安朗杰 (ALLE) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Allegion's Q3 2014 earnings conference call.

(Operator Instructions).

As a reminder this call is being recorded. I would now like to introduce your host for today's conference, Tom Martineau, Director of Investor Relations. Sir, you may begin.

Thank you, Amanda. Good morning. Welcome and thank you for joining us for the third-quarter 2014 Allegion earnings call. With me today is Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President & 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 web site, www.Allegion.com. 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 security's 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. 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.

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

Good morning, everyone. Thank you for joining us today.

I am pleased with the performance of Allegion in the third quarter. Our team delivered solid operation leverage with a nice increase in demand. Revenues were $546 million, up 6.8% on an adjusted basis versus last year and up 6.4% on an organic basis. The American region led the way with 8.5% organic growth with increases in nonresidential, residential and Latin American segments.

Adjusting operating income of $110 million increased 15.4% versus last year. All regions contributed margin improvement resulting in an increase of adjusted operating margin of 150 basis points for the company. We delivered reporting earnings per share of $0.64 which includes $0.04 of restructuring and one-time separation costs resulting in adjusted earnings per share of $0.68. This is an increase of 41.7% versus the prior year.

We are increasing our full-year EPS guidance which is now forecasted to be $2.37 to $2.42 on an adjusted basis and $2.07 to $2.12 on a reported basis. This earnings forecast assumes adjusted revenue growth of approximately 4.5%.

Please go to slide 4.

We continue to focus on our key growth strategies that create practical solutions and innovative products that meet our customer needs. We are making great progress in Europe and although we are seeing additional market headwinds, I'm pleased with the continued improvement in margin performance. Our focus on key markets, pruning the portfolio and management of the internal cost structure are continuing to result in improved financial results.

In the Americas, we began to pilot initiatives focused on the commercial repair and renovation segment. Specifically, this would be the portion of the market that focused on fast-moving through stock, quick shift deliveries. Historically, this has been an underserved market for Allegion. Consistent with our strategy on core market expansion, we will look to position ourselves in the channel to enjoy a bigger part of this large market segment. Capital allocation management continues to be a key element on the measurement of success for the business. Patrick will provide an update on this a little later.

Please go to slide 5.

Allegion continues to lead the way as businesses and residential consumers are increasingly choosing electronic locks and credentials. As we see this convergence across the globe, we are experiencing what we are calling the keyless era, which is all about convenience. Our solutions are redefining the way people connect with and control their homes and offices. We launched our latest advancement, ENGAGE technology, at the as-is conference in September.

ENGAGE technology delivers a new level of security, connectivity and convenience to commercial office buildings and tenant spaces. ENGAGE technology provides a solution that is not only easy to install, manage and use, but is also affordable. Cloud-based mobile and web apps make it easy to manage locks and users from anywhere, supporting the growth or changing needs of a business or building. The Schlage NDE wireless lock fits a standard cylindrical door and can be installed in a few minutes with just a screwdriver. ENGAGE technology provides opportunity to expand in underserved markets.

We will begin shipping in the US in the fourth quarter and will expand globally in the future. Later this year, we'll expand our keyless era offerings with several products that continue to redefine the way people enter, exit and connect with their homes.

Patrick will now walk you through the financial results, and I will be back to update you on the full-year 2014 outlook.

Thank you, Dave. Good morning, everyone. Thank you for joining today's call.

Please go to slide 6.

Reported net revenues for the quarter were $546.7 million, reflecting an increase of 3.3% versus the prior year. Adjusting prior periods for a previously discussed order flow change with our consolidated joint venture in Asia, net revenues increased $34.6 million or 6.8% versus the prior year. Organic revenue growth, which excludes the impact of our recent acquisitions, the UK door divestiture and foreign exchange rate fluctuations is up 6.4%.

We realized high single digit growth in the Americas with growth in all segments of the market. US commercial and residential segments increased mid single digits with Latin America up significantly, primarily due to incremental price realization in Venezuela to offset inflation. Allegion revenues were down slightly in the quarter as geopolitical unrest and currency volatility late in the quarter created market headwinds.

