安朗杰 (ALLE) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allegion Q3 2015 earnings call.

(Operator Instructions)

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

Thank you, Liz. Good morning, everyone. Welcome and thank you for joining us for the third 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 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 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, acquisition, and divestiture expenses and charges 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 third 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'll turn the call over to Dave.

Thanks, Tom. Good morning and thank you for joining us today.

I'm pleased to report another strong quarter for Allegion, with nice organic growth and operating margin expansion. There has been a tremendous amount of positive activity during this past quarter and we'll be covering in today's call.

Revenues of $544 million grew 5.1% on an organic basis. Total revenue declined 0.4%, reflecting the negative impact of foreign currency. Of note, organic growth for the business has averaged more than 6% over the last 12 months.

Our electronics portfolio continues to perform well in the quarter, improving more than 30% versus prior year. We have seen a continuous acceleration of the electronics growth rate, reflective of an ongoing electromechanical transformation and supportive of our increased investment in accelerating new electronic security products and solutions.

The Americas segment grew 7% organically, driven by continued strength in both the non-residential and residential business. In EMEIA, organic growth of 2% reflects a slight improvement in the region, although market recovery continues to be mixed across countries.

Our one decline this quarter is in the Asia Pacific region, with negative organic growth of 10%. Patrick will provide more details on this later, but the decline is primarily driven by weakness in our system integration business in China.

Adjusted operating income of $116.8 million increased 5.3% versus the prior year. We realized operating margin expansion in all regions and improved overall margin by 120 basis points. We continue to show margin improvement while absorbing incremental investments, investments predominantly in new product and channel initiatives creating a 90 basis point headwind in the quarter.

Adjusted earnings per share of $0.92 increased 35% versus the prior-year, driven primarily from improved operating performance, acquisition, and a lower effective tax rate, partially offset by incremental investments and foreign exchange impact. This is our fifth straight quarter with double-digit earnings per share growth.

We are raising our full-year 2015 adjusted earnings per share guidance to a range of $2.85 to $2.90 per share. Please go to slide 4.

We have been extremely active as a Company effecting change in line with our long-term growth strategies. I'm happy to report that we successfully closed the three acquisitions mentioned last quarter within the expected timeframe.

We are well underway with the integration work and have already seen contribution in our third quarter results. We're excited to realize the benefits of a broader electronic portfolio, as well as seeing the expansion of our position as a global leader in portable security.

During the quarter, we completed the divestiture of our Venezuela business. This decision was made to reduce risk associated with an uncertain economic operating environment.

Also in the quarter, we announced our intent to sell the majority stake in our Bocom Wincent business in China. Although a market leader in the system integration industry in China, this business was not deemed to be a good strategic fit with the rest of the Allegion portfolio. The sale has the benefit of reducing risk in an environment that is currently realizing an economic slowing combined with tightening credit and reduces the high capital requirements of the business. This decision allows us to prioritize efforts and resources on core mechanical and electronic hardware solutions.

And earlier this month, we reached an agreement with regard to the restructuring plan for our CISA business in Italy that will ensure long-term viability and enhance the customer experience. CISA remains a critical part of the European portfolio and will continue to provide innovative solutions for convergence of mechanical and electronic technologies.

In conjunction with the plan, we will begin to transition products of non-specialized product to Flex, an existing supplier of Allegion today. Flex offers innovative design engineering, manufacturing, real-time supply chain insight, and logistical services to companies of all sizes in various industries around today's connected world. By partnering with Flex, we will simplify and optimize our supply chain, reducing risks assisted with the transition and we'll better serve our customer needs.

And last, we enhanced our debt structure with the issuance of $300 million in senior notes, as well as completing an amendment and extension of our senior credit facility. The proceeds of the senior notes were used to repay a portion of our outstanding borrowings under the revolving credit facility as a result of the previous completed acquisitions. Please go to slide 5.

On September 1, we launched preorders for Schlage's newest Internet of Things innovation, the Schlage Sense Smart deadbolt at Amazon.com, HomeDepot.com, and build.com. Schlage Sense is one of the strongest, most intelligent bluetooth-enabled locks on the market, with the highest industry ratings for security and durability. It's designed to work with Apple HomeKit, allowing users to control their door lock as part of their smart home. Apple HomeKit technology provides advanced security with end to end encryption and authentication between the Schlage Sense Smart deadbolt and an iPhone, an iPad or an iPod touch.

