安朗杰 (ALLE) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Allegion Q2 2015 earnings call.

(Operator Instructions)

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

Thank you. Good morning, welcome and thank you for joining us for the second quarter 2015 Allegion earnings call. With me today is Dave Petratis, Chairman, President and Chief Executive Officer and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at www.Allegion.com. This call will be recorded and archived on our website. Please go to slide number two.

Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated results. The company assumes no obligation to update these forward-looking statements. Our release and today's commentary includes non-GAAP financial measures which exclude the impact of restructuring and acquisition expenses in current year results and restructuring and spin expenses from prior year results.

We believe these adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior year periods. Please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will discuss our second quarter 2015 results, which will be followed by a Q&A session. For the Q&A we would like to ask each caller to limit themselves to one question and then reenter the queue. We will do our best to get to everyone given the time allotted. Please go to slide 3 and I will turn the call over to Dave.

Thanks Tom. Good morning and thank you for joining us today. It's been an exciting quarter for Allegion. Since the last time we spoke we've announced three more acquisitions and communicated further steps in our European transformation. But most importantly, we continue to deliver solid results aligned with our communicated growth strategy and financial expectations. Revenues of $519 million grew 5.8% on an organic basis. Total revenue declined 2.3% reflecting the negative impact of foreign currency. The Americas segment grew 7.2% organically driven by strength in both nonresidential and residential businesses.

In EMEIA market recover continues to be uneven across countries and organic revenues are relatively flat as expected. In our Asia Pacific region organic growth of 7.7% with supported contributions from the hardware businesses and the inclusion of previously announced acquisition of Brio. Adjusted operating income of $101.2 million was relatively flat to prior year. We realized operating margin expansion in all regions for the quarter and improved overall margin by 40 basis points. It's important to remember that we are showing margin improvement while absorbing incremental investments. Investments predominantly in new product and channel initiatives created 140 basis point headwind in the quarter. Adjusted earnings per share of $0.71 increased 16.4% versus the prior year, driven primarily from improved operating performance and a lower tax rate, partially offset by incremental investments and foreign exchange impact.

This is our fourth straight quarter with double digits earnings per share growth. We are raising our full year 2015 adjusted EPS guidance to a range of $2.70 to $2.80 per share.

Please go to slide four. As you are aware, one of Allegion's core strategies is to grow three strategic acquisitions. Our strategy has been focused on opportunities that fill certain product gaps, expand our business geographically, provide new innovative technologies that can be leveraged across the business, and provide solid financial returns. Since the spend we have been asked to be building our capabilities, developing a [distillive] process and expanding our pipeline of opportunities. Since the last earnings release, we announced three acquisitions that are an excellent fit with our core business, expand our product and geographical footprint, and provide exciting accelerated growth opportunities.

In June we entered into an agreement to acquire SimonsVoss, a leading electronic lock manufacturer that holds the number one market position in Germany and number two market position in Europe with a track record of innovation, product development that complements Allegion's growth strategy. SimonsVoss is not just a forerunner, this company is a pioneer setting standards for connected products like digital cylinders and smart handles. By adding SimonsVoss to the Allegion business we are expanding our electronic portfolio in the European market as well as strengthening our global technology in electromechanical conversion and miniaturization.

Just last week we made two more acquisition announcements, starting with Milre Systek. Milre is the market-leading manufacturer in South Korea focusing on producing high quality and innovative electronic security solutions including mortis, rim and cabinet locks. Milre has a well-established cadence of operational excellence which is also highly aligned with the Allegion's growth strategy. Combined with this culture of continuous improvement and technical innovation, Milre offers superior quality digital products and creates lasting relationships in the industry that will enhance Allegion's portfolio in South Korea and other Asian markets.

Finally, last week we announced the acquisition of AXA Stenman a leading European residential and portable security provider headquartered in the Netherlands. Founded in 1902, AXA manufactures and sells and a branded portfolio of bicycle locks and lights and a wide variety of window and door hardware. Joining the Allegion family will enhance AXAs deep local heritage and create more meaningful growth opportunities through innovative product development across Europe and globally. AXA's portable security portfolio is highly synergetic with our Kryptonite business, allowing the two brands to leverage one another's extensive customer and channel relationship and product development. AXA Stenman also provides a highly profitable position in the residential security arena in the Dutch market, with opportunities to expand into Poland and German markets. In 2015 AXA is expected to generate double digit revenue growth.

