安朗杰 (ALLE) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegion fourth-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Tom Martineau, Director, Investor Relations. Please begin.

Thank you, Latoya. Good morning, welcome, and thank you for joining us for the fourth-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 of Allegion.

Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at www.allegion.com. This call will be recorded and archived on our website.

Please go to slide number 2. Statements made in today's call that are not historical facts are considered forward-looking statements are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated results. The Company assumes no obligation to update these forward-looking statements.

Our release and today's commentary includes non-GAAP financial measures, which exclude restructuring and spin expenses. Also included in these adjustments are the impacts related to a movement in measuring results in Venezuela from the official exchange rate of VEF6.3 per US dollar to using the Venezuelan government's SICAD II exchange rate of VEF50 per US dollar.

We believe these adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior-year period. Please refer to the reconciliation in the financial tables of our press release and the quarterly information in the appendix of today's presentation for further details.

Also in the fourth quarter of 2014 the Company changed its method of accounting so that all inventory is now based on first in, first out method from the last in, first out method. The financial statements for all periods have been revised for this change and recast quarterly data has been provided in the appendix of today's presentation.

The impact of this adjustment was favorable by $1.3 million, or $0.01 per diluted share, for the year ended December 31, 2013. The impact for the year ended December 31, 2014, was favorable by $0.4 million. As a result, our tax inventory accounting are now on the same basis and the Company achieves global consistency with one inventory accounting treatment.

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. Allegion posted another strong quarter of organic growth, operating leverage, and cash flow generation.

Revenues were $573 million, up 5.5% on an adjusted basis versus last year and up 7.6% on an organic basis. The Americas region delivered strong organic growth of 8.4% with increases in all segments and the timing of large system integration projects drove organic growth of 17% in the Asia Pacific region. Organic revenues were relatively flat in Europe, reflecting ongoing market softness.

Adjusted operating income of $106 million increased 9% versus last year and adjusted operating margin improved 60 basis points for the Company, reflecting solid operating leverage on the incremental volume and improved pricing. Adjusted earnings per share of $0.76 increased 26.7% versus the prior year. Patrick will cover the details later.

We are issuing our full-year 2015 EPS guidance of $2.65 to $2.75, an increase of 12% to 17% compared to adjusted 2014 EPS excluding Venezuela. The guidance reflects overall organic revenue growth of 3% to 4%.

Please go to slide 4. Now that we've completed our first full year as a standalone public company I would like to take a moment to review our performance.

First, it is hard to appreciate the amount of effort it takes to stand up a company. We are truly fortunate to have a strong team at Allegion that embraces the change necessary while ensuring we met our customer and shareholder commitments.

And although you don't see it as a metric on the slide, one of our core values is to be safe and healthy, which we focus on every single day of the year. We finished 2014 with a lost-time incident rate of less than 1%, 26 locations with zero lost-time days, 13 sites celebrated 1 million hour milestone without lost-time incident, and in our Bogota facility there was an 81% reduction in the number of injuries, resulting in zero lost-time days in our first full year of ownership.

Allegion is one of the safest companies in the world. I am extremely proud of this. It is a true north metric of Allegion's manufacturing excellence and a commitment to safety.

Last year at this time I shared with you the 2014 financial goals of the Company. We delivered revenue in the expected range with some incremental volume covering lower-than-expected price. I am pleased with the top-line performance of the business, given the challenging market environments and currency headwinds.

Adjusted earnings per share came in at the high end of our range, and taking into account the realization of our lower effective tax rate, we exceeded the high end of our original guidance by $0.09. Spin and restructuring expenses were within expected ranges and we over delivered on available cash flow. It was a solid first year for Allegion and I believe we are positioned well for 2015 and the long-term growth to deliver high shareholder returns.

Please go to slide 5. Globally we hit the ground running in 2014 to secure large project customer wins for the Allegion portfolio. This slide reflects a sampling of some of the project wins in 2014.

We continue to leverage our strong institutional knowledge with project wins in education and healthcare. We are proud to have outfitted both an elementary school and middle school in Shanghai, China, with Schlage locks as part of a safe campus initiative and to have our locks and accessories at the premiere Stanford Medical Center in Fargo, North Dakota.

It is exciting to also note that Allegion is pioneering safety and security for well-traveled facilities like Levi Stadium, which is the new home of the San Francisco 49ers, as well as notable hotels and office spaces alike. Please go to slide 6.

Of course, our project wins are also highly reliant on our ability to innovate and in 2014 it was a year of significant innovation investment. With Allegion's emphasis on electromechanical convergence, we launched both ENGAGE Technology and Schlage Touch.