Asia-Pacific revenues were up mid single digits, driven primarily from acquisition which occurred in the second quarter. Adjusted operating income of $110.4 million increased 15.4% compared to the prior year. Adjusted operating margin of 20.2% reflects an increase of 150 basis points versus the prior year, reflecting good operating leverage on incremental revenues. We are extremely pleased with the incremental operating leverage of the business, particularly as we continue to make incremental growth investments for new products and channel development in order to accelerate our earrings growth and return on capital.

Please go to slide 7.

This slide reflects our EPS reconciliation for the third quarter. For the third quarter of 2013, reported EPS was a negative $0.81, adjusting for prior year restructuring, a land sale gain and an asset impairment, the 2013 adjusted EPS was $0.48. Operational results increased EPS by $0.13 as pricing, productivity and favorable operating leverage more than offset inflation. Note in the pricing actions were taken in quarter to offset increased inflation particularly in Venezuela.

The decrease in adjusted effective tax rate to 29% drove $0.21 per share improvement versus the prior year. The decrease in our effective tax rate is primarily due to favorable changes in the mix of pretax income as well as adjustments made in the third quarter of 2013. The next item reflects a reduction of $0.06 per share related to the incremental interest expense incurred as a result of the additional indebtedness associated with the spin-off of Ingersoll Rand.

Next, incremental investments and ongoing growth and corporate initiatives tied for a strategy specific to taxes and M&A were a $0.04 reduction. Of note, the volume benefits shown earlier on the reconciliation more than offsets the incremental investment. Increased non-controlling interest and a higher number of weighted average diluted shares outstanding in aggregate represented a $0.04 reduction in EPS. This resulted in adjusted third quarter 2014 EPS of $0.68 per share. Continuing on, we have a $0.04 per share reduction for structuring and spend related expense to arrive at the third-quarter 2014 reported EPS of $0.64.

Please go to slide 8.

Third-quarter revenues for the Americas region were $423.1 million, up 9% on an adjusted basis. Removing the impact of Venezuelan price increases, revenues were up 5.8% on an adjusted basis. Removing the impact of acquisition and foreign currency, organic revenue was up 8.5%. Higher volumes and Venezuelan pricing and the acquisition of Shlage Lock de Columbia in January of 2014,, offset unfavorable currency movement in Canada.

All market segments delivered incremental volume growth. Volumes improved in the commercial segments by mid-single digits as we began activities in the US market to build repair and renovation capability with our channel partners as well as some incremental business ahead of a announced price increase effective October 6.

US residential growth in the mid-single digits was driven by the strength in the builder markets. Americas adjusted operating income of $122.9 million was up 12.2% versus the prior year. Adjusted operating margin for the quarter increased 80 basis points due to favorable volume leverage, price and productivity that more than offset inflation and ongoing investments in new product and channel development.

Please go to slide 9.

As we review the EMEIA results, please keep in mind our UK door businesses have been moved to discontinued operations. Third-quarter revenues for the EMEIA region were $89.5 million down 2.8% and down 0.9% on organic basis. Favorable currency movement early in the quarter offset unfavorable September impacts. We anticipate exchange rates will continue to be a headwind in the fourth quarter. But note most of our expenses are also in the region and will minimize the associated margin impact.

Markets continue to be soft in the region than most major countries, EMEIA adjusted operating income of $1.2 million was up 129% versus the prior year. Adjusted operating margin for the quarter was 1.3% up 570 basis points. Favorable pricing, productivity in excess of inflation and foreign currency exchange movements offset increase investment spending and unfavorable volume leverage.

The benefits of previously announced restructuring in the region supported the increase in productivity. This quarter represents the fourth quarter in a row in which the region has improved operating margin and performance. Year to date, adjusted operating profit has improved by $10 million or 350 basis points.

Please go to slide 10.

Third-quarter revenues for the Asia-Pacific region were $34.1 million up 6.9% and up 1.9% on an organic basis. The revenue growth was primarily due to the acquisition of FSH, hardware volumes grew in the North Asia, Australia and New Zealand regions. Lower system integration revenues were mostly timing-driven as ending Q3 backlog was strong. As announced yesterday, Bocom System won a significant safe city project valued at approximately $25 million.