Within Apple TV in-home users can enjoy the convenience of remote access. Additionally, HomeKit lets consumers talk to unlock their Schlage Sense using Siri voice control. In November, Schlage Sense will be available in Apple stores and online.

This lock has received media attention from large industry [influers] like CNET, Hardware and Building Supply Dealer, along with praise from tech industry publications like Mashable, TechCrunch, and Mac Rumors. I'm also proud to say it's been featured by large national media outlets like Fortune and CNBC. Schlage Sense will be -- officially be available in retail in November in selected big-box stores like Home Depot and Lowe's.

Patrick will now walk you through the financial results and I'll be back to update you on 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 third quarter, as well as our growth by regional segment. As indicated, we delivered 5.1% organic growth in the third quarter, supported by incremental volume that reflects improving market fundamentals, price improvements and early traction on our key organic growth investments in products and channels. We realized solid organic growth in Americas and EMEIA segments.

As expected, unfavorable foreign currency rates continue to be a headwind to revenue growth, noted by the negative the negative 7.5% decline. All reporting segments were impacted by currency, due to the strengthening of the US dollar against currencies in EMEIA and Asia Pacific, as well as the devaluation of the Venezuelan bolivar. Acquisitions and divestitures provided 2% of growth, which includes contributions from acquisitions offset by Venezuelan divestitures. Please go to slide number 7.

Reported net revenues for the quarter were $544.5 million. This reflects a decrease of 0.4% versus the prior-year, up 5.1% on an organic basis. We realized strong organic growth in Americas and EMEIA across most product segments.

We continue to experience great progress in electronic product growth, up over 30% compared to the prior-year period. This growth was across both residential and commercial segments and is a result of new products and accelerated adoption of electronic products. Adjusted operating income of $116.8 million grew 5.3% compared to the prior year. Incremental volume leverage and acquisitions compensated for increased investment spending and unfavorable foreign currency exchange rate movements.

Adjusted operating margin of 21.5% reflects an increase of 120 basis points versus the prior year. Incremental investments made in the areas of new product development, channel, and market expansion, and certain infrastructure programs had a negative impact of 90 basis points on the quarter. The adjusted EBITDA margin of 23.7% is a record performance since the Company went public in December 2013. Please go to slide number 8.

This slide reflects our EPS reconciliation for the third quarter. For the third quarter of 2014, reported EPS was $0.65. Adjusting for prior year one-time separation and restructuring expenses of $0.03, the 2014 adjusted EPS was $0.68.

Operational results increased EPS by $0.12 as pricing, productivity, and favorable operating leverage were more than offset inflation and unfavorable currency exchange impacts. The decrease in the adjusted effective tax rate drove $0.15 per share improvement versus the prior-year. The improvement reflects favorable changes in the mix of income earned in lower rate jurisdictions and the benefit of discrete tax items recorded in the quarter. Acquisitions and interest expense added $0.02, as did other net items.

Next, incremental investments related to ongoing growth opportunities for new product development and channel management, as well as corporate initiatives tied to our strategy specific to taxes and IT investments were a $0.03 reduction. And lastly, the net year-over-year impact of Venezuela at current exchange rates is a $0.04 reduction. This results in adjusted third quarter 2015 EPS of $0.92 per share.

Continuing on, we have a negative $1.20 per share reduction for charges related to the Bocom Wincent and Venezuelan business divestitures, as well as acquisition and restructuring expenses. After giving effect to these one-time items, you arrive at the third quarter 2015 reported EPS of negative $0.28. Please go to slide number 9.

Third quarter revenues for the Americas region were $418.9 million, down 1% for an increase of 7% on an organic basis. Higher volumes, pricing, and contribution from the acquisition of Zero compensated for unfavorable currency movements in Canada and Venezuela and the divestiture of the Venezuelan business. The higher volumes reflect strong organic growth in both residential and non-residential products. This reflects better than market performance, driven by our new product and channel initiatives.