With ENGAGE Technology, we are changing the way commercial building owners and tenants think about the interior building access. ENGAGE is a connectivity platform that is easy to install, manage, and use. Our Schlage NDE Series wireless locks with ENGAGE Technology can be installed in minutes with a screwdriver and they allow users to manage electronic credentials with cloud-based, web, and mobile apps.

Schlage Touch, which launched in October, aligns with the keyless era we have been pioneering for homeowners giving the ability to unlock their doors using a stylish touchscreen pin pad. For residential, we have really emphasized not just the strength of our locks, but the style and design. In 2014 we expanded our style options to offer more choices to our customers. We are now offering more design and finish options that support both modern and traditional tastes.

Allegion also expanded style options for high-end non-residential and multi-family customers with the M Collection series of levers for Schlage and Von Duprin.

In our non-residential mechanical product lines we have created more specialized applications for our customers. This includes the Von Duprin AX device, which was the first, and currently only, UL certified exit device to meet the new California building code 5 pound operating force requirement and the Von Duprin quiet electric latch for medical facilities where both patients and caregivers value an environment free of excessive noise from traditional exit operations.

Please go to slide 7. As you probably have seen, Allegion recently launched Schlage Sense in January 2015 as an integral part of Schlage's leadership position in the Internet of Things. As an innovative extension of the keyless era, the residential lock comes with a mobile app that allows homeowners to manage it with their phones or with the lock's touchscreen PIN pad. Specifically, it is designed to work with Apple's HomeKit technology, providing advanced security with end-to-end encryption and authentication between the Schlage Sense lock and an iPhone, an iPad, and an iTouch. HomeKit also lets consumers control their Schlage Sense lock with their voice using Siri.

The Schlage Sense system can manage up to 30 codes at the same time. Its app allows homeowners to create and delete access codes, check on lock status, and view activity. Residents can also use the app to update settings and check battery life without connecting to an existing home automation system or pay a monthly subscription charge.

Schlage Sense launched at the Consumer Electronics Show and had over 300 million impressions in one week. Major news outlets applauded the innovation. Wired named it one of the 11 hot products from the show, Fox News named it as one of their top eight list of the most innovative products there, and CNET praised the talk-to-unlock capability.

With Schlage Sense we are continuing to generate positive coverage for Allegion and expect the product to be available for our customers later this year.

To help stay on the forefront of innovation and the growth of the Internet of Things, Allegion also recently made an equity investment in iDevices. iDevices like Schlage launched the next-generation connected home solution at the Consumer Electronics Show and our partnership will amplify the impact of Schlage Sense on the market. As part of the minority stake in the company, Allegion and iDevices entered into a joint technology agreement.

Patrick will now walk you through the financial results and I will be back to update our full-year 2015 guidance.

Thanks, Dave, and good morning, everyone. Please go to slide number 8. This slide depicts the components of our revenue for both fourth quarter and full year. This is helpful as the impact of pricing in Venezuela and currency headwinds across the business drive quite a bit of noise in the results.

If you focus on the organic growth, we delivered 7.6% and 5.1% growth for the fourth quarter and full year, respectively. Both include 2% of price increase associate with Venezuela. The stronger organic growth reflects improving markets and introduction of new products.

Pricing benefits have been mostly driven by Venezuela. However, we are seeing pricing improvement sequentially and expect to gain improved traction in the first half of 2015, particularly in our US non-residential business.

One other thing to note is the currency line. We really started to see the impact of a weaker euro in the fourth quarter. Add in the impacts of a softer Canadian dollar, Chinese renminbi, and Australian dollar and you will see a fourth-quarter year-over-year impact of a negative 2.4%.

Although the strong US dollar will continue to create pressure on the bottom line, it is important to remember that most of our costs are in the same region with our revenues, which mitigates some of the income pressure. Please go to slide number 9.

Reported net revenues for the quarter were $573.5 million. As mentioned on the previous slide, this reflects an increase of 5.5% versus the prior year, up 7.6% on an organic basis inclusive of Venezuela pricing.

We realized high single-digit growth in the Americas with growth in all segments of the market. US commercial grew low single digits and residential segments increased mid single digits. Latin America was up significantly, primarily due to incremental price realization in Venezuela to offset inflation.

EMEA revenues were down approximately 10% driven by currency headwind. Asia Pacific revenues were up over 17% due to strong mechanical hardware and the timing of large system integration projects.

