安朗杰 (ALLE) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Allegion Q4 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I'd now like to turn the conference over to Mike Wagnes, Vice President, Treasurer and Investor Relations.

Please go ahead, sir.

Thank you, Keith.

Good morning, everyone.

Welcome, and thank you for joining us for Allegion's Fourth Quarter and Full Year 2017 Earnings Call.

With me today are 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 allegion.com.

This call will be recorded and archived on our website.

Please go to Slide #2.

Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal 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.

Please go to Slide #3.

Our release and today's commentary include non-GAAP financial measures, which exclude the impact of restructuring and acquisition expenses, impairment charges, debt refinancing costs, and charges related to U.S. tax reform in current year and 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 fourth quarter and full year 2017 results and provide 2018 guidance, which will be followed by a Q&A session.

(Operator Instructions).

Please go to Slide 4, and I'll turn the call over to Dave.

Thanks, Mike.

Good morning, and thank you for joining us today.

In the fourth quarter, Allegion posted strong operational results.

With one of the most engaged and safest workforce in the industry, Allegion once again delivered a high level of execution and performance.

For the fourth quarter, revenue came in at $623 million, growing 6.1% on an organic basis.

Total revenue increased 9.4% over the prior year, reflecting strong organic growth and the impact of acquisitions and foreign currency tailwinds.

The strong organic growth was driven by all regions.

Americas organic revenues grew at 4.8% as the business rebounded nicely from softer performance in the prior quarter.

Business continued to see solid price performance and against our mid-teens electronics growth.

EMEIA delivered outstanding organic growth of 7.7%, driven across most products and geographies.

In particular, SimonsVoss, AXA and Interflex businesses saw a strong top line growth.

Asia Pacific organic revenues grew extremely well at 16.4%, driven predominantly by the China hardware and Milre businesses.

Adjusted operating income of $135.4 million increased 32.7% versus prior year.

Adjusted operating margin increased by 380 basis points, 260 basis points of the improvement is related to an environmental remediation charge taken in the prior year.

The operating performance, excluding the environmental charge, reflected continued price realization and solid leverage on incremental volumes, which more than offset headwinds from inflation and incremental investments.

All 3 regions saw significant improvement in adjusted operating margins.

Adjusted earnings per share of $1.11 increased $0.30 or 37% versus the prior year.

This includes the environmental remediation charge in the prior year, which had a $0.10 per share impact.

Reported earnings per share of $0.10 decreased $0.67 versus the prior year.

The decrease is driven by onetime charges related to U.S. tax reform and debt refinancing costs, which had impacts of $0.56 and $0.40 per share, respectively.

These were partially offset by the $0.10 impact of the prior year environmental charge mentioned previously.

Overall, I'm extremely pleased with the strong fourth quarter revenue growth and operational performance.

Please go to Slide 5. Now I'd like to talk about Allegion's accomplishments in 2017.

We continue to have an exceptional occupational safety record and continue to be a safety leader in our industry.

At Allegion, we believe that safety and health is the true north measurement of business excellence.

The recognition received from the National Safety Council in January of this year is a reflection of the hard work and importance that our company places on employee safety and health.

In December of 2017, Allegion was also recognized by the Wall Street Journal as one of the best run companies.

It's my belief that this is a reflection of our highly engaged management team, driving a system of continuous improvement that harmonizes with our workforce and makes Allegion a great place to work as well as a great investment for shareholders.

Moving on to revenue, we delivered solid organic growth in all regions.

Americas and Asia Pacific continued their success, while the European region recovered nicely in 2017.

We continue to execute on our channel initiatives to drive above-market growth and continue to focus on innovation to accelerate new products to the market, increasing our vitality index and remain a leader in the digital convergence.

In addition, we've seen continued strong operating leverage and expansion of adjusted operating margins in all regions.

We delivered an 18.6% increase in full year adjusted earnings per share and had another solid cash flow year.

Please go to Slide 6. Allegion recently announced acquisitions that demonstrate our commitment to deploying capital to drive shareholder value.

We continue to focus on opportunities that fill product gaps, expand our business and provide new innovative technologies that can be leveraged across the global enterprise and provide solid financial returns.

In January, we've acquired Technical Glass Products, a leading U.S. manufacturer of advanced fire-rated glass and frames for doors, entrances and curtain walls.