Asia-Pacific adjusted operating margin of negative $500,000 was up $400,000 versus the prior year. Adjusted operating margin improved 130 basis points. The improvement in margin was driven by FSH acquisition and improved business mix.

Please go to slide 11.

We generated $135 million of available cash flow year to date. The decrease in available cash versus 2013 reflects incremental capital expenditures, new product development, information systems and spin-related projects. As you can see from the grass, we continue to demonstrate effective working capital management as well as improvements in our cash conversion cycle. We continue to target available cash flow for the year to approximate 100% of net earnings from continuing operations.

Please go to slide 12.

As Dave mentioned earlier, I want to take a moment to reaffirm our commitment to a balanced and flexible capital allocation strategy. We ended Q3 with a gross debt to EBITDA of 2.9 against the target range of 2.75 to 3.25. Earlier this month, we announced amendment of our existing credit facility that lowers our cost to capital and assuming constant liable rates will result in approximately $5 million of annualized interest expense savings.

We continue to fund incremental investments and organic growth for new product development and channel strategies to accelerate core market expansion. We remain focused on acquisition opportunities in emerging markets, emerging technologies and product portfolio expansion. Integration of previous acquisitions are on track and they're making contributions to our financial results.

We are making good progress on developing our acquisition pipeline tied to our long-term strategy as well as developing our competencies globally in this area. We will continue to view shareholder distribution as a key component of the allocation. The Company has repurchased approximately 1 million shares year to date for $50.3 million.

Please go to slide 13.

You will remember the slide from our investor day when we discussed our effective tax rate expectations. We continue to view our structure as a strategic asset of the Company that we can leverage to facilitate our operating strategies and to achieve a lower effective tax rate to accelerate earnings as well as cash flow growth. We ended 2013 with an effective tax rate of approximately 38%. This was a result of taxes essentially being prepared on a stand-alone or statutory rate basis.

Our first communication for 2014 was that we anticipated an effective rate of 31% and then updated our guidance last quarter to reflect a 30% rate. Subsequent to this, we have continued our tax strategy and planning efforts and we now anticipate a full-year 2014 tax rate of approximately 28%. The reduction from the prior guidance was a result of accelerating the execution of tax planning strategies.

As we have discussed previously, with we set an initial target of a mid-twenties rate by 2016. I am happy to report that we will exceed this target by 2015, a year earlier than originally anticipated. I would also like to add we do not see any impact to our tax strategy with regard to recent inversion in Irish tax legislation changes. This was all made possible by the efforts of our strong tax team which evaluated and prioritized opportunities and invested appropriately to support the accelerated reduction in the effective tax rate.

In addition, based on what has been achieved in a better view of the opportunities, we have revised the objective to be below 20% by 2016.

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

Thank you, Patrick.

Please go to slide 14.

For 2014, we expect revenues to be up approximately 4.5% for the full year. In the Americas, we expect high single digit residential revenue growth and strong Venezuelan growth driven by pricing actions to offset material and other inflation. And although we realized nice growth in the quarter, we still only expect modest nonresidential revenue increases for the full year as institutional market recovery continues at a very slow pace.

Our outlook for Europe revenue growth is now at negative 2%, slightly worse than previous expectations. This reflects the net impact of our portfolio pruning, the currency exchange headwind that began in September and general market softness. Of note, increased geopolitical uncertainty in the region continues to limit overall recovery and is an obstacle for sustained growth.

Given our system integration backlog exit in Q3, we are guiding to revenue growth of approximately 10% in the Asia-Pacific region. As previously announced, our Asia-Pacific team through our Bocom System grant and an alliance with China Telecom won the Wuhu City Skynet Project valued at approximately $25 million. This project continues our success with safe city projects in China.

Please go to slide 15.