All of these transactions are expected to close in the third quarter subject to customery closing conditions and regulatory approvals. We are very excited to welcome these businesses, brands and employees to the Allegion family.

Please go to slide five. Allegion is on the cutting edge in the security sector with the Internet of Things. We recognized early that the smartphone will be a disruptive innovation and security and it has certainly become an essential part of creating the responsive environment and managing access.

As Techwatch recently noted, the connected term really took hold when Schlage entered the market with it's keyless Schlage LiNK Lock in 2009. We followed up the 2014 with the launch of Engage technology for the commercial market. And in the first quarter of this year Allegion unveiled Schlage Sense solution for Apple HomeKit, while in the second quarter we announced Schlage Control for managing multifamily buildings. All these connected solutions make Schlage Lock a prevalent entry point for home and office automation.

Consider these results. We have the leading security position in retail with channel players like Home Depot, Lowe's, and Menards. We are anticipating to sell 1 million electronic locks in 2015. A leading consumer publication recently ranked Schlage locks number one in both keyless locks and connected locks. Allegion is a clear thought leader with a strong share of voice-on-security solutions in the Internet of Things.

What's driving these results? We believe three unique advantages drive our success in the space. First, Allegion has partnerships in place with companies like Apple, Chamberlain, Seeboard and iDevices, among others. This collaboration expands our footprint and expedites adoption of security products. Second, our leading position across residential, multifamily and commercial markets in the US gives Allegion the experience and vision to recognize trends and customer needs very early. We move very quickly to adapt technology and spread it into new markets, new businesses and new applications.

Third, thanks to our worldwide engineering and operations we continue to invest, develop and support global platforms and open standards. This gives us extraordinary flexibility and adaptability to meet and exceed expectation of both industry professionals and consumers alike. Allegion had an early commitment to the Internet of Things and today we see dividends of our leadership in this dramatic, high-growth space.

Before I turn the call over to Patrick, I want to thank -- provide some comments with regard to our European transformation. We have seen positive results from the work done by our team in the region and the leadership of Lucia Moretti The transformation is changing the way EMEIA does business. The team is focusing its efforts on developing comprehensive solutions, for verticals and enhancing specific capabilities across the region. This approach creates demand and additional customer value. They are also simplifying and streamlining systems and processes to better service customers and becoming a more agile organization.

Last, the EMEIA team is optimizing its assets to drive enterprise excellence. In the second quarter Allegion announced its intention to implement a restructuring plan in CISA's Italian operations, the objective of this plan in line with the regions overall transformation is to improve CISA's competitive position, ensure long-term viability, and enhance the customer experience. Negotiations are currently underway and we are working to find the best possible solution for the people affected in accordance with the social parties involved.

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

Thanks, Dave and good morning everyone. Thank you for joining the call this morning.

Please go to slide number 6. This slide depicts the components of our revenue growth in the second quarter as well as our growth by regional segment. As indicated, we delivered 5.8% organic growth in the second quarter, supported by incremental volume that reflect improving market fundamentals, price improvements and early traction on our key organic growth investments and products and channels. We realized good growth across most product segments and continue to experience favorable traction on our electronic products portfolio which grew more than 20%. As expected, currency rates continue to be a headwind to revenue growth noted by the negative 9.3% decline. All reporting segments were impacted. Most notably, the weaker Euro in EMEIA, softer Canadian dollar and Venezuelan Bolivar devaluation impact in the Americas results.

In Asia Pacific, the impact of weaker Australian and New Zealand dollars were offset by acquisitions in the region. As a result of unfavorable exchange rates, reported revenue decreased 2.3% compared to the prior year period.

Please go to slide number seven. Reported net revenues for the quarter were $519.5 million. This reflects a decrease of 2.3% versus the prior year, up 5.8% on an organic basis. Americas revenue grew 0.3%, up 7.2% on an organic basis. US non-residential and residential segments provided balance growth.

EMEIA revenues were down 17.1%, driven primarily by currency headwinds. Asia Pacific revenues were up 13.2% with good traction in residential electronic locks and contributions from acquisitions. Adjusted operating income of $101.2 million was essentially flat compared to the prior year. Incremental volume leverage compensated for increased investment spending. Adjusted operating margin of 19.5% reflects an increase of 40 basis points versus the prior year. Incremental investments made in the areas of the new product development, channel market expansion, and certain infrastructure programs had an impact of 140 basis points on the quarter. The impact of incremental investment comparisons get easier in the second half of the year, particularly in the fourth quarter.