Adjusted operating income of $106.6 million increased 9% compared to the prior year. Adjusted operating margin of 18.6% reflects an increase of 60 basis points versus the prior year as favorable price, volume leverage, and productivity more than offset increased investments and inflation.

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 earnings growth and return on capital. Please go to slide number 10.

This reflects our EPS reconciliation for the fourth quarter. For the fourth quarter of 2013, reported EPS was $0.12 a share. Adjusting for prior-year one-time separation and restructuring expenses of $0.04 and $0.44 related to discrete tax items, the 2013 reported EPS was $0.60.

Operational results increased EPS by $0.13 as pricing, productivity, and favorable operating leverage more than offset inflation. The decrease in the adjusted effective tax rate to 26.3% rose $0.07 per share improvement versus the prior year. Other net items added $0.04, primarily due to foreign exchange gains offset by $0.01 of incremental interest expense.

Next, incremental investments related to ongoing growth opportunities from new product development and channel management, as well as corporate initiatives tied to our strategy specific to taxes in M&A, were a $0.07 reduction. This results in adjusted fourth-quarter 2014 EPS of $0.76 a share.

Continuing on, we have a negative $0.39 per share reduction consisting of $0.08 for restructuring and spin-related expenses, $0.09 for the Venezuelan devaluation charge to revalue monetary assets, $0.19 for a non-cash impairment charge to adjust Venezuelan inventory balances, and $0.03 for the extinguishment of capitalized debt costs related to the October amendment and extension of our senior credit facility. After giving effect to these one-time items you arrive at the fourth-quarter 2014 reported EPS of $0.37.

Please go to slide number 11. Fourth-quarter revenues for the America's region were $390.8 million, up 8.4% on an adjusted basis. Removing the impact of Venezuelan price increases, revenues were up 5.4% on an adjusted basis.

Higher volumes, Venezuela pricing, and the acquisition of Schlage to Colombia in January 2014 offset unfavorable currency movement in Canada. Volumes improved in the non-residential segment by low single digits led by the strength in the mechanical and door businesses. US residential growth in the mid single digits was driven by strength in the builder and e-commerce segments.

Revenues in Venezuela doubled year-over-year led primarily by price. Americas' adjusted operating income of $100 million was up 13.3% versus the prior-year period. Adjusted operating margin for the quarter increased 110 basis points due to favorable volume leverage, price, and productivity that more than offset inflation and ongoing investments in new products and channel development.

Please go to slide number 12. Fourth-quarter revenues for the EMEA region were $103.5 million, down 10.3% and down 0.3% on an organic basis. Currency headwind continues to be a challenge in the region due to the softening euro and the Russian ruble, which impacts Eastern European sales. Market-driven weakness in hardware sales in France and Italy were mostly offset by strength in the Interflex and hospitality businesses.

EMEA adjusted operating income of $11.6 million was down 13.4% versus the prior-year period. Adjusted operating margin for the quarter was 11.2%, down 40 basis points, primarily due to unfavorable product and market mix.

For the full year adjusted operating profit has more than doubled, delivering 210 basis points of improvement. When including the impact of the UK door divestiture, operating margins improved 280 basis points compared to the reported results in 2013.

The Company continues to target an operating margin of 10% in 2016 through ongoing cost reduction and productivity initiatives, specific customer and market pricing actions, and the elimination of unprofitable business. Please go to slide number 13.

Fourth-quarter revenues for the Asia-Pacific region were $79.2 million, up 17%. The revenue growth was driven by mid-teens system integration growth and high-teen mechanical hardware growth.

Asia-Pacific adjusted operating income of $9.7 million was up 42.6% versus the prior year. Adjusted operating margin improved 220 basis points due to incremental volume leverage and favorable margins from the FSH acquisition completed in Q2 2014.

Please go to slide number 14. Available cash flow for 2014 was $207.5 million, a decrease of $1.6 million compared to the prior year. The reduction reflects higher capital expenditures of $31.3 million, mostly offset by improved working capital. The incremental capital expenditures were associated with new product development, information systems, and spin-related projects.

We continue to operate with a very effective working capital structure and realized a 15% improvement in our cash conversion cycle for the year. Full-year available cash flow ended the year at 111% of net earnings from continuing operations, exceeding our original goal of 100%.

Please go to slide number 15. By now the slide will be very familiar as it reflects our commitment to a balanced and flexible capital allocation strategy.

We ended the year with gross debt to adjusted EBITDA of 2.9 well within a normalized target range of 2.75 to 3.25. We continue to fund incremental investments in organic growth for new product development, channel strategies and operational excellence to accelerate core market expansion. We believe these investments will enable the Company to grow at an accelerated pace and faster than the broader market.