Americas adjusted operating income of $122.2 million was down 1% versus the prior-year period. Pricing and productivity more than offset inflation and investment, while incremental volume was absorbed by unfavorable foreign exchange rates in the Venezuelan divestiture. 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 and unfavorable mix due to the Venezuelan divestiture. Please go to slide number 10.

Third quarter revenues for the EMEIA region were $91.5 million, up 2.2% both on a reported and an organic basis. The growth was driven by strong pricing within the mechanical business and modest volume increases. Significant ongoing currency headwinds were offset by recent acquisitions completed in the quarter.

EMEIA adjusted operating income of $5.9 million was up $4.7 million or 392% versus the prior-year period. Adjusted operating margin for the quarter increased 510 basis points, reflecting continued improvements in an ongoing business transformation, as well as partial quarter contributions from the recent acquisitions, which were accretive to the region's margins. Please go to slide number 11.

Third quarter revenues for the Asia Pacific region were $34.1 million, flat to the prior year. Revenues were down 10.2% on an organic basis. Strength in the hardware business and acquisitions offset unfavorable foreign exchange and a decline in the Bocom Wincent system integration business.

The decline reflects the slowdown of the China business environment and the delay of a few large products. Note that this business historically relies on large project awards in the second half of the year. During the third quarter, projects in the pipeline have been delayed resulting in a year-over-year reduction in revenue approximately $6 million or negative 36%. We also in expect an impact to the fourth quarter organic growth rates, which Dave will discuss later.

Of note, the announced divestiture of Bocom Wincent reduces future risk inherent in the seasonal nature of the business, both in terms of size and timing of awards. Asia Pacific adjusted operating income of $0.7 million was up $1.2 million or 240% versus the prior year. Adjusted operating margin improved 360 basis points, due to the mix shift of hardware volume, productivity, and acquisitions, which offset inflation and currency exchange impacts. Please go to slide number 12.

Year-to-date available cash flow for 2015 was $98.7 million, a reduction of $36.3 million compared to the prior-year period. The reduction in year-over-year cash flow was due to increased operating cash requirements and one-time cash tax payments, partially offset by reduced capital expenditures.

We continue to operate with an effective working capital structure and continue to see improvement in working capital as a percentage of revenue, as well as our cash conversion cycle. We expect full year available cash flow for the business to be approximately $200 million. This guidance incorporates a reduction in anticipated 2015 collections for a Bocom Wincent business and slightly higher working capital requirements.

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 13.

Looking at full-year revenue guidance, we are increasing our growth expectations for the full year by 1 point. In the Americas, we are improving organic revenue growth by 50 basis points, reflecting the third quarter results. Reported full-year revenue growth for the Americas remains consistent to prior guidance, as the increases in organic revenue is offset by increased currency headwinds. We see end markets as unchanged from prior guidance with regard to verticals or construction growth.

Total revenue for EMEIA region now reflects the inclusion of the SimonsVoss and Axa acquisitions, while organic growth guidance remains unchanged. The largest change occurs within our Asia Pacific region where we now forecast organic revenues to decline for the full year by negative 13% to negative 15%. This impact flows through the total Asia Pacific revenues that are primarily offset by the inclusion of the Milre acquisition. As Patrick mentioned earlier, when discussing Q3 results, the revenue call-down is related to the Bocom Wincent system integration business where we now forecast a number of large projects to be delayed until 2016.

And note that we continue to include Bocom Wincent in our guidance as announced not yet closed transaction. Furthermore, margins for Bocom Wincent are historically strongest in the fourth quarter, due to increased volume, which compensates for operating losses in the first three quarters. Given the reduction in volume, we expect full-year margins for Asia Pacific to be down from prior year and close to breakeven. We estimate the earnings impact of the lower Bocom Wincent revenues in the fourth quarter to be a headwind of approximately $0.05 versus prior guidance.

Inclusive of this impact, we are still able to increase full-year adjusted EPS from continuing operations to a range of $2.85 to $2.90. This reflects an improvement of our adjusted effective tax rate now estimated to be 20% for the full year and improved operational performance. Furthermore, this incorporates the impact of acquisitions, as well as increased interest expense related to the new senior notes. Please go to slide 14.