We are in the early stage of new product and channel initiatives and are encouraged by the early feedback from the market. We continue to navigate the currency headwind, but still expect margin rates to improve in all regions for the full year.

Please go to slide number eight. This slide reflects our EPS reconciliation for the second quarter. For the second quarter 2014, reported EPS was $0.53. Adjusting for prior year prior one-time separation and restructuring expenses of $0.08, the 2014 adjusted EPS was $0.61. Operational results increased EPS by $0.11 as pricing, productivity and favorable operating leverage more than offset inflation. As noted on the chart, this includes a favorable $0.01 per share related to the reduction in year over year bad debt adjustments in the Asia Pacific region. The decrease in the adjustment effective tax rate to 22.3% drove $0.09 per share improvement versus the prior year. Interest expense improvements from the credit facility amendment in 2014 added a $0.01, and other net items were a $0.02 reduction, primarily due to unfavorable currency exchange losses and related expenses.

Next, incremental investments related to ongoing growth opportunities for new product development and channel management as well as corporate initiatives tied to our strategies specific to taxes and IT investments, were a $0.05 reduction. Lastly, the net year-over-year impact of Venezuela at current exchange rates is $0.04 reduction. This results in adjusted second quarter 2015 EPS of $0.71 per share. Continuing on, we have a negative $0.05 per share reduction for restructuring and acquisition expenses. After giving effect to these one time items you arrive at the second quarter 2015 reported EPS of $0.66.

Please go to slide number nine. Second quarters for the Americas region were reported $402.1 million, up 0.3%, or an increase of 7.2% on an organic basis. Higher volumes, pricing and contribution from the acquisition of zero, compensated for unfavorable currency movements in Canada and Venezuela. The higher volumes reflect balanced organic growth in both residential and nonresidential markets, as well as electronics growth exceeding 20% with strong contributions from both residential and non-residential products. This reflects better than market performance driven by our new products and channel initiatives. Americas adjusted operating income of $111.9 million was up 0.9% versus the prior year period. Adjusted operating margin for the quarter increased 10 basis points while absorbing incremental investment spending that created a 70 basis point headwind in the quarter.

Please go to slide number 10. Second quarter revenues for the EMEIA region were $83.9 million, down 17.1% and down 0.3% on an organic basis. Currency headwind continues to be a challenge in the region due to the softening Euro and the Russian Ruble which impacts Eastern European sales. Slightly lower organic volume was offset by favorable pricing and net acquisition contributions. Electronics growth was also strong in the region. EMEIA adjusted operating income of $4.3 million, was up $2.2 million or 104.8%, versus the prior year period, on revenues that were down more than 17%.

Adjusted operating margin for the quarter increased 300 basis points, primarily due to favorable pricing and productivity that more than offset inflation, investment, and unfavorable foreign currency exchange rate movements. Our EMEIA results continue to improve, and we continue the transformation work that not only reshapes and resizes the business, but also scales the business for strategic acquisitions. The Company continues to target an operating margin a 10% with a base business in 2016 for ongoing cost reduction and productivity initiatives, specific customer and market pricing actions and the elimination of unprofitable business.

Please go to slide number 11. Second quarter revenues for the Asia Pacific region were $33.5 million, up 13.2%. Improved residential electronic lock growth, pricing, and the impact of acquisitions, more than offset unfavorable currency exchange rate movements. Asia Pacific adjusted operating income of negative $1.4 million was up $1.9 million, or 57.6%, versus the prior year. Adjusted operating margin improved 690 basis points, due to incremental pricing, productivity and acquisitions, which offset inflation and currency exchange impacts. Results also reflect a year-over-year improvement in bad debt adjustments of $1.2 million.

Please go to slide number 12. Year to date available cash flow for 2015 was $14.8 million, a reduction of $24.6 million compared to the prior year period. The reduction in year-over-year cash flow is due to increased operating cash requirements, offset by increased earnings and reduced capital expenditures. As you know, available cash flow for the business is very seasonal and the majority of our available cash flow is generated in the second half of the year. We continue to operate with an effective working capital structure and have realized a year-over-year improvement in working capital as a percentage of revenue in every quarter since the spend. In addition, our cash conversion cycle continues to improve with more than a 20% reduction in the second quarter 2015. We continue to guide full year available cash flow of 95% of net earnings from continuing operations, which reflects some one-time tax related cash expenditures.