We remain focused on growing our portfolio through acquisitions. Dave already mentioned the iDevices equity investment made earlier this month. We have additional opportunities that are deep in the pipeline process.

Over the course of the past year the Company has developed an acquisition strategy, built capability, and developed an acquisition pipeline. We want to keep our flexibility and our balance sheet optionality available until we vet and conclude on all M&A opportunities. Please go to slide number 16.

Our full-year 2014 effective tax rate was 28.6% and we are forecasting a full-year 2015 effective rate of approximately 22% as a result of the tax strategies executed in 2014. We continue to view our structure as a strategic asset of the Company that we can leverage to move cash efficiently through the business and achieve a lower effective tax rate to accelerate earnings as well as cash flow growth. We are still targeting our effective rate to be at or below 20% next year.

Please go to slide number 17. Before I hand things back to Dave I want to speak about our Venezuela business and the impact of the devaluation.

The recent drop in the price of oil has accelerated the deterioration of the economic conditions in Venezuela and the Company concluded that the SICAD II exchange rate was the most appropriate rate to use at the end of the year. This decision had two immediate impacts.

First, we devalued the bolivar-denominated monetary assets, resulting in a pretax charge of $12.1 million, or negative $0.09 per share. Second, we took a non-cash before tax inventory impairment charge of $33.3 million, or negative $0.19. This impairment charge was recorded in cost of goods sold and reflected the lower of cost or market valuation of the inventory held in Venezuela.

As a result of the change in exchange rates, there will be significant ongoing translation impacts related to the devaluation, which will essentially eliminate the reported 2014 results associated with the Venezuela business. This month the Venezuelan government announced changes to an exchange rate system that introduced a new market-based system called the Marginal Currency System, or Simadi.

The Company is currently evaluating this announcement. Adoption to the Simadi rate would result in additional charges to remeasure the net monetary assets and impair other assets.

I will now hand it back over to Dave for an update of our full-year 2015 guidance.

Thanks, Patrick. Please go to slide 18.

As we look forward to 2015, we will continue to be faced with currency volatility and a challenging macroeconomic environment. In the Americas, we remain cautious but increasingly positive on the US non-residential market recovery. We are still in the early days of a construction rebound and estimate that we are only 75% to 80% of the pre-recession peak.

The recovery will continue at a much slower pace as compared to historic cycles as the economy navigates tight labor availability and modest improvement in public spending. This is especially true as it relates to the institutional segment, which is approximately 60% of our non-residential revenue. As such, we see the non-residential markets growing at low single digits in 2015.

The commercial new construction markets will continue to grow in the low to mid single digits with the institutional markets beginning to improve. The non-residential aftermarket growth will approximate GDP growth and remain in the low single-digit range.

The US residential markets will increase mid single digits driven by both builder and big-box segments as we continue our slow and steady recovery out of the recession. Single-family home construction, which remains approximately 30% below historic average, will continue its recovery, although we don't expect to see normal levels for a few more years. The multifamily segment will continue to remain strong.

Consolidating the market outlooks, we project organic revenue growth in the Americas of 4% to 5%. Foreign-exchange headwinds from Venezuela and Canada will be about 6 to 8 percentage points, leaving us with a reported revenue growth of negative 2% to negative 3%.

Our outlook in Europe continues to remain subdued, driven by weak GDP growth, political uncertainty, and high debt. The southern markets remain soft with relatively slow growth as monetary policy easing helps to support recovery.

We project low growth in the non-residential construction markets in Germany and the UK, France and Italy will see slight improvements supported by renovation activity offsetting weak new construction, and Eastern Europe growth will struggle given geopolitical climates. All-in, we project EMEA organic growth to be flat to negative 2%. Taking into account currency headwinds in the region, we expect reported revenue of negative 9% to negative 11%.

The Asia-Pacific market continued to show mid single-digit growth in both residential and non-residential segments. Growth in China continues, but at a slower rate than recent history. Australia and New Zealand will continue to improve, while [north] Asia will be flat driven by soft residential construction.

Organic growth in the region is estimated to be 6% to 8%. Total revenue is estimated to be 5% to 7%. All-in, we are projecting organic growth of 3% to 4% for Allegion. Incorporating the currency headwinds, we expect total revenue of negative 3% to negative 4%.