The third quarter results were very strong and represented solid growth with a 5.1% organic revenue increase, a 120 basis point margin expansion, and adjusted earnings per share growth of over 35%. From a market perspective, the trends for the US market are still leaning positive, although economic data remains choppy. After a long recessionary cycle, we're seeing signs of slight improvements in our primary European geographies. In Asia Pacific, China growth is decelerating while other countries outside China are holding.

Overall, the business continues to perform well and we are executing at a high level. We're making the tough portfolio decisions that need to be made and we'll continue to execute on our strategies to drive profitable growth and customer satisfaction.

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

(Operator Instructions)

Rich Kwas, Wells Fargo Securities.

Hi, good morning, everyone.

Good morning, Rich.

I wanted to just, Dave, ask you about institutional markets. I know it does it seem like you changed our outlook, at least in the Americas, around verticals and the institutional activity seems to be getting better here as the years progress, which provides some visibility into 2016. Just wanted to get a quick update on your initial thoughts as we move forward over the next 6 to 12 months on institutional.

As we see the institutional markets, they continue to lean positive, but we don't see a huge [C] change in the environment that we've operated in previously. I recently was at our California field office and was extremely pleased with the bond approvals for Southern California schools, so it tends to support our view, and I think your view, that institutional spending, state government spending is improving, but we're still nowhere near normal.

Okay. But net-net, would you say that should be an incremental positive as to start to think about 2016 versus this year?

I think it's a mixed bag. As positive as I saw in California, you move into some of the oil patches like Texas, which has been a good driver, softer. So I think you've got to take into context we continue to be leaning positive, but we still think we've got a couple years for that institutional state budgets to normalize.

Okay. And just last one on Europe, the margin outperformed versus expectation here in Q3. You've got the 10% target for next year. How would you gauge progress versus your goal in Europe at this point?

10% target doesn't change. We lost a couple months in the labor negotiations, which we closed. Overall, very pleased with the trajectory of the base business and believe SimonsVoss and Axa pushes us well into our goal aspirations, but our goal remains the same. On the base business, 10% OI and we're headed toward that achievement.

Okay. Thanks. I'll pass it on. Appreciate it.

(Operator Instructions)

Jeremie Capron, CLSA.

Thanks, good morning. Dave, I think you called out some progress in terms of the channel in the US and the repair and replace market. Could you dig a little deeper into this and give us more color around the progress there and where you're starting from and if the timeline has changed at all?

So we reviewed our channel initiatives and growth in the retrofit and tenant improvement build-out in the quarter. The results are exceeding our expectations, but I want to ground you: we launched that program in six cities. I've said clearly, our target is to launch that across the United States and Canada, let's say 32 cities, and we'll do that over 36 months. But we're pleased with the progress and it's embedded in our organic growth and we see further progress as we move into 2016 and 2070. Why wouldn't I go faster? This program's got to be done correctly and it takes people. So pleased with the results and we'll continue to work on these areas.

That it's good to hear. Moving to the electronic portfolio, so I think you said more than 30% growth in electronic locks. Between the new Sense, you've the Connect series and now you've got SimonsVoss that's added to the portfolio. It looks like you have a pretty full range now of electromechanical locks.

We're mindful of that, whatever the economy deals us, I think you can look for us with execution. We erred on the side of caution.

I mean as how things are tracking so far in the quarter warrant keeping that low-end of the range where it is?

We would say yes.

Got you. Maybe just a quick one on pricing. Pricing has been accelerating for the last few quarters. Just curious about what's driving that? I assume some of the new products, but also the outlook for pricing.

We raised prices end of Q3. We saw some effects of that in the quarter. I would say the pricing environment continues to be slightly positive. I think in the Americas, we've got a little less than 1% and we continue to see that moving forward as opportunistic. How can we sharpen our game in terms of achieving price realization on the commercial, as well as the residential side.

Just a little bit more color, too, Rob. The majority of that price increase or what you're seeing in the numbers year-over-year is on the commercial side. Residential has kind of been a challenge throughout the course of the year. Anytime we introduce new products, that's not reflected in a price change. It's just the delta shows up in organic growth or new products.

Got it. Did the change in price cause any pull forward into the quarter?

No, not really. We think it's a pretty good comparison and didn't really pull forward any activity.

Got it. Okay. Great. Thank you.

Josh Pokrzywinski, Buckingham Research.