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

Thank you, Patrick. Please go to slide number 13. Looking at full year revenue guidance, we are increasing our growth expectations for the year by a full point. We are increasing total revenue expectations in the Asia Pacific region by 3%, reflecting the inclusion of the Brio acquisition, partially offset by additional currency headwind in Australia and New Zealand. In the Americas we're improving total revenue by 1%, supported by first half organic growth and favorable contributions from new product and channel initiatives. We continue to project year-over-year improvements in the US markets. Institutional markets continue to grow slowly with improvement in higher education markets, while K-12 education continues to lag, driven by modest state funding increases.

Our outlook for institutional recovery remains favorable, although we are watching labor availability that may struggle to meet demand in the mid term. Residential construction markets continue to grow as inventory continues to tighten, foreclosure rights are at their highest since 2006 and mortgage rates continue to remain low. However, builders are facing challenges with land availability and labor shortages. Our revenue outlook remains unchanged for the EMEIA region. I would characterize the markets as stable overall, but uneven across countries.

We see growth in the UK and Spain, flat performance in Italy, as renovation markets offset new construction, and continued weakness in France. The Russian Ruble depreciation is driving negative revenue growth for our Eastern European business, as imports into that region have declined considerably. In Asia Pacific, we continue to expect favorable growth across the region, and see China slowing due to excessive debt and industrial capacity glut and ongoing real estate recession. Australia's residential construction market has been positive, but commercial construction continues to lag expectations. Market growth for the overall Asia Pacific region will remain in the low to mid single digits for the year.

Inclusive of the revenue update, we're updating our full year adjusted EPS from continuing operations to a range of $2.70 to $2.80 and a reported EPS of $2.51 to $2.63, which incorporates the first quarter Venezuela devaluation incurred, acquisition expenses in the second quarter, and full year estimated expenses related to the announced restructuring plan in Italy. The guidance does not reflect announced acquisitions not yet closed.

Please go to slide number 14. The second quarter results were very strong and represented solid growth with a 5.8% organic revenue increase, a 40 basis point margin expansion, and EPS growth of over 16%. Our markets are essentially as we expected at the beginning of the year, and we continue to make progress on new product introductions and our channel initiatives. Our results demonstrate alignment with our strategic growth pillars and we continue to expand our acquisition capability as indicated in our recent announcements.

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

(Operator Instructions)

Jeff Kessler, Imperial Capital.

Thank you. You talked about, and you stressed several times, your commitment to open standards. Not everybody in the industry -- not every industry is taking that tack.

I am wondering where you think you have a competitive advantage, competitive perhaps and maybe some admitted disadvantage in opening up your APIs as well as sticking to that and NFC, one form of wireless, as opposed to going out in spreading your wings and doing it three or four at once.

Jeff, we've got major competitors that you know that have formidable positions in the marketplace with technology. We think moving into the market with open platforms helps us to grow more quickly.

We also, as we listened and survey customers -- customers in the security space as well as the electrical space that I come from, do not want to be handcuffed by legacy systems. And as we can integrate more open protocols, we think it's a better way to grow. And ultimately it will end up that way.

So that's our perspective. Our technical people have more insight into it, but in my viewing of technology advances over the year, open platforms I think, enhances our opportunity for growth.

Okay. One follow question.

In Europe you basically laid out three bullet points for how you are going to grow basically enhancing specialist capabilities. Looking at verticals and optimizing your assets.

Could you elaborate on that and give a little more detail on what you are going to do? What you are doing in Europe and where you think in terms of numbers, what you can gain out of that over the next 18 months toward the end of 2016 when you have that goal of 10%?

So we continue to be committed on the base business the 10%. I think hopefully we are building credibility with you in terms of where we came from. The trajectory has been good.

Second, a core opportunity for us is to get our structure right. Our announcements in Italy and our work with the union presses us in that direction.

Third is around targeted segmented markets. We're doing well in electronics and hospitality, that's part of our overall 20% growth in electronics. And we think the addition of SimonsVoss and AXA helps us to drive that.

SimonsVoss, I'll comment on in particular -- SimonsVoss has been extremely well in Germany and the Germanic area. They influence markets. We think our positions, Italy, Spain, UK, France open doors to that and can help us to take a market that we think is going to be difficult from a macro standpoint to grow and improve.