We are increasing our 2014 EPS guidance. Adjusted earnings per share are now forecasted to be in the range of the $2.37 to $2.42, an increase of 10% to 12% from 2013 adjusted earnings per share. This is driven by operational improvements, European actions in an reduction in the effective tax rate while investing and positioning the company for future growth. Restructuring, spend costs and the write off of debt issuance cost related to the amended credit facility are expected to be approximately $0.30 of impact during the year, resulting in an EPS range of $2.07 to $2.12.

The effective tax rate assumption in the guidance is approximately 28% and outstanding diluted shares are approximately $97 million. Finally, the guidance does not reflect the potential risk of a devaluation of the Venezuelan boulevard. For more information on this topic, please refer to our Form 10-Q filed with the Securities and Exchange Commission for the period ended September 30, 2014. I know everyone is interested in 2015 and we are in the process of developing our guidance and will provide more detail in our next earnings call.

I can assure that we expect modest growth to continue next year with the continued slow march to recovery. US residential markets are still a number of years away from what I believe to be a normal construction level of 1.5 million homes. And we are planning on unpredictable nonresidential recovery, but are positioned well to meet demand in recovery exceeds expectation in the year. While we still see meaningful European growth occurring after 2015, we believe the 2015 European market will remain flat to negative, driven by weak GDP growth, political uncertainty and high debt levels.

In the Asia-Pacific market we will continue to be one of the strongest growth regions albeit at a slower pace than recent history. Our plan for double-digit earnings growth in the business remains driven the solid business fundamental, margin enhancement opportunities, particularly in Europe and the tax rate reduction.

Please go to slide 16.

So to summarize, I was please with the results in solid performance in the third quarter. We demonstrated the strong leverage potential of the company, given revenue growth. We continue to focus on what matters. Leading the electromechanical conversion, driving core market expansion, improving European profitability, executing our tax strategy, and driving on a balance and flexible capital allocation plan.

I feel good about where we are in our first year and we are positioned for fourth quarter and long term success.

Now, Patrick and I will be happy to take your questions.

(Operator Instructions).

Our first question comes from David MacGregor, Longbow Research. Your line is open.

Yes. Good morning, everyone.

Good morning, David.

North America strong performance there. You had very strong incremental margins and I am just wondering was that the Venezuela in FX or could you just talk about the factors those strong incremental.

Yes, so I would say -- yes, Venezuela did contribute a little bit to the margin improvement. We have done a really good job in terms of offsetting inflation with price improvements exceeding inflation. So there's some contribution there, but we have been very pleased with operating leverage in our core facilities here in the Americas both on the commercial and residential side. So I see -- I think you are seeing really good uplift in margins as associated with the incremental volume primarily. Good productivity, offsetting inflation.

I guess it looks like you are leveraging off investments that maybe you have made in past so you had incremental costs associated with those revenues How much further run way do you have in front of you on this? How much could we see incremental margins stay strong like this for the next couple of quarters or is it longer.

I think we are leveraging the investing of the paths. If you look at the roof line take outs and lien implementations in North America that have been driven over the last few years, we proved in Q3 that increased revenues have significant leverage capabilities in the Company. And as markets return to normal we are very positive on our potential.

Yes. I would just add a lot of the incremental margin will also be dependent upon our future investments so we have always said we will try to balance the two making sure we get some incremental margin associated with the incremental investments that drives future growth. So in the future you may not see such a big increase, but it's all going to be dependent upon the level of investments we put in the business.

Thank you for that. Just secondly, can you just talk about within North America and your nonres business, velocity through the quarter and how October may fit into that?

I thought we commercially went out and took the opportunities that were on the table. I wouldn't call it velocity. The market was there -- we were able convert it. We talk about in the discussion this morning that we believe there's growth opportunity in the fast moving through stock businesses.

I felt in coming into the business that there was an opportunity there. We ran some test regions and what we call proexpress and the results were favorable. So in markets that may be uncertain, you know, we're working hard on what I'd call self-help to get more than our fair share in this R&R-like commercial space.

Would that account for the increase then in the finished goods inventories?

A little bit, but not significantly.

Thanks very much.

Thank you. Our next question comes from Robert Berry with Susquehanna International Group. Your line is now open.