Hi, good morning, guys.

Hi, Josh.

Just because I got disconnected here, you can cut me off if you already went through it. But I think as a follow-up to Rich's questions earlier on European margins, if we had to take that 10% and true it up just for the new business, from a mix perspective, that you guys have acquired, maybe not pretending any margin improvements there, but kind of fully loaded, what would that look like now on a more apples to apples basis?

Yes, we will be giving full year 2016 guidance at the next quarterly conference call. The acquisitions are accretive to the overall margin. So you would expect to see, as you look at the European region next year, to be north of 10% certainly. As Dave highlighted, the business has really made good progress relative to the margin expansion on the base business. We continue to get the carryover effects relative to the restructuring programs we executed last year. The team has done a great job on pricing.

We talked about really looking at customer-specific accounts and trying to be more specific there in terms of implementing and executing price increases. This move, in terms of the facility, helps bridge the gap from base business performance to get us closer to that 10% margin on base business. A lot of good progress there. When we go out with guidance on a going forward basis, we'll probably be talking about how the overall European region is performing and provide guidance relative to that aspect.

Got you. That's helpful. And if I could just ask a corollary to that, on all of the puts and takes in 2015 guidance, can you maybe parse out, aside from Bocom, with the acquisitions and other divestiture, i.e. Venezuela, are contributing to that?

For what period, specifically?

For 2015, so I guess for the fourth quarter. For the changes you guys just made, how much of that is the other deals that have closed?

So you saw in the quarter, again net of the incremental interests associated with the acquisitions, i.e., the new senior notes, about a $0.02 contribution net. I would anticipate to see something similar in Q4, relative to the acquisition performance. Going forward, you would expect that perhaps to get a little bit stronger as we begin to realize the integration efforts, synergy attainment, and those type of things.

Okay. But no real step function into the fourth quarter necessarily?

No, no.

Got you. Thanks guys.

Steve Winoker, Bernstein.

Thanks and good morning, guys. Also, the line cut out on me as well, as a number of investors, so if I ask something that's already been asked, just let me know. On the organic growth side for the fourth quarter, I just want to make sure I understand this. Bocom, et cetera, is being included in that kind of negative organic growth in total for the entire quarter. Is that correct?

That's correct. And that business, in particular, Q4 last year had a very strong quarter. There was a couple of large project wins in the quarter. So if you look at it year-over-year, it's about a $30 million call-down in the quarter.

Okay. All right. So that explains that. And on the capital allocation side, where are you thinking now in terms of incremental leverage, given where you're running and what you're seeing in US and Europe being a little stronger? How are you thinking about continued acquisition runway and size tuck-in versus maybe larger transformational versus share buybacks at this point?

We continue to be aggressive on working the acquisition pipeline. Deal size tends to be reflective of what you saw in Axa, SimonsVoss or smaller is what our game is. We think there's plenty of runway there. Patrick, some additional comments.

Yes, so you guys are aware, we target a leverage ratio from 3.25 to 2.75. We're a little bit north of that today. Not concerning because of the free cash flow generation of this business, we delever fairly quickly and we'll do so next year. So I think next year's plan would kind of put us back in the middle of that range and we've indicated previously that would not have an issue with going to, say, four times leverage for the right transactions. We also have our equity currency that we could use for the right type of strategic deal.

Okay. If I could just sneak one more in on tax rate if you didn't answer this. Ex those one-time items, where are you? Does that change your kind of expectations in terms of where you're trying to head?

For this year, no. So the majority of the rate-improvement for Q3 was one-time favorable discrete items. We got a full-year effective rate of 20%, which puts Q4 around 22%, which was our beginning of the year guidance. We are still marching towards the 20% target for 2016, making some good progress there. A little headwinds relative to the acquisitions, just given the nature of where the earnings are, but I think we'll be able to execute some tax planning strategies that mitigate that and get us within the target that we established last year for 20% in 2016.

Okay. Thanks, guys.

David MacGregor, Longbow Research.

Yes, good morning, thanks for taking the questions. I had been disconnected as well, so if you've addressed this already, I apologize. Dave, you talked about the 90 basis points of headwind associated with the investments. I think earlier in the year, you'd been up closer to about 150 basis points, so it seems like maybe that's coming off. Maybe now with Sense roll-out that continues to come off, I'm not sure. Maybe you could talk about that and just what do you expect that number to look like for the fourth quarter, but I guess more importantly, for 2016?