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

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

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

We are proud of him.

(Operator Instructions)

Jeff Sprague, Vertical Research.

Thank you good morning.

Good morning.

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

I am confident you are aware of our position with Kryptonite. We like that business. We had to -- to grow Kryptonite especially in Europe, we were going to have to make investments to grow that into some of the markets that AXA brings.

As I think about portable locking, it will again move into a keyless environment in a percentage of those locks. We like that transition.

And you know I like to drive our teams here, can we be a global leader in portable locking? This is a bigger market than you may anticipate, so the movement with that AXA Stenman complements that. That would be some of our thinking in terms of that acquisition.

And do you have an active pipeline in that area than from this point forward?

Our pipeline across the business is active. That would include portable locking, that would include further electronics and geographical expectations.

I think what we showed with the three announcements is really starting with the dormant acquisition pipeline, this $30 billion mechanical market remains fragmented. And there's opportunities for us to move and complement our portfolio that we enjoy today.

Thank you.

Timothy Wojs, Baird.

Good morning. I guess, my question is a couple of parts, but it really focuses on the acquisition.

So I guess first, just the pace of acquisitions seems to be accelerating. I guess is that emblematic of just how robust the pipeline is or was it just really just kind of chalked up to timing?

And then, based on our math you're increasing your revenue base in Europe by probably 50%, and you're doing the restructuring there. So just how confident are you in the ability to tie together to larger deals plus perform the restructuring in Europe?

And then lastly, just any sort of financial update on acquisitions in terms of how we should think about annualized EPS accretion or margin profiles of the businesses you are acquiring?

So, three questions there. I will try to take them in order.

In terms of the pipeline, as Dave mentioned, since the spend it has been all about building capabilities, getting resources focused on building the pipeline. And think we've done a pretty good job of that. We have been able to complete some transactions here.

I think the last 3 and outs transactions in the last 30 days or so is more a factor of just availability, 2 of which were auctioned assets. And so those come and go in ebbs and flows and that type of thing, but we continue to build the pipeline. And we like what we see. We think there's a more opportunity that we would like to pursue and we're going to continue to do that.

In terms of our confidence relative to the integration of the acquisitions, yes, the team there is working on a lot of things. Not only the transformation of the business, but also staffing up to integrate the acquired businesses. I like our opportunities there. I think we've got a great team in place there as well as the employees that we've acquired from the businesses.

From an integration perspective, we've got a fairly disciplined process. We're going to hire external assistance, a third-party provider, to help us accelerate the process to really focus on the value drivers and the synergies attached to the acquisitions.

We've got teams in place and we are beginning to work on the necessary activities to integrate the businesses. So I feel pretty good there. In terms of how we are delegating the resources across the business to be able to tackle all of those opportunities.

I would step in here too. I really challenge myself, 3 acquisitions in a quarter are we ready? If you think about the last 18 months, we spun out a $2 billion company, have established credibility with used systems processes. I'm confident we can handle these acquisitions that we've announced this quarter, and future opportunities that may come based on what we've done and delivered over the last 18 months.

Your last question on the financials, our first focus obviously is to focus on getting the transactions closed, subject to regulatory approvals. The Milre deal hopefully will close here in the next week or so. The other ones we need to hear back from the regulators. Hopefully, before the end of this quarter.

And from an accretion perspective, I would anticipate slight accretion for this year. And then for 2016 obviously we'll come back to more specific guidance, we'll come out with our full-year plan attached with those acquisitions.

Okay. Great. Thanks for all the color. I appreciate it.

Stephen Winoker, Bernstein.

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

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

That's low double digit EBITDA multiple for EBITDA multiples, when you mentioned that, right?

Yes.

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

So first priority is to grow our mechanical core business in the region.

Second, is as our we are acquiring you see it's more of a Pacific Rim, that doesn't mean we wouldn't be interested in a Chinese-based asset. We just think there is some sorting out there. The markets had of difficulty, but we are opportunistic in the region. It's around our core business. We think it's key.

And then integrate the electronics. The Milre acquisition, what we're doing globally, the electronics is going to move there and be opportunistic in terms of that.

Okay I will pass it on. Thanks.

Josh Pokrzywinski, Buckingham Research.

Good morning guys.

Good morning.