Hey, guys. Good morning.

Good morning.

Nice work on the tax rate. Maybe, I wanted to actually just start there and clarify. It sounds like the outlook now for 2015 is that the rate would be below the mid-20%s?

Yes, that's [correct]. I think a good way to think about it, this year we're ending about a 28% effective tax rate. We've got a glide path and pretty good visibility by 2016 to get to 20%. The majority of that reduction of 8 points, you would see next year.

And would you expect it to filter in gradually through the year or should we just assume for the whole year whatever we are going to assume below the mid-20%s.

So, we will give more specific guidance in our fourth quarter earnings call relative to the annualized effective tax rate, but you will see it pretty much the whole year.

Okay.

As we continue to execute additional strategies, it will be some added benefits during the course of year. But, most of it will come at the beginning of the year.

What's the rate you are you are assuming in 4Q?

We are about, with the full year effective tax rate of 28%, about 24% for the quarter.

24%, okay. And then, maybe just shifting focus to the Americas region, it sounds like -- well it was a very solid quarter, very good volume growth. But it sounds like there's some real caution around 4Q and easing. Is that just conservatism or was there strength in 3Q that was a little abnormal? You don't see it carrying forward.

I believe this recover has been one of the choppiest of my business career, so we're cautioned. Our business softens in Q4 and into Q1 just because of the construction season, we've got to be mindful of that. We're going to continue to focus on this commercial R&R through stock capability. That will take us several quarters and years to really master, but you know I feel good about our position.

Yes.

I would just -- I would also add looking at the result there's probably a little pull forward from Q4 into Q3 in conjunction with our previously announced price increase that went into effect the first week in October. And as Dave talked about this repair replacement market, the new promo that we had in the market there for that.

And then just finally a clarification on the impact from Venezuela price in the quarter. Was that just over a 3% or what was the impact from Venezuela on pricing in the America.

So relative -- the Venezuela price increase was basically if you look at the total increase for Americas, up about 12.7% pricing, all of that was associated with Venezuela.

Okay.

So, commercial and residential were essentially flat for quarter.

Right, okay great. Thank you.

Thank you.

Our next question comes from Jeff Bragg with Vertical Research. Your line is now open.

Thank you. Good morning, fellas.

Good morning, Jeff.

Good morning. Good morning. Just a couple of questions back to the repair and renovation opportunity. As you stepped into that, how is your view evolving on actually the size of the opportunity and have you seen any competitive response? Obviously your gain there is someone else's pain. And I just wonder what the market reaction is if you've seen that yet?

We have sized the opportunity -- we put it is [$1.4 billion to $1.6 billion]. We think we get less than our entitled share of that. I have not seen a competitive response.

I think you're familiar with the electrical industry. Having stock on the shelf and managing that through stock business with has been neglected in our business model and I believe that we can flex our capability there and weather a competitive response.

Can you size your revenues there now currently?

Say it again?

What's your revenue take in that piece of the market currently?

More from a share perspective, low-single digits. You get into the institutional and new construction, we go up 25%, 30%.So, we think there's gain there. We think we've got some opening price point product gaps that we have got to deal with, but we see it as very opportunistic.

I was wondering if you could comment a little bit on institutional? You gave some passing color there but it sounds like we're still just kind of bumping along the bottom. Is that fair or do you see a little turn happening? Just a little color.

I am bumping along the bottom with you. You know, we are caution. I would say 2015 will lean positively, but this is a slow grind to normalization.

Yes. And then just one last one then I'll move on, for Patrick. Patrick, should we expect cash taxes to come down in [lock step] with kind of what's going on in the P&L.

Yes. The delta between book provision and cash should be relatively the same, actually cash will be lower this year. So, yes, is the answer. So as the tax rate comes down, that provides obviously more cash flow for the business to invest for our future growth. It is a good thing.

Right. Thank you very much.

Our next question comes from Steven Winoker with Sanford C. Bernstein. Your line is open.

Thank you and good morning, all.

Good morning.