So we had or beginning or year guidance had guided incremental investments around $0.50 to $0.20 per share impact. Year-to-date, we're around $0.15. Q4 you're going to see a tapering off. Maybe there's $0.02 to $0.03 impact and the year-over-year impact relative to the margin comes down maybe to around 40 or 50 basis points. You may recall last year, Q4 in particular, really stepped up our activities associated with engineering, repair, retrofit market opportunity that Dave talked about making incremental investments in the channel, et cetera.

It does start coming down. You kind of look forward to 2016 and you would expect the incremental year-over-year investments to also decrease on a full-year basis, as we previously highlighted at our shareholder meeting in March.

Okay. In the residential, I wonder if you could just talk about, within kind of the conventional product offering, what competitive conditions within in the big box aisle look like right now and the extent to which this is impacting your residential margins?

From a competitive standpoint, in big-box, our results are strong. We think the overall demand, especially for renovation and retrofit, is positive. New-home starts again will be choppy, but we think they normalize around 1.4 to 1.6. We like that. We think the new products, Touch, Schlage Sense, Schlage Pulse actually expands the total available market for our products. So I'm net positive and I think we are executing well. I'd challenge all of you, understand the new Schlage Sense. It's a superior product out there and I think we'll perform well in that environment versus the competition.

Last question, just within your portfolio of North American businesses and the various lines and the markets you've got there, do you watch one or two or three as particular leading indicators and what would you be seeing there right now?

So ironically, our door business Steelcraft is an early indicator. Because in the new construction, it's like cement and starts to gives you an indication of what's ahead and I'd say generally, that business continues to lean positively. I think all of this construction, whether it's residential, commercial is capped by labor availability, land availability. If I looked at just frames, doorframes, that market continues to be positive.

Okay. Thanks very much and congratulations on all the progress.

Tim Wojs, Baird.

Hey, guys. Good morning, nice job.

Hi, Tim.

I guess just the first question I wanted to ask, if you look at the midpoint of your prior guidance and the midpoint of this guidance, there's some moving pieces. I was just hoping you could tell us or maybe break it into a few buckets in terms of how much is the core guidance up? How much is acquisitions? How much is the tax rate and then maybe with the headwinds are from Bocom and then maybe some of the Venezuela stuff? It sounds like there might be a little bit of incremental there from the divestiture?

Yes, if you start with the beat, relative to Q3 performance, tax $0.07 to $0.08, ops $0.05 or so and we had other of $0.01, the way you should probably think about Q4 or the full year is that carries forward and then you've got a negative reduction on Bocom, which we mentioned a $0.05. That's offset by acquisitions net of interest of a couple pennies and then the general business or operations, $0.03 is how I would characterize it, if you go midpoint to midpoint.

Okay. And then if we just completely ripped out Bocom, what would be the adjusted impact in the full year of 14?

$0.06.

$0.06 and then be higher in the fourth quarter? I'm just trying to understand because $0.05 is coming up for Bocom, but effectively that'll be divested by the next time you guys report. So, I'm just trying to understand what the total impact on EPS could be from Bocom.

Yes, year-over-year, $0.05. That assumes some profitability in the quarter. We've got it in for the full quarter. If the divestiture takes place, let's say December 1 for example, it would have some added pressure on earnings because a lot of the revenue generation is in the month of December. It is just the way the contracts work with the government. But we'll see that we will talk about that when we get there.

Okay. And then the other question I had was just -- it's a broader question, but Dave, could you talk a little bit about just the Safe Schools initiatives? You've talked about it a little bit in the past, but just curious where we are maybe with those initiatives and what's the opportunity for Allegion over the next year few years from just Safe Schools?

I think Safe Schools is predominantly driven by funding. There is movement. The State of California has passed legislation that requires locks with visible signaling capability that you could visually see is secure for rooms with over five people, but there's still a long ways to go in this. We've created a consortium and awareness on this, but we're still in the front end of this initiative and I think we're providing some good though leadership in terms of how do we keep students safe, but how do we also create an environment that allows them to exit if required? You've got concerns of fire safety, as well as violence safety. This is all opportunistic, but it continues to be in its infancy in development and I think lacks funding.