Just a follow up on the accretion question. I know that obviously you're going to have some true ups when things close, you have timing and still waiting for approval in some things.

But just to back into some of the numbers you threw out relative to your margins and prices paid, it seems like ongoing basis after close we're talking about $0.15 to $0.20 of accretion, just using the math you gave, into next year and throwing Europe on top of that, maybe more like $0.30 of self-help before organic growth. Is that an unfair way to think about it or are there some other weeks in that, that we're not aware of, as part of the deal or part of the restructuring?

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

Great if I just as one follow-up --

Let me just follow up on one comment. Just so everyone is clear on that.

So that would exclude acquisition and integration related expenses. So to the extent we incurred additional one-time related costs, i.e. expenses for third party assistance, whether it be integration or third party costs to help complete the transaction, those costs would be excluded from that accretion number.

Understood. That's helpful.

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

So raw material commodities, represent maybe 10% of our purchase material. Obviously, we see that from components from other suppliers.

We don't see the immediate effect of reduction in commodity prices because we enter into supplier locks. That hedge, our costs, kind of going out on a 12 month basis. Some of that is unhedged, so we see some, but not the immediate impact. But as you kind of look at the numbers for this year, deflation has helped us, and we would expect that to continue for the balance of the year.

Got you. Thanks guys.

Charles Clarke, Credit Suisse.

Just maybe change gears a little bit, just a question on European restructuring. Just didn't know how the process was progressing. If you could give an update on that.

And then also just in the EMEIA region, divestments of low margin businesses are part of the path to get to the 10% target, what acquisitions like SimonsVoss presumably have 20% plus margins, would that potentially be accretive or better than that 10% target? I am just wondering that was part of the prior plan or it that's all new.

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

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

I would just reinforce, our commitment is the 10% with the base and I am really proud of the progress we are making towards that.

Sounds good. Great. Thanks.

Robert Berry, Susquehanna International Group.

Good morning guys. This is Filippo Falorni, I'm on the call for Rob today.

My first question is on the pricing in Americas. If you can comment on the pricing environment, the pricing improved from 0.3% to 0.6%, and what's included in your 5% to 6% outlook?

Pricing has improved year-over-year sequentially, improved a little bit, particularly in the commercial segment. We saw a little step up there. We anticipate that to carry through for the balance of the year.

It's the residential side of the house that has been a little bit under pressure, and the discontinuance of certain products and rotating in some of the electronic products that we talked about. So a little pressure there on the pricing. I would anticipate for the full year pricing to be a little under 1% is what we are anticipating for the full year guidance.

Okay great. If you could comment on the extent which strong double-digit growth in electronics contributed to the Americas margin in Q2?

The strong residential growth, if you remember, we have launched new products. The NDE with Engage technology, Schlage Sense.

There is interest on the residential to the mid-market and upper market. They want connected locks. And we are in the A position there. So that drives it.

And then as we have invested in new technologies, whether it's in the educational section, in dorms, with our NDE, these markets are growing. I think we said early on they'd be at a 6% to 8% growth for electronics, and that adoption is happening. And we've got good products and technical application ability to be able to position it, and we like our position.

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

Great thank you guys.

Jeremie Capron, CLSA.

Thanks good morning. Really good to hear about the 20% growth in electronics portfolio. Obviously, you've had a major product launch this year. So looks like you seeing good traction.

I wonder if you could help us understand what would be a good long-term growth assumption for that part of your business one or two years out? The 20% numbers probably not sustainable a year out, or correct me if I am wrong.

So it's interesting to ponder the future convergence here. I think you have to go back to the macro forecast 6% or 8% globally, but let's not underestimate, there is 1 billion locks in the world. And the transformation because of mobile credentials is going to happen over the next 5 years to 10 years, globally. And the market opportunities for us there is very good.

So I think you're right in your assessment, 20% year-over-year not going to happen, but we should be north of that 6% to 8% global, is certainly realistic. And complementary acquisitions like Milre Systek and SimonsVoss enhances our position. This strategy on open protocols I think will also complement us over time.

Thanks. That's helpful.

And going back to acquisitions, congratulations on these deals, it's good to see you signing on this. Your main competitor has made some interesting comments around the current M&A environment. Obviously, they have been a lot of deals over the years, and it looks like they are getting worried about prices.

And so I wonder if you could give us your perspective on prices for assets out there? You sound like you have a still very active pipeline here and probably going to pull the trigger on a few more, so your commentary here would be welcome.