Maybe just on the tax rate, what is the -- is there any US margin impact over time as part of your strategy? In other words, do you see any headwinds to US margins as you start down this tax rate path more aggressively?

So, as you guys know the majority of our pretax income is US centric. As we look into our strategy and kind of looking at what we think the potential rate can be in the future, we did not take into account any significant change in the mix of earnings so that wasn't taken into account. But as our businesses grow internationally and we improve the results in both Europe and Asia, I mean that will help the rate a little bit, but not significantly.

Okay. All right. And secondly, on AMEA, could you maybe giver us a little more depth on the progress there? You know, clearly you talked about weak markets, one of your competitors noted I think 3% organic for themselves, but they're more northern European weighted. What in terms of how should we think about market impact versus the things you are doing yourself consciously to narrow your scope and drive higher margins in the future.

I think you are probably familiar that we trimmed the portfolio in the UK with our door business, our numbers are adjusted for that.

Yes.

What you see is a softening of the business. I have talked that there's five or six markets that were really well positioned in Italy, Spain as an example, Greece These are we weak markets, I certainly would trade some of the economic growth in northern Europe. We think that our inner flex business which is more access control is driving some growth but as we look at the overall space, we're not encouraged that the market is going to help us.

I guess the question for me then is the 6% and 10% goals you've called out previously, do they still apply very much as they did? Any change in thinking on that front?

So, the way I would characterize it is a lot of good progress this year, it should be up 300 basis points relative to last year's numbers. We've got some restructuring benefit that will carry over to next year that will give us a nice tailwind there. I've got pretty good line of site to an 8% margin basis of current volumes.

If you look at the opportunities in terms of we still have a couple of unprofitable segments in business that we can change, take in a rifle shot approach from a pricing perspective not only market centric, but also looking at specific customers. And then accelerating our productivity on the lead initiatives. To get to 10% goal, still has wood to chop, but I think we can get there. But that would been on a flat volume relative to today. If markets continue to weaken and if we've got some pressure on the volumes that will put pressure on our OI margin of 10%.

Patrick, what time frame is that 8% around?

That's a 2016 -- again good line of sight to that and need to execute some additional initiatives to bridge the gap to 10%.

Right, 2016 average margin though right?

Yes, yes.

Okay, I'll hand it off. Thanks.

Our next question comes from is from Saliq Kahn with Imperial Capital. Your line is open.

Thank you, good morning guys. Speaking on behalf of Jeff [Jeffers] today. Two real quick questions, the first one regarding bureau. Potentially as you're looking at the discretion improvement and (inaudible) Europe, many of the integrator's that are out there would likely choose between Allegion, ASA and CABBA. What are you doing right now essentially to be able to raise the overall profile with the distributors?

Great question. Number one, is more work around our specifying capability. We were hanging on, what I call, a through stock model. You've got to create demand through specification. Our partnership with Eco Schulte is a good example of that, they've got an outstanding wing door offering. And it give us the opportunity to go in to specifiers and talk about products that compete on specs and allows us to pull through stock products.

So, more work to do that, some modest investment. As I think about specifying pools, I tend to like to have people in a common room that are going out to customers versus one in Paris, one in Balona, one in Madrid. That's why where we're working. Second, would be transferring some of our own lean initiates to make sure that our cycle times are shortened, our delivery commitments are solid, would be a couple of areas.

Great. Thank you. The other question I had was, sticking to Europe itself. Interflex, you guys have mentioned this previously, this was a business that has been pretty sheltered with a relatively decentralized management team under Ingersoll obviously. So over the last 14 or 16 years, the margins thought, as I recall, the margins have been up for this business. Is there any other updates that you guys are able the to provide us? We feel like this is a much better business model now than it was previously under the previous management team.

Well, thanks for that. If you visit us at Essen show in Germany, Interflex presented as stand alone company. We have named a new general manager for that business and with an effort to try and get them some oxygen, I want to look at them in their performance and we've set them up to do that. The second thing that we're really transforming there and it's part of our restructuring is they were trying to use a direct go-to market model out of Germany and it was not working.

We pushed them towards a VAR model and it's in its infancy but I believe it's the right path. When I was at the Essen show I had the opportunity to speak with AON, the large insurance group, air bus, large auto manufacturer that we've been successful with. They love the product. They love the support. We just need to get that out of the beyond the German borders. We think the VAR model helps us do that. Good little asset in that European portfolio.

Great. I have one more question. I'm sorry. As we're looking at essentially the electronic locks and the access control industry, the margins for that business tends to be somewhere around, ballpark, at 8% to 15% a little bit lower than mechanical side. I envision that would reverse at some point, is there anything that you are seeing in marketplace that could help us better understand that?

Ask me that question once more.

Sure. As you're looking at the electronic locks and the access control business overall, the margins tend to be say 8% to 15% lower than the mechanical side. It could be a function of possibly higher complexity as well. And that I would envision would likely reverse at some point. Is there anything that you are seeing in the marketplace right now that can provide us more color within that?

As I think about our engaged technology and the NDE platform, in my mind, it opens up opportunities today. Yes, you are right, the margins could be a bit softer than our mechanical. But, it creates a new market opportunity -- it 's like going from analog phones to digital phones. It is like going from cable TV to satellite, I mean we are opening up new markets. People were not considering automating their locks because you had very high priced complex installation capabilities.

With the screwdriver and an iPad, you can install these lock capabilities. So, we don't expect a cannibalization, we're really, for a commercial building owner, simplifying his life with new products. So, you know, it's -- we've just got it out there more to learn, but, from my perspective we are opening up new markets.

Great. Thank you all.

Our next question comes from Jeremy Capron, CLSA. Your line is now open.

Thanks and good morning. Could you comment on mix and pricing going into the next couple of quarters? I understand the residential growth is sort of coming down and nonresidential on the other hand seems to be picking up a little bit. And if we exclude the Venezuela effect, how should we think about mix in prices going forward?

So, as we discussed we executed a price increase at the beginning of this quarter. I would anticipate that we should see better price realization in our core business here in Americas and in Q4 compared to what we saw in Q3, not significant but some incremental volume there.

From a mix perspective, don't see a big change relative to the mix. Maybe a little bit higher residential than mechanical business, but I wouldn't anticipate that to have a significant impact on margins particularly relative to the prior year quarter. So, you know, not a big impact there.

I would also say, from a resi standpoint, the demand is going to hold steady. As we go into Q4 and Q1, it's some is of the softest periods of our -- of the construction year and we won't get the volume leverage that we would enjoy like in Q2 and Q3.

Okay. And Dave, can you give us an update on the M&A landscape, what are you seeing? Are you seeing any -- the asking prices coming off particularly when you look at Asia and just give us a sense of what we should expect over the next say 12 months from Allegion in terms of M&A.

There's a lot of work in building this M&A pipeline -- satisfied with the progress. We've got more work to do. I challenged our general managers -- get our teams engaged in terms of technology and opportunities building those relationships and opportunities. I spent a week in China building relationships. The softening there may be increases a little bit of sense of urgency. But you look at that market over the next five years its goes double a big step change in valuations. I don't see it, I am pleased with the progress we're making in terms of the building of the pipeline. It will -- it's a high priority for us, and it takes a lot of work.

Thanks very much.

(Operator Instructions)

Our next question comes from Charles Clark with Credit Suisse Your line is now open.

Hey, guy.

Charlie. What's happening.

Not much. Just had a couple of quick housekeeping items. Two things that surprised me, just in the quarter, the noncontrolling interest and the corporate expense. I mean the corporate expense came up like $7 million, $8 million sequentially, noncontrolling interest as well. Just didn't know if there were any comments on why or how we should think about hose two line items moving forward?

Well, I will tell corporate expense. Patrick will probably have some comments as well. Number one, investing I think everybody is pretty pleased with the optimization of our tax structure and the method we're sending on longer term tax rate. That doesn't come for free.

In fact I would say Patrick and I's view on that is we've been very aggressive from an investment perspective to make sure that that realization comes true. We think it is a very good trade off. Second, is we're active in the M&A pipeline, due diligence is expensive. It doesn't mean we put something on the hook. Third is, as we have stepped up our electronic investments in new products, the making sure that we protect ourselves from a patent portfolio, patent exposure, has been significantly more expensive than we budgeted.

And then the last would be IT. As we have split off from Ingersoll, ran -- there were needs again, we want to make sure that we've got the IT capabilities to be able to support a very profitable business. Those would be some of the things. On the noncontrolling --

Yes, Charlie, on the noncontrolling interest a big piece of that is related to our joint venture with Venezuela so you are seeing a step up in the performance relative to that entity and that would be the sequential on year-over-year increase there.

Okay, great. And then just to confirm, the refinancing that you guys worked on this month, that should bring the interest expense down by $5 million next year.

Assuming the same LIBOR rates as today, yes.

Okay, great. Thanks. I'll hop back in the queue.

Our next question comes from Josh Pokrzywinski, with Buckingham Research.

Good morning, guys.

Good morning.

Just a clarification from last question on corporate expense, Dave, you gave a lot of detail there on what's driving that in the near term. Is that to say that we're seeing a permanent step up in corporate expense to some double digit number quarterly to support this lower tax rate? Or is it kind of the one-time investment to get that optimized and then corporate settles out something more sustainably lower?

No, I think you've got to look at it like sustaining going forward. It will be in the double digit area for the balance of this year and going into 2015. Some of it is, to what Dave had talked about and some of it's just additional cost associated with being a stand alone publicly traded company.

Okay, that's helpful. And then on the implied 4Q particularly in the Americas. I know you mentioned some pull forward there, do you have you have a rough sense of what that would look like and then I guess just thinking about how all of this rolls up in the EPS guidance. It seems like there's a pretty draconian outlook for America's margins implied in that. If you're going to get that 300 basis points you talked about in AMEA, it seems like the plug number seems to be a lower margin in Americas and if I recall, you have a pretty easy comp there from last year. So just first what's the pull forward and then second, what should we be thinking about as any outsized driver on margins in the fourth quarter in Americas?

So, the pull forwards, I would call it in the low-single digits, millions there. Or excuse me, mid-single digits. So, not a significant pull forward but if you look at it as a percentage year-over-year revenue increase, 1 to 1.5% increase there as a result of that. Relative to the margins going toward you are exactly right. There's an easier comparison for this year relative to 2013. But we are anticipating margin improvement in Americas and we will see that just through the incremental volume leverage, productivity offsetting inflation, some incremental price realization.

The comment on Europe, just to be clear, the 300 basis points, last year we reported 1% operating margin. This year we'll end a little bit north of 4%, so that's 300 basis points. But when you restate for the UK door divestiture, year-over-year it's more like 200 basis points. That may be part of your delta that you are seeing. The other piece relative to the global margin relative to the prior year comparison, as Dave talked about, you've got some head winds relative to the corporate expenditures that's putting a little pressure on the overall margins.

Okay, so I guess you should still see good volume leverage in the fourth quarter in the Americas maybe some of that's the easy comp. And margins in AMEA should still be seasonably pretty solid and maybe there is some fine tuning there around with the year over year looks just based on some mix issue -- or the different composition of the business.

Yes, correct

And then I guess just lastly, how are you guys thinking or not thinking about the cadence of capital allocation here? You have been at this the better part of the year at this point. I think the pipeline -- you've mentioned you've done a lot of work there. How periodic should we see you guys dip a toe in the water into buy back in the absence of deals kind of from this point now that you're flushed out a little bit more of a pipeline?

I would say we will continue the balanced approach if we think stock buy backs -- Allegion's at a discount, we have the ability to flex. M&A will remain a priority. Organic growth as we have displayed in this quarter is a great lever. We like this -- investments in this R&R and like commercials in the US, but you know we're prudent. We're investors and where we see good long term return opportunities we're going to pull those levers.

That's helpful. All right, thanks guys.

I am showing no further questions at this time. I would like to hand the call back to Tom Martin now for closing remarks.

Thank you. We appreciate everybody joining us today for the call. Have a safe day.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.