TGP is focused on institutional and nonresidential projects, provides a strong tie to Allegion's core business and will leverage the strength of our existing justification writing capabilities to help accelerate growth.

TGP customers and distributors will benefit from access to the full range of Allegion product offering.

At the beginning of February we formally closed on our acquisition of QMI, which was originally announced at the end of last year.

QMI is one of the Middle East's largest manufacturers of commercial steel and wood door and frames.

QMI product offerings are closely aligned with Allegion's core business and specification capabilities, and it provides customers with full door solutions in the Middle East.

All of this supports our strategy to accelerate Allegion's growth in this fast-growing region and EMEIA as a whole.

And finally, last week, we announced our intent to acquire AD Systems, a U.S. innovator in door solutions.

AD Systems designs and manufactures high-performance interior, health care door systems, specializing in sliding and acoustic solutions.

These solutions are sought across the U.S. health care and commercial office spaces because of their distinct design that provides acoustic control, privacy and ADA compliance.

AD Systems is a natural fit with Allegion's already strong door and door control brands and will further enable our teams to offer best full suite solutions to customer.

Altogether, these newest additions to the Allegion family represent leading brands and natural portfolio extensions that leverage our strong spec writing capabilities and vertical market presence in health care and commercial office building.

As we move forward in 2018, we will continue to use a disciplined approach through strategic acquisitions that drive shareholder value.

Patrick will now walk you through the financial results, and I'll be back to update you on our full 2018 guidance.

Thanks, Dave, and good morning, everyone.

Thank you for joining the call this morning.

Please go to Slide #7.

This slide highlights the components of our revenue growth for both the fourth quarter and full year.

I'll focus on the total Allegion results and cover the regions on their respective slides.

As indicated, we delivered 9.4% total growth and 6.1% organic growth in the fourth quarter.

The full year delivered total growth of 7.6% with organic growth of 5.7%.

I was particularly pleased with the outstanding organic growth from all regions.

The strong organic growth reflects the continued execution on the company's growth initiatives, the introduction of new products and strong growth in electronics portfolio.

Pricing was once again favorable in the quarter, closing out a strong full year performance in all regions as the company remains disciplined in taking necessary pricing actions to help mitigate the impacts of rising commodity prices.

Foreign currency was a tailwind in the quarter and the full year, particularly in the EMEIA region.

Acquisitions also contributed to total revenue growth.

Please go to Slide #8.

Reported net revenues for the quarter were $623 million.

As stated earlier, this reflects an increase of 9.4% versus the prior year, up 6.1% on an organic basis.

Adjusted operating income of $135.4 million and adjusted operating margin of 21.7% increased 32.7% and 380 basis points, respectively, when compared to the prior year.

The margin improvement was driven by strong operational results, with pricing and productivity more than offsetting the impacts of inflation and incremental investments.

Included in the 2016 numbers is a $15 million environmental remediation charge, which had a 260 basis point impact on the adjusted operating margin in that quarter.

Our adjusted EBITDA margin of 24.3% was also a 380 basis point increase versus the prior year, and similar to adjusted operating margin mentioned earlier, includes the impact of the 2016 environmental remediation charge.

Full year adjusted operating margins were 21% and were up 140 basis points versus the prior year.

Strong operational performance drove the increase.

Margin expansion was also aided by the 70 basis points from the impact of the 2016 environmental charge.

This represents record performance in the fourth consecutive year with improved adjusted operating and EBITDA margins as Allegion continues to execute at a high level, demonstrating both strong organic growth and operational margin improvement.

Please go to Slide #9.

This slide reflects our EPS reconciliation for the fourth quarter.

For the fourth quarter of 2016, reported EPS was $0.77.

Adjusting $0.04 for the prior year restructuring expenses and integration costs related to acquisitions, the 2016 adjusted EPS was $0.81.

Operational results increased EPS by $0.18 as favorable volume, price, operating leverage and productivity more than offset inflationary impacts.

As noted previously, the impact of the 2016 environmental remediation charge drove a $0.10 increase.

Next, interest and other income were a net $0.05 increase.

This was driven primarily by the reduced interest expense, resulting from the company's debt refinancing that took place earlier in the quarter.

