5%. We continue to expect the Americas' revenues to be up 3.5% to 5% in aggregate, although the mix of the revenues has shifted when compared to previous guidance. Essentially, strong residential volumes are compensating for lower-than-expected institutional volumes.

We see the EMEIA region as essentially flat, and Asia-Pacific region to be up 8% to 10%, with a strong second half.

Please go to slide 14.

We are raising the midpoint of our 2014 EPS guidance. Adjusted earnings per share are now forecasted to be in the range of $2.30 to $2.40, an increase of 6% to 11% from 2013 adjusted earnings per share. We continued to anticipate earnings growth will accelerate in the second half of this year due to higher volumes, 2014 European actions, and a wider spread in the effective tax rate.

Restructuring and Spin costs are still expected to be $0.25 to $0.30 of impact during the year, resulting in a reported EPS range of $2.00 to $2.15. The effective tax rate assumptions in the guidance is approximately 30%, and outstanding diluted shares are approximately 97 million.

Finally, the guidance does not reflect the potential risk of the devaluation of the Venezuela Bolivar. For more information on this topic, please refer to our Form 10-Q filed with the Securities and Exchange Commission for the period ended June 30, 2014.

Please go to slide 15.

So to summarize, we are pleased with the results in the quarter, given the soft institutional and Southern European market environments. The American Residential segment continues to perform well, and we're taking the pricing actions in Venezuela to compensate for inflation. We have a solid backlog of system integration projects in China and expect to see stronger second half within that business. And as evident in the quarter, we continue to make significant progress on our European profitability actions.

Our 2014 priorities are clear. We continue to execute on our operating strategies; position the Company for accelerated growth; drive a balanced capital allocation plan; and complete spin-related activities quickly and efficiently.

Now Patrick and I would be happy to take your questions.

(Operator Instructions)

Our first question comes from the line of Steven Winoker, Sanford Bernstein.

Thanks very much. Good morning.

Good morning Steve.

Nice progress as seen in all the key initiatives that you been talking about the one thing just to be helpful especially on that working capital reduction, again, Patrick could you call out exactly how you're getting that?

Yes it's coming primarily from improved focus on both receivable and inventory turnover. I think we've talked about historically if you look at the businesses from a regional perspective Americas in pretty good shape. The opportunity was really in the European area. And the team has done a nice job in reducing our inventory there. Continued vigilance and receivable management and it just releasing good progress across the board.

The expect that to continue than going forward?

If you kind of look at it over the last four quarters we've continuously made good progress in that area. Both in terms of working capital as a percentage of revenue, as well as our cash conversion cycle. I think there's some additional opportunities here. But at some point it becomes limited in terms of the step improvements but we'll continue to remain focused on it to drive improvements.

If you benchmark the business it shows up extremely well. It will be a high priority for us as we run Allegion.

Okay. Great. And then in the Americas just digging into that a little bit for now, the 3% pricing growth you called out the Latin American actions being taken, but with the US also getting priced, or is this all Latin America and price was the other way in the US?

The majority was Venezuela price-related. The high inflation economy, as you know. The team has done a really good job to offset the inflationary, both in terms of material, as well as salaries and those types of things there.

I'd say about 80% is relative to Venezuela. The majority in both our residential -- or the rest of it and our residential commercial areas. So we're getting some pricing improvement. You may recall last quarter we instituted a price increase effective at the beginning of April. It took some time to work out the backlog but we're starting to see some incremental price now going into Q3.

And you're not seeing additional pricing related competition in the US? That's abnormal.

I wouldn't say is abnormal. It's always a competitive market. We are getting our share of price here.

And just on the Venezuela point again, I'm not sure I'm clear -- what would actually take to trigger an accounting change -- a change to those other rates? Given you described a very full in prior calls about how they closed loop and all of that. What would actually have to happen externally or what should we look for that would give us a sign that you'd actually be forced to take that action?

Right now when we looked at that I think patient is prudent. There's a lot of potential movement there in the currency. The triggering of that, obviously, would be a change in the official exchange rate. We would be forced at that point in time to adopt to the new rate. If our intent or our business strategy changes to the extent we need to go out and exchange local currency to US dollars that would be a triggering event. We talked about previously that if you look at that business as fairly well self-contained, i.e., it sources of the product, manufacturers distribute in country we don't really have a need nor do we have a desire today to exchange local currency to dollars.

That's why we're sitting on the fence now and we'll wait and see how this shakes out. I think we'll all agree at some point there's going to be a devaluation here. It's just a question of when, is my perspective on that: when and at what rate.

All right. I will pass it on. Thanks.

Our next question comes from the line of Jeff Kessler, Imperial capital.

In the Americas, I'm wondering if you could describe the margin differential between commercial and institutional and any government business that you might have? As those mix of those small micro segments changes, how does that affect you?

Jeff, we don't really look at it in terms of specific mix within the vertical markets. What we're looking at obviously is how the total commercial business is performing. Relative to residential there was a mix change there as the residential volumes were higher proportionate to commercial.