Great, nice job. Good luck.

All right. Thank you.

Julian Mitchell, Credit Suisse.

Just a question around the European business, trying to understand the margin impact for acquisitions. In Q4, the last couple of years, you've had a very strong margin. What sort of margin rate should we expect for Europe right now this quarter exiting the year?

So normally, we don't provide quarterly guidance relative to regions, but given the accretion relative to the acquired businesses and some of the improvements that the business has executed on during the course of the year, north of last year, you're exactly right. Seasonally, it is the best quarter for that segment of our business. I think it was around 11% or so last year. So you can expect the results for this quarter to be north of that in aggregate.

Understood. Thank you. Just my follow-up is on the Asia-Pacific, maybe just give a sense of the scale of that business and the profitability ex-Bocom and what the strategy is from here? Is it sort of consolidating what you have left or do you look to kind of regrow with acquisitions off that lowered base?

So think about Asia Pacific in our mechanical core business $90 million to $100 million, slightly profitable on today's scale. We'll work to improve to put profitability and growth into that region, similar to what we've done in Europe. I think the thing to remember, Asia Pacific, from a mechanical electronics standpoint, grew low double-digits in the quarter. With our FSH acquisition, the Milre acquisition, we think we're building a base there that can compete and it's another strategic issue that will go to drive what's our long-term view there. But we think -- we're positive on the region. We think China, India, the whole area will continue to be a growth opportunity for us and will position ourselves over the long term.

Great. Thank you.

Jeff Sprague, Vertical Research.

Thank you. Good morning, guys. I was also off for a few minutes. I apologize if any of this is repetitive. But I just wanted to get a little bit more into the price costs. Patrick, can you give us some idea of how much of the realized price you saw was just kind of actions to counter FX versus kind of real life for life price? That's the first question.

Yes. So the actions implemented to offset FX predominantly within Europe. A smaller part of our business, but they did see some good price pull-through in the quarter. But from an overall perspective, relative to the total Company, small impact on price. So the majority of the price improvement you saw coming through in Americas, very little FX-related. So we would expect, with a new price increase announced this quarter, hopefully that trend would continue going forward.

I'm sorry, I missed it. Did you say the size of that price increased?

Excuse me.

Did you say the size of that price increased earlier in the call? I missed that.

No, we didn't. The list price is always announced a higher level and then when you settle after discounts and rebates et cetera, it's lower. But normally, we look to try to get a 1% net price improvement year-over-year. That's the target. It's sometimes difficult to get, particularly in the residential segment.

Great. And then you mentioned inflation in your opening remarks. I'm sure there's some meaningful cost deflation in parts of the equation, but net-net, the cost structure is experiencing inflation. Can you provide a little more color on that?

Yes, so the inflation comment really salaries, people-oriented type costs. Materials year to date, I'd say, we're at a net positive. When I look at how prices have reacted, particularly given the commodity cost today, you're looking at spot rates for brass, zinc, copper et cetera 20%-plus below last year's average rate and we would expect to participate in that decline in cost. Keep in mind our material, raw material, purchase is not a large percentage of our overall material buy and we do enter into supplier contracts, as we've talked about previously. So no immediate impact on our operating results, but certainly, as we look forward to 2016, given where commodity rates are trading today, it should be a positive effect on our margins going forward.

Great. Just one quick one, finally, and I'll jump off, just the deals, you said, are similar in Q2 then Q3? Why would that be if you only had kind of a partial quarter impact in Q3? Is there some other purchase accounting or some other dynamic going through or seasonality in the businesses that you bought?

So, it's predominantly the interest impact. Operationally, much higher uplift on the results, but it's the full quarter effect on the interest. And we're adding in all the interest costs associated with the $300 million senior notes issued at the end of September, so you've got the full quarter effect of that offsetting the operational impact.

Great. Got it. Thank you.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Tom Martineau for closing remarks.

I'd just like to thank everybody for attending. Again, I apologize for the technical delay that we had earlier in the call, but I appreciate everybody's patience as we went through it. As always, if you have any further questions, please reach out. We thank you for attending.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.