Share count reductions drove an increase of $0.01.

Incremental investments related to ongoing growth opportunities for new product development and channel strategies were a $0.02 reduction.

The increase in the adjusted effective tax rate drove a $0.02 per share reduction versus the prior year.

Both fourth quarter 2017 and 2016 effective tax rates benefited from the favorable discrete items recorded in the respective quarters.

This results in adjusted fourth quarter 2017 EPS of $1.11 per share, an increase of $0.30 or 37% compared to the prior year.

Further, we have a negative $1.01 per share reduction for acquisition and restructuring charges as well as impacts of $0.56 and $0.40 from charges related to U.S. tax reform and debt refinancing costs, respectively.

After giving effect to these onetime items, we arrived at fourth quarter 2017 reported EPS of $0.10.

Please go to Slide #10.

Fourth quarter revenues for the Americas region were $436.1 million, up 6.4% on a reported basis and up 4.8% organically.

The organic growth was driven by volume and price as we experienced mid-single-digit growth in both nonresidential and residential products.

Additionally, the Americas saw another quarter of mid-teens growth in electronics products.

Americas' adjusted operating income of $123.9 million increased $27.2 million or 28.1% versus the prior year period, $15 million of the increase was due to the 2016 environmental remediation charge mentioned earlier.

Even after excluding the impact of the charge, Americas saw strong operational performance as adjusted operating income increased due to incremental volume leverage, price and productivity, more than offsetting the impacts from inflation, incremental investments and unfavorable mix.

Adjusted operating margin for the quarter increased 480 basis points, 370 basis points of the improvement was driven by the impact of the prior year environmental charge.

The remaining strong operational increase demonstrates excellent performance and execution by the entire Americas team.

For the full year, the Americas region delivered adjusted operating margin of 28.8%, continuing to expand our industry-leading margins.

The region continued its strong operational performance.

The full year impact to the Americas region from the prior year environmental charge was 90 basis points.

Please go to Slide #11.

Fourth quarter revenues for the EMEIA region were $150.8 million, up 16.5% and up 7.7% on an organic basis.

The reported revenue growth was driven by the impact of the strong organic growth along with currency tailwinds.

Organic growth was attributable to growth across most business units and geographies with particular strength in SimonsVoss, AXA and enterprise.

EMEIA adjusted operating income of $24.8 million increased 24.6% versus the prior year period.

Adjusted operating margin for the quarter increased 100 basis points, reflecting continued operational improvements, driven by the benefits of price and volume leverage, more than offsetting the impact of inflation and unfavorable mix.

Full year adjusted operating margin came in at 10.2%, an increase of 90 basis points over the prior year.

At the time of the spinoff, adjusted operating margin for this business was approximately 1%.

We had a stated goal of reaching 10%.

Reaching that goal is a significant achievement and highlights the hard work and success of the entire EMEIA team.

Please go to Slide #12.

Fourth quarter revenues for the Asia Pacific region were $36.1 million, up 19.1% versus the prior year.

Organic revenue was up 16.4% and was driven by strong performance across most geographies and product portfolios, with the Milre business acquired in 2015 and our business in China leading the way.

Favorable currency impacts also benefited total reported revenue.

Asia Pacific adjusted operating income of $4.7 million was up 104.3%.

Adjusted operating margin for the quarter was up 540 basis points, reflecting leverage on the incremental volume, along with productivity more than offsetting inflation and investment impacts.

The full year adjusted operating margin for Asia Pacific was 8.4%, an outstanding performance by the entire Asia Pacific team and representing an increase of 240 basis points as the region leveraged a strong organic growth into strong margin expansion.

Please go to Slide #13.

Available cash flow for 2017 was $297.9 million versus $335 million in the prior year.

The decrease in year-over-year available cash flow is attributable to the $50 million discretionary pension payment made earlier in the year, partially offset by higher net earnings.

Working capital as a percent of revenues and the ratio for the cash conversion cycle increased slightly in 2017.

Please go to Slide #14.

As you are aware, the U.S. Federal Government passed tax reform late last year.

The legislation reduced the federal statutory rate in the U.S. from 35% to 21%, while at the same time, limiting certain deductions in various other aspects in the tax code.