Please go to slide 19. Our 2015 earnings per share range is $2.65 to $2.75, an increase of 12% to 17% compared to 2014 adjusted results excluding Venezuela. The earnings increase is primarily driven by operational improvements and tax rate charge partially offset by investments in the business, Venezuela devaluation, and EMEA currency headwind and nonrecurring exchange rate games and other income.

Investments will be predominantly focused on new products and channel development to meet demands of the electromechanical conversion, as well as driving solutions for the underserved repair and replacement market. The full-year effective tax rate assumption in the guidance is approximately 22% and our outstanding diluted shares are approximately 97 million.

As mentioned previously, the guidance assumes minimal contribution from Venezuela. And although we don't typically provide quarterly guidance, it is important to note that margins early in the year will be under some pressure on a year-over-year basis due to carryover expenditures, which were not in place at the beginning of 2014, as well as new investments in 2015.

Please go to slide 20. Let me finish by reiterating that I am pleased with our 2014 results. We made significant progress in our first year. We delivered solid organic revenue growth. We increased operating margins while investing for future growth, made significant progress on our tax-planning strategies, established a foundation for ongoing margin improvement in Europe, and continued to achieve a high level of cash conversion performance.

We enter 2015 positioned well, and we will build on our results. We will remain focused on our growth pillars, core market expansion, innovation, growth in emerging markets, enterprise excellence and opportunistic acquisitions. And I believe we have the right team in place that will drive long-term growth that will deliver value to shareholders.

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

Thank you. (Operator Instructions) Charles Clark, Credit Suisse.

Just wondered if you could give a quick update on capital allocation. I think in the prepared remarks, you guys had talked about some deals that you were close on, close to getting over the goal line with, and then obviously no reduction in share count in the guidance. So if you could just give an update on capital allocation, that would be great.

Sure. So as we indicated, basically three pillars in capital allocation, the first being organic growth opportunities. And as you saw in the guidance, we are going to continue to invest in the business for things that we feel are in line with our strategy, obviously, it can accelerate our growth faster than the market.

Feel pretty good about those particular opportunities, and the fully vetted will provide a good return on capital going forward.

As we look at the M&A front, I would say we've got a much broader acquisition pipeline certainly than we did a year ago. Feel very confident that you will be seeing a step-up in activity here in the short term. So we are still vetting a lot of opportunities.

I would characterize the delta between M&A and share distribution would be, if we don't see opportunities to expand our business and product portfolio on the M&A front, we would be looking at accelerating shareholder distribution. But right now, that's not what we're going to be doing.

We will be offsetting our dilution associated with management compensation plans. The idea is not to hoard cash on the balance sheet. So to the extent we are not increasing our M&A activity, you would be seeing a further step-up in shareholder distributions.

Thanks. And just as a question to the ending leverage, 2.9 times gross debt to adjusted EBITDA, does that adjusted EBITDA -- does that exclude Venezuela; or kind of including the Venezuelan markdown, the leverage would be a little bit higher?

Yes, so that would be on a reported basis, so including Venezuela. So if you were to take out Venezuela, then the ratio would go up a little bit.

Okay. And then just maybe a housekeeping, you guys are targeting the 95% cash conversion this year versus just a target of 100%. Is that due to some timing on payments or --?

Yes, predominantly. So if you look at this business over the last three years, we have averaged ACF as a percentage of continuing operations, earnings, of around 110%. So I would look at 2015 as an unusual year.

We have some one-time tax payments that we need to make as a result of our tax restructuring activities that took place last year one-off on a go-forward basis 2016 forward. As you know, this is a great company in terms of cash flow generation and we should be north of 100% on average going forward.

Great, thanks.

Steven Winoker, Bernstein.

Thanks. Good morning and congrats on your first-year milestone, guys. Lot to cover here.

The first one is on the actual price versus volume growth in the US within the Americas. Could you break that out a little bit more for us in terms of what you actually saw in the quarter?

Okay. So, again all inclusive, if you look at including Venezuela, good volume growth --.

Just the US, Patrick.

Oh, just the US -- okay, bear with me for just a minute. Most of the organic growth there was volume, very little price improvement. We were able to get some sequential pricing improvement in leverage from our non-res business from the price increase we put in in October last year. Residential not much price improvement, but we did sequentially see some price improvement.

In summary, the majority of the increase there was all volume related.

And given the other comments you made, is that low single-digit volume then for the US? Or low -- organic?

Yes, low to mid collectively, non-res and res, yes.

Okay, fine. Then on EMEA, maybe talk a little bit more detail from page 12 about the progress that Lucia is making there. It's a little hard to tell, given all the puts and takes that are going on, what is going on with the plan.