So I think the market leader make some obvious observations. The price of businesses are high today. You have to judge that versus your strategy, does it make sense, can I fold this into make a go.

Second, the market leader has been extremely successful in the roll up of the industry. In some cases they are landlocked. They've got positions that preclude them for making moves. That doesn't mean that we can't, because our positions are different.

There is still opportunity in all areas of the world for Allegion to grow, through acquisition and organically, the market leaders have been on a path for 15 years. You can see where they run into some of these challenges, but we think it's a good space. I continue to expect this industry to consolidate and that's an opportunity for us.

Great. Thanks very much. Appreciate it.

David MacGregor, Longbow Research.

Good morning everyone. David I wondered if you could just talk about progress this quarter with the North American light commercial channel and just to the extent that you were able to gain share there. What may be behind the share gains.

We identified light commercial R&R in the channel as an opportunity early. I am pleased with our execution on that.

I think there has been some analysis by firms on the phone that said our organic growth, not only this quarter but back over several quarters, has leader industry, and the development in the light commercial R&R is fueling that. I would say we are continued on our early -- we're here in the early innings of that execution, and I am pleased with the outcomes that it is adding to our growth.

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

Maybe too early there, if you understand some of the drivers of our programs, I think we're making early gains, short lead times. In-stock availability in our factories and that's part of what I would call the advancement of that program.

For us to be very successful, I want our inventory on the shelves of our committed wholesale partners. And then I'll back that up with the superior lead time capability and customer service that we've got.

Got it. And then second question is just on Europe and I wonder if you could talk about progress in terms of building your staff of spec writers.

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

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

Our focus has really been the elimination of profitable business. Europe's going to be a difficult pricing environment. We've got to use outstanding customer service.

We have dramatically improved on-time delivery in Europe, and it will help us. The addition of SimonsVoss so that we can have a spec-driven discussion, I think, will lead for us to see some price realization versus straight price increases.

I would just add to that the team, as part of this transformation in the focus on the front end of the business, also. The market segmentation and looking at what pricing we can get on a customer by customer basis, is really helped. If you look at the results, you're seeing some incremental price income through, even in a flat low-inflation environment.

Right. Last question I wonder if you could discuss the pace of investment in the second half versus the first half and how that will show up in your margins?

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

Great. Thanks very much.

Thank you.

Jeff Kessler, Imperial Capital.

Thank you. Just a follow up on small business related items.

You were the first out with your Engage technology. Now you have -- there is technology out there, obviously from your competitors, that purports to either mimic, be better or at least parallel Engage. How you, when you go to market because it's clearly is a first mover product for you, an important product for you, how do you differentiate this product from what else is out there and is obviously going to be coming out there from other competitors?

So I think our greatest advantage is to be able to leverage and continue to drive that technology into our full portfolio. Beyond Schlage cylindrical locks, into Mortise, into Von Duprin exit devices, potentially into closers and the over access environment. I think that's going to be very difficult for a competitor to overcome. It's that mechanical strength, leveraged with this communication protocol that I think really puts water in the moat.

Okay. So essentially the communication protocol engages is a major differentiating factor because it can interact with all of the other pieces of your puzzle?

Yes. And we've got work to do in bringing the rest of that puzzle into the connected pipeline. But we're going to make it happen over the next 36 months.

And it builds on the legendary strength that we've had Von Duprin, LCN, Schlage, CESA. I like our opportunity.

Okay just a quick follow up on the spec comment that you made. Your strength in the United States is certainly been your capability of spec writers and writing to code, and being ahead of everybody else with your trust factor, the fact that you're not going to screw up. Is there any way, obviously things are very different in Europe, for you to -- if you want to say clone, or bring over talent, from the US to Europe in either training or just making them into European spec writers?

Absolutely. You go through our factories. Things like standard work, processes and systems are key to how we think, so we think that's an opportunity.

Second is, we've made some pretty significant investments over the years and continue to invest in things like configurators. Common configurators around the world will help us drive that capability and it's one of the advantages we have. We've got a big successful operation here in North America, and the more we can think of like a global company and take advantages of our positions globally, it will help us grow.

But right now you're saying is still in its infancy.

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

Right. Great. Thank you very much.

Thanks Jeff. Thanks everybody. We would like everyone to participate for participating in today's call.

Please contact Tom Martineau if you've got any further questions. Have a great day.

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