As a result of the new legislation, we recorded a $53.5 million charge in the fourth quarter of 2017 results, primarily related to revaluation of deferred tax assets due to the reduced future statutory rate and uncertainty around our ability to realize deferred tax assets that were previously recorded.

In addition, the tax reform included a repatriation tax on foreign earnings.

However, as Allegion is an Irish-domiciled company, we only incurred a minimal cash repatriation tax.

As we evaluate the impacts on 2018 and beyond, we expect our long-term tax rate to remain in the mid to high teens with an estimated tax rate of approximately 16% in 2018.

In addition, we expect to see an increase in our 2018 cash taxes as a result of tax reform, inclusive of onetime payments.

Finally, the law is complex and future interpretation of the legislation is expected from the U.S. government and regulatory agencies, which may result in future discrete impacts for our tax rate, primarily related to the onetime charge of $53.5 million mentioned earlier.

I will now hand it back over to Dave for an update on our full year 2018 guidance.

Thank you, Patrick.

Please go to Slide #15.

We continue to see favorable trends in our primary end markets in 2018, and it is our expectation that the organic investments combined with our ability to execute will again drive better than market growth.

We also believe the electronics business will continue to outpace mechanical, which will additionally benefit our growth as we are well positioned to continue to take advantage of this industry trend.

In the Americas, we see positive indicators in the key verticals within the nonresidential and residential businesses and expect both markets to remain solid and grow in the low to mid-single digits.

If there is relief in the labor constraints and the supply chain, we would expect better market growth as underlying macro trends are expected to remain strong.

Consolidating the market outlooks, we project organic revenue growth in the Americas of 4% to 5% and reported revenue growth of 10% to 11%, reflecting the inclusion of the acquisitions of TGP and AD Systems.

For the EMEIA region, we anticipate growth in core markets to be in low single digit as the markets in the region continue to rebound.

General macroeconomic indicators such as manufacturer’s confidence, consumer confidence and unemployment rates continue to be positive.

For the region, we project organic growth of 2% to 4%.

When combining that with the impact of currency and the acquisition of QMI, we project reported growth of 13% to 15%.

In Asia Pacific, markets continue to show strength in China and North Asia with a more modest growth outlook for Australia and New Zealand markets.

We expect to drive above market growth as we continue to focus our efforts on key vertical markets where we are strong.

Organic growth in the region is estimated to be 6% to 8% and the total revenue growth is estimated to be 8% to 10%, reflecting benefits from currency tailwinds.

All in, we are projecting total growth for the company at 10.5% to 11.5% and organic growth at 4% to 5%.

We anticipate continued price realization across all regions to help mitigate inflationary pressures in 2018.

Please go to Slide 16.

Our 2018 outlook for adjusted earnings per share range is $4.35 to $4.50, an increase of approximately 10% to 14%.

As indicated, the earnings increase is primarily driven by revenue growth and operational improvements, a lower effective tax rate, tailwinds from currency and the benefit of acquisitions, partially offset by investments in the business.

Incremental investments are anticipated to be slightly lower than the prior year, and we'll continue to focus on accelerating new product development and channel initiatives, which we believe enable us to deliver above-market growth and enhance our vitality index as demonstrated historically.

Our guidance assumes a full year effective tax rate of approximately 16% and outstanding diluted shares of approximately $96 million, reflecting the company's goal to at least offset share dilution with repurchases.

The guidance also includes a $0.15 per share impact from restructuring charges and acquisition-related costs during the year.

As a result, EPS is $4.20 to $4.35.

We are projecting our available cash flow for 2018 to be in the range of $380 million to $400 million.

Please go to Slide 17.

We are very pleased with our 2017 results that delivered organic revenue of 5.7% and increased our operating margin by 140 basis points and by 70 basis points after excluding the impact of the prior year environmental remediation charge.

The growth of both revenue and margin will make an investment in our business, demonstrate continued execution on our strategy, along with a disciplined approach to managing our business.

We continue to make progress on our vitality index with new and innovative products, while we also continue to consistently generate strong cash flow.

We are executing on our flexible capital allocation strategy as evidenced by our recent acquisition announcements, along with an increase in our Q1 dividend.

As we look to 2018, we expect to drive continued organic growth above market and expect the impact of acquisitions to help drive robust top line growth.