I know you will give us more detail at the investor day, but I'm just trying to get a sense for where you really are in terms of that comment -- recovery plan accelerating productivity versus the mix impact that resulted in the lower margin.

So I will let Patrick give you some of the financial metrics. We are on a good track. We've doubled the operating income 2013 to 2014. Cost takeouts.

What we have been extremely aggressive on is pruning bad business that was embedded and that pruning is helping us to drive improvement. Our long-term goal 10% OI as we exit the year still stands and moving to 2016 the end markets remain difficult.

I would just add, Steve, ended the year where we had anticipated, maybe a little light when we started the year. We did get the 280 basis points improvement we had targeted beginning at around 300.

The mix element, a little pressure there as the Eastern European sales a little bit softer than what we would like to see, but as Dave indicated, still targeting the 10% number by 2016. As I look at 2015, you could assume kind of similar performance in terms of margin improvement year-over-year and a lot of that coming from some of the carryover activities that took place in our restructuring in 2014.

Again, we are taking a rifle shot approach on pricing, specific to customers and markets. And then the ongoing productivity and cost containment I think will be the primary drivers there.

Okay. And if I could to sneak one in back to that capital allocation point you made. Patrick, at the last investor day you talked about a willingness to stretch even up to 4 times leverage for, quote, the right deal or the right opportunities. Are you guys still feeling confident that you would be willing to go there, or is there a reason to be more conservative these days? How are you feeling?

No, very confident to stretch it to 4 times for the right transaction. Would not hesitate, given the strong cash flow generation of this business and the earnings. Obviously we would be acquiring so that wouldn't be an issue.

When we give the range of debt to EBITDA there, I look at that more on a normalized basis. It doesn't mean we can't be a little bit outside of the bounds there, but over a long term that's where we would like to be and how we manage the business.

I can't reemphasize that again. For the right opportunity with the -- and right fit with the Company we will stretch.

Okay, great. Thanks, guys.

Josh Pokrzywinski, Buckingham Research.

I guess not being able to see some of the specific margin parameters or [CorpEx] for 2015 some of this is a little backed into, but it looks like your incremental margin assumption in the Americans, ex-investment, ex-Venezuela, is pretty low, call it 30% or below by my math. Is there something else going on in that?

It sounds like institutional is getting better, price uptake you expect to be better, and clearly you guys had good progress in 2014 on margin expansion even with investment. So I guess first is, is that math right? And then secondly, is there something I am missing in some of the mix dynamics into 2015 in the Americas?

So the margin excluding Venezuela improvement year-over-year is higher than what you indicated, so we will have to maybe take it offline and look at your assumptions in terms of the mix component and taking out Venezuela.

We should see incremental pricing improvement. We are in still a low inflationary environment so there should be some incremental leverage there with the -- added to that the volume improvement net of investments. So we should still see some continued improvement in the Americas margin, and the same is true for the overall company as well as the other regions and businesses of the world.

Got you. Then I guess as we get out of 2015 I appreciate you guys spiking out the investments and where those are focused. Of those three buckets that you broke down in the $0.15 to $0.20, what stays, what goes, what gets bigger, what gets smaller from here and among the new products, channel marketing and some of the more systems-oriented spending?

I would say, as we look forward to 2016 and beyond sequentially, incrementally the investments come down. And the dollars will inherently stay, but incrementally the numbers will come down. So I would be looking at some incremental investment year-over-year, but not to the magnitude of $0.15 to $0.20.

Got you. Then just one last one, more housekeeping. What are you guys targeting for corporate expense in 2015?

We ended the year, as you saw it, at $44 million. You should be thinking about an additional $10 million or so on top of the $44 million, so that would give you a quarterly run rate around $13 million to $14 million.

And let me just add the delta there, the increase in 2015 versus 2014, 75% predominantly it is investment-related IT systems associated with our ERP deployment. We are going to continue to invest in incremental tax expense to drive our tax rate lower for 2016 and beyond.

Got you. Okay, that's helpful. Thank you.

Jeff Sprague, Vertical Research Partners.

Thank you, gentlemen; couple other things. Just to clarify on the comment on price, it was a little unclear because you mentioned price and then you mentioned deflation. Are you actually talking an improvement in net price as is, or is that kind of a price cost comment you are making there because of some relief on the cost side?

Sorry about the confusion, but the comment was there should be a delta improvement price over material inflation.

And that is driven mostly by materials deflation, though, I would take it?

Correct.