The good news story there is the residential margins are improving. We're getting good throughput in the factory, good activity there. So that is helping mitigate the mix change.

That was my next question. It was surprising that given all the emphasis you put on the residential versus commercial mix, with residential having a lower margin you been able to maintain the margin up there. The other question that I had was regarding Europe and is there any change in the timing of 2015 into 2016 where you want to end up as a -- at a margin? What is the process you're going through to get to a 10% type of margin in Europe? What's the process and timing of that process.

We've made the big moves with our pruning. You see that in terms of the exit of our UK door businesses. The second step was our internal structural cost. We've tried to move our resources much closer to our markets.

The third is really getting in these five or six markets that I see are strong in our mechanical businesses and raising the performance and face time of our spec writers and working with our channel partners to get more of our share in a flat market. The other side of this is the interflex business, which we are in the search to appoint and entrepreneurial leader there. That business is performing well and understanding the growth opportunities we've got within that space.

To that how I would frame it. I was really pleased with the actions that we've taken to get to this point. I thought the improvement in margins at year-over-year for the quarter were outstanding and we're going to continue to work that to reach the aspirations of that we see.

Dave one final question. Those new Schlage electronic locks. Granted they may be under a different brand name, but are they applicable to the European market? Is the European market resistant at this point to residential wireless electronic locks, or is it just going to be three or four years behind just by the normal course of things?

We believe the technology is applicable. I think it's one of the challenges of the new Allegion to think about how we can leverage our technology globally. We're looking at that capability in Europe, as well as Asia to be able to extend it, and we think we've got good opportunities to go there. But work to be done.

Right. Great. Thank you very much.

Is thanks Jeff. The to hear from you.

Our next question comes from the line from Jeremy Kepron, CLSA.

Hello good morning everybody. A question on the margins in the Americas segment. You called it the shift in the mix here really weighing of the margin. I'm wondering if this is purely a function of strength in the residential and weaker non-res products? You also called out 20 % plus growth and electronic locks and I'm wondering how that would effect margins? Probably in a positive way?

I would say that if you looked at the revenue top line, the majority of the volume growth was residential related. We continue to see strong end market growth there. So that was the primary driver, just mix. The residential margins as you know our lower than the commercial revenue margins. So that was the driver there.

In terms of electronic locks, it's a good trend for us. We're the category leader and residential electronic locks. We saw good growth there +20%.

If you think about the margin perspective I'd say equal to may be slightly better than mechanical traditional locks, but with a much higher price point. So not only are beginning higher-margin, but we're getting incremental OI dollars, as well because of the high price point. That's a good mix shift for us and we see that given our leading condition technology connectivity we see that growing in the future.

I would just add in the residential segmented the Res Pro, which is new construction in our residential activity is very price competitive. Especially in today's market. As we can take E locks on the residential side in the retrofit market and move that up we're going to do better. The second think that's improving our margins remember a year and half ago we moved production capability from [IR Fu Shing] sharing a joint venture to our Baja facilities, that team is doing an excellent job of weaning out capability and it is having a positive effect on our margins.

Understood. Okay and looking at the cash flow statement, just two things here. One is the step up in CapEx. I think $26 million year to date. It's a little bit ahead of what I had in mind. Could you may be remind us of what the plan is for this year and next?

Sure. So this year our CapEx plan is to be around $40 million for the year. The first half is a little bit higher and that was really done purposefully. We had some systems-related expenditures to get off our transitional services agreements. Particularly as it rated HR MS systems. We had anticipated to be front end-loaded. But we're planning on $40 million for the year, and as we look into next year I would anticipate the CapEx to stay around that level, close to 2% of revenue.

Okay. Great. And a question for Dave regarding the restructuring plan in Europe. I think you laid out the plan with the three steps. But I'm wondering if you also have an idea about what will be the ideal manufacturing footprint in Europe, and would that be a further step in that restructuring plan.

We continue to challenge our manufacturing footprint globally. We certainly hypothesize around what the opportunities are in Europe. We think pruning what we did in the UK was a nice first step. It's always a challenge to restructure in Europe. We think there's opportunities there, but we're also mindful we need to be close to our end customers. We're working those alternatives. In mind of how we properly position the business to be successful.

Great. Thank you very much.

Our next question come from the line of Charles Clarke Credit Suisse.

Hello guys.

Hello Charles.

First question, just on tax. I realized that you lowered the rate to 30% from 31%. Probably being nitpicky here, but is that a function of ongoing internal efforts, or is that more related to mix?

More related to mix. A couple things we're able to do their from a strategy perspective to have an impact on that. This is an area that, obviously, continues to get heightened focus. It is a strategic asset of the business and we want to continue to leverage this.

We have engaged external advisors to help us in this area. The more we look into this I think the more we like in terms of potential opportunity. There's a lot of work to be done. So right now we're -- our guidance hasn't changed in terms of our tax rate and what we anticipate to reduce it to the mid-20s by 2016.

Great. Thanks. And just looking at Americas specifically. Just looking at the first half of this year compared to the first half of last year just on that adjusted operating profit line it looks like margins were down about 50 basis points. Just wondering if you think in the back half that we should expect Americas margin to be higher year-over-year, just given tablet with the Venezuela pricing that's probably won't repeat?

Absolutely. We're still forecasting and projecting full-year margins to be up year-over-year. So consequently second-half margins would be stronger to mitigate for the first half shortfall there. And that's primarily a couple things.

We're looking at stronger growth, a better mix, in the commercial market. We are anticipating improved pricing. We have some price increases that went into effect and we're starting to see that come through in our order book and getting good leverage and incremental volume, as well as, we may remember fourth quarter last year had a little noise in it. So the comparisons get a little bit easier in Q4, and that will help us as well for the full year margin comparisons.

Great. Thanks a lot.

(Operator Instructions) Our next question comes from the line of Jeff Sprague, Vertical Research.

Thank you good morning everyone.

Hello Jeff.

A couple of things that you didn't really want to get into the margin difference with in commercial versus institutional but I wonder few could speak to the product intensity difference? Kind of value per square foot or anything like that where you been able to size the difference. I would assume your value intensity is much higher on institutional. Just wondering how much lower commercial might be?

Institutional versus commercial?

Yes.

Have not on the value intensity analysis. It's a good challenge to get to. I would describe it this way. That the margins are not significantly lower. What has driven the success of the company in the institutional side is a build to order model.

And our opportunity wise and what I'd call through stock distributor business, inventory in the shelf, so that we first focus on what I would call the retrofit market, let's say 10 office doors in New York City, we're doing some test case and see opportunity to that. There could be a bit less margin, but I don't think it's significant. We are challenging ourselves and our US Americas team that there is significant opportunity in this retrofit fast-moving market, and how can we do that with our leading brand as well as our price fighting brands and growth in that space.

I was also just wondering on Europe with the UK move. Is there a substantial amount of addition by subtraction that could happen as you right side that portfolio? Is there more revenue that comes out through divesture?

I believe we are done. I think it's now continuing to optimize the structure and really working the channel relationships driving more specification capabilities in the front end of the business. We've lost some of that capability over the last five years and that's how you win.

I'd also -- we're looking at our opportunities with interflex. That's been a good engine for us. And you think in the bigger world of connected security, the Internet of Things, we think there's good opportunity there. So I'd say we're done at least for now.

Just one from me. Just the bad debt expense in Asia, where was that? What was it? Was it a distributor or retailer or project that you completed that you didn't get paid on? Can you give us a little more color there? And is there anything else there we ought to be mindful of?

Just caught is primarily related to our system integration business there, which, as you know, has longtails to contracts and payouts from customers accordingly. Unfortunately we had a change in some of the payment history from a couple of primary customers.

I would say this is not systemic problem. We did a comprehensive review of both our receivable portfolio as well as the unbilled receivables and the reserve there. What you see was a fall out of that comprehensive review. You never want to have these things, but I think we addressed it properly and hopefully we've got it behind us now.

Okay. Thank you.

our next question comes from the line of David MacGregor, Longbow Research.

Good morning. Question is with respect to your ability to flex your operational excellence programs, and specifically in the second half topline growth in US commercial and institutional is below your expectations, to what extent do have the ability to accelerate your cost reduction and value stream initiatives to protect the margins?

I think this business has been modeled and builds on its ability to flex up and flex down. I would be critical of our performance in the first half that we anticipated it being a touch stronger and maybe stood at readiness. So, we've got our eyes focused that if things don't materialize we will flex down faster.

Okay. The second question is just with regard to the mix and you talk specifically with regard to the Americas, what kind of growth you saw in your opening price point brands versus your premium brands?

I would say generally disappointed in the opening price point brands. I think that's reflective in this replacement market the retrofit market. It's part of a channel that we're not as well positioned in. Jeff Kessler asked a question about this through stock. I can name several industries where the actual through stock business carries a higher-margin. Our challenge is to get -- position ourselves in the channel to enjoy a bigger part of that space.

Thank you very much.

We have a follow-up question from the line of Jeremy Kepron, CLSA.

Thank you. Just a follow-up on Jeff's question regarding the Asia-Pacific business and the system integration projects over there. Could you tell us a little bit more about those projects that you expect to come through in the second half and precisely the nature of them.

You may remember from analyst day we give an overview. These are typically seven-figure projects. Our backlog of those projects are up 20%. This would be providing higher definition cameras in the Pudong airport. These are safe city projects where we're pulling together systems.

A video, car counting vehicle recognition, and if you look at the BOCOM business over the last five years it tends to be second-half loaded. Normal from our perspective, we think our ability to execute on that is right. We're trying to drive more of our operational excellence initiatives to make sure we apply the same techniques on this more service-oriented capability as we do in our manufacturing capability. So feel good about our ability to bring that home in the second half.

All right. Thank you.

I'm not showing any further questions in the queue at this time. I would like to turn the call back to you, Tom for closing remarks.

Okay. We'll wrap it up. We would like to thank everyone for joining us today and have a safe day.

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program intimate all disconnect. Everyone have a wonderful day.