We look to drive another double-digit increase in adjusted earnings per share and look to generate substantial available cash flow.

We have an excellent team in place that's committed to our vision to make the world safer, securing the places where people thrive.

Thank you to the Allegion Board of Directors and the global Allegion team for a great 2017.

Here at Allegion, our best days are ahead of us.

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

(Operator Instructions) The first question comes from Jeff Sprague with Vertical Research.

This is actually John Walsh on for Jeff.

So as we think about -- well, first, solid quarter.

And then as we think about the 4% to 5% you're looking for in the Americas in 2018, that 5%, does that feel like a cap?

Or meaning, we've heard in the past around constraints around the market, labor, things like that.

Or do you think that if the macro comes in a little bit better, there's actually an ability to drive that higher from a market perspective?

I'd like our opportunities to be stronger.

I think we have to be realistic in the labor constraints that I see and have identified for the last year.

If those labor constraints work themselves through, we will exceed the market growth.

I always believe in and we believe here at Allegion that if the market's better, we'll do better than our share.

We've also been mindful in the projects that we're quoting and bidding.

There's good projects and bad projects out there that go on time, trying to pick the right horses, if you will.

I would say this, John, we've got data out there that says general construction backlogs are at all-time highs.

And the opportunity for us to excel in that environment, I think is positive.

And then I guess just as we think about the investment spend going forward, I would suspect we should continue to model incremental growth, but maybe at a slowing rate.

Is that the way to think about that?

So as we indicated, for 2018, the incremental spend year-over-year is up, but down relative to the prior year.

So we look at it relative to opportunities in the marketplace, and as Dave indicated.

We're really looking at continuing to expand our channel initiatives, market segmentation, driving demand creation, particularly in electronics as well as accelerating new product development.

We like the opportunities there and believe, to date, the investments have provided a good return on those investments.

And so to some extent, it does come down to management capacity to be able to execute on some of those opportunities.

But each year, we look at separately.

And it doesn't mean, for example in 2019, if there's some opportunities that we see and identify in the marketplace, that could accelerate growth faster than the broader market that we could step up those investments.

So I would just say, it's dependent upon market situations, opportunities and what else is going on in the business relative to the incremental spend year-over-year.

But thus far, we've been very pleased with the results we've got in terms of driving incremental revenue growth relative to the market.

And the next question comes from Andrew Obin with Bank of America.

Just a question.

On European operations.

You sort of highlighted brands that are growing, you did not highlight CISA.

Can you give us a sense as to what's happening in Italy, Spain?

And what's happening with production moved to Eastern Europe?

If you could highlight growth rates associated with that and efficiency associated there.

CISA and Italy was the part of the growth we enjoyed in the quarter and the year.

The supply chain under pressure all year got better every quarter.

We continue to develop that capability and improve customer satisfaction.

So I think we're in a good position to take advantage of better Italian markets and the regions that CISA fix -- or serves in 2018.

And what about your channel initiative?

I know that you guys sort of tweaked the channels, going after new projects.

Are we seeing any outgrowth related to that?

And I'm speaking about Europe.

Our channel initiatives that we pioneered here in the Americas have been expanded to Asia Pacific and in Europe.

We're in the throes of some channel analysis right now.

I think as we understand more intimately our opportunities, I think it's reflective in our growth, I think it's reflective in our acquisitions.

We're extremely well positioned in the Middle East, QMI adds to that.

And this belief that we can drive granular growth through better channel initiatives, Andrew, is part of the, I think, the success you're seeing in 2017 that will extend to '18.

And the next question comes from Rich Kwas with Wells Fargo.

On the acquisitions that have been completed, how should we think about the margins here for the business?

It looks -- the businesses acquired, it looks like it's a bit below what you would -- at least when you look at the Americas piece.

I know doors in general tend to carry lower margins.

But anything you would note there in terms of cost synergies or revenue synergies?

Which do you think are more important for the various deals?

So like all of the transactions, I believe good product portfolios, brand positions, very good market position in the respective areas like the growth prospects, predominantly as we look at opportunities to leverage our specification writing capabilities as well as getting more throughput through our distribution.

So I think we'll see that across all of those acquisition opportunities, so like the upside relative to the revenue and top line