Okay. And then the comment on non-resi pricing, that sounded like it was specifically targeted on pricing. Is there some particular area within US non-res where you see price opportunity, or what is really going on there?

We got traction in Q4 on our pricing initiatives and we feel that that will carry into 2015.

And on currency, are there hedge benefits that we should expect coming through below the line as a partial offset to some of the headline translation impact that we see? Or what, if anything, are you doing on hedging?

So we do hedge our cash flow exposures, all the known exposures. You will see some favorability on what I call transaction exchange, but only minimal amounts. The majority of our costs and revenues are in region and so there's a natural hedge there, so we don't have a lot of exposure relative to transactional gains or losses.

Then just finally on the growth spending. Is there a figure you have in mind or something you could guide us to think about impact on the top line from actions you started taking in 2014 and now ramping up in 2015? Is there a discernible impact on your organic growth in 2015 from these actions and how would you expect that to play out going forward?

I would like to maybe reserve that for midyear. We made significant investments in 2014. The NDX would be a good example of that. Those are going on the shelf of our wholesalers and I would like to see the actual pull-through. I would say new products should help us grow as those get into the market on both a residential and non-residential.

Second is a longer-term investment is in our channel development and this is where we think in the light commercial repair and replacement that we are getting less than our share, so I am investing and we should be able to see traction as we move through 2015.

Thank you.

David MacGregor, Longbow Research.

David, you talked about aggressively pruning bad businesses in Europe. I wonder if you could just go back and maybe dig in a little further there for us and give us a sense of what you have still on the books there that would be unprofitable business. What would that represent in terms of revenues and what would be the loss or the burden to the P&L right now?

If we said our mechanical side is $300 million, it's 5% to 10% of that top line.

Okay. And can you give us a sense of what it means at the operating line?

First of all, when we make the comment pruning bad business it's not necessarily a business, it is sale- through to particular distributors or customers and that type of thing. So it is normally at a margin lower than what we realized for the full year this year, so call it basically a breakeven type of scenario.

And it would be baked in to our plan to get to 10%. Some of those are OEM commitments that you just don't get out of overnight.

Okay, thanks for that. Then I guess on the US business you talk about organic revenue growth of 3% to 4%. You talk about slow and steady improvement in the US non-res construction business.

In your 2015 guidance what are you assuming for non-res remodel growth? I wonder if you could just remind us again what the mix percentages are for new versus remodel in your non-res business.

We define new construction in the commercial as where square footage is added and so we think of that R&R it's 50%, 55% of our top line. As we think about that growth, we see activity picking up over the next three years in that institutional new construction phase that will help us. But specifics in terms of that element of growth, don't have it at the top of my mind.

Okay. Then just a big picture question. I guess you have talked in the past about trying to grow your spec writing capacity. I guess I just wanted to check in with you and see if you are where you need to be at this point or where you may still have some work to do.

We are strengthening our spec writing capability with tools, but we believe that we are the leader in the market in terms of spec writing, so generally pretty comfortable with that. I think some of our competitors potentially are envious of our position, but our investments along that line are more in configuration tools that help us to be more efficient at serving that construction market.

Are there still feet on the street that you need to add, or are you satisfied with where you are there?

We are satisfied. Our investments will be in the management of the channel, making sure that our through-stock businesses in the local markets are meeting the expectations of a market leader.

Thanks very much.

Jeff Kessler, Imperial Capital.

With regard to the partnership with iDevices, we actually spent a long time with them at CES. Given iDevices close tie to Apple and home automation, what type of lock and non-lock wireless solutions could we expect from Allegion from this during 2015, 2016? You don't have to give me the exact product, obviously, but the types of things you are going to be doing.

Number one, our Schlage Sense that will come out later in the year will position to line up and serve that market. A couple things as we thought about iDevices, they've got some history in working with Apple. We think we can learn from that.

We think they can also benefit from some of our supply expertise and then collaboratively sharing technology in this Internet of Things. If you would have noted, Jeff, iDevices are coming out with some electrical switching and it is indicative of this collaborative capability that we think is important to our core lock business.

I think the other thing that you may have picked up at the Consumer Electronics Shows was our partnering with Honeywell, Chamberlain, iDevices, and others. We really believe that our products have to operate in a community of technologies and it will help us refine those roadmaps.

Okay, great. With regard to your development of your channel, you have been talking about a bifurcated area here.

One, that you are trying to build or wait for pent-up demand coming out of the institutional market where you have been negotiating deals for some time now. Number two, developing a channel -- better channel capacity for the small business area.

Can you talk about number one, because these are both areas where you have been under capacity in terms of number one, revenues in the institutional area? How are you developing the channel to pull that through? And number two, on the small business area, how are you developing the channel to pull that through?

In what we call the light commercial R&R, we size that market, let's say, $1.4 billion to $1.6 billion and we believe we've got a high single-digit market share. Compare that to the presence that we have on new construction.

It's apparent to us that we have to develop stronger channel policies, inventory requirements in the local markets and work with our channel partners to get more of that through-stock business to complement what is already going through on a new construction basis.

I like to think about it as we are flexing our muscle. We should be getting more of that through stock in places like Miami or the Washington DC area. We're putting in the systems and processes to be able to get our share of that market we think is naturally ours.

Does that also include working with distributors?

Yes, sir.

Okay.

And potentially changing our lineup of distributors. I feel one of the strengths of Allegion, when we win a major hospital job and we run that through wholesale distribution, that allows us to require the stocking of inventory performance on small project jobs that will help us grow.

Okay. And also just to follow-up on that, my institutional question?

Yes, please. Restate your institutional question, please?

The institutional question, again just similar question in that you have been -- there has been some pent-up demand in institutional business. It hasn't come through yet. You've been talking about negotiation now for probably about six months.

Are we at a point now at which you are more positive for 2015 or 2016? Obviously the turnaround time on the negotiations are quite long, but that is out there and the question is how far do you think you are into that process.

I am more positive on the improvement in institutional spending as we move into 2015 and 2016. And we will talk about that at our investor day.

All right, great. Thank you very much.

Jeremie Capron, CLSA.

I wanted to go back to earlier questions on pricing. Could you talk about what you are seeing in the marketplace at this point and what are your expectations in 2015 in terms of potential price gains?

So we had price increase announcements in the second half, specifically around our commercial businesses in the Americas. We felt we picked up traction in specifically late Q3, Q4 and those will carry in.

We still feel that it is a positive price environment. It is going to be 1%, 2% as we move through 2015. We think Europe will be difficult.

I see, so within your overall 3% to 4% organic growth guide for 2015 you have more than 1 point of price gains in there?

It is a little bit under 1% if you look at it across the globe. America specifically, which is the lion's share obviously, a little bit under 1%.

Okay, great. And on the material cost side of things, metal prices are obviously coming down. Can you talk about what you are seeing and how you expect commodity prices to affect your cost base in 2015?

So if you look at our commodities, the important ones would be steel, brass, zinc, and aluminum. Steel you kind of look at the spot rate today relative to the average in 2014, I think very consistent. Brass, which is a big spend for our -- for us is down, so that would be beneficial. Aluminum and zinc flat to a little bit up.

So collectively right now, based on spot rates, I would say the same as 2014. We do hedge commodities in terms of supplier lock contracts, so it's not a financial hedge or an instrument, so any further decrease in the spot rates would come into our results over an extended period of time.

Okay, great. And maybe lastly on CapEx and R&D spend, obviously a significant step up in 2014 compared to previous years. What should we expect in 2015 in terms of CapEx intensity? You are running at about was it 2% to 2.5% of sales. Are seeing more increases going forward and then [similarly] if you could comment around R&D dollar spend?

On the CapEx side, you are right there was a big step up in 2015. $10 million of that $50 million total spend related to spin-related projects, IT specific. On a more normalized basis we are looking at $40 million per year, which is our plan for 2015, and that would include IT spend associate with our ERP system, maintenance and NPD kind of programs, productivity, etc.

So I look at capital $40 million a normalized level. One thing to keep in mind is this business, and we get a recovery in the non-res area, we do not have significant capacity constraints that would require additional incremental capital expenditure. So feel pretty good that we can manage it at $40 million.

In terms of R&D, we stepped it up in 2014. We are generally holding at that level into 2015. If we see the opportunities are out there we will invest, but we will inform you of that.

Okay. What about the effective tax rate? It looks like we are looking at a lower effective tax rate in 2015 than what you guys had in mind just a few months ago? Where do you think we ultimately settle say in 2016 or 2017?

So I think aspirationally we have said aspirationally less than 20%. If you go back 15 months ago, I've got to reemphasize we didn't have a tax department. We have invested here aggressively. It is part of our corporate cost step up and it has delivered a good return, but we think long-term high teens aspirationally could be possible.

Excellent. Thanks very much and good luck.

Thank you. There are no further questions at this time. I will turn the call back over to Tom for closing remarks.

We just want to say thank you and appreciate everybody joining today's call. Have a very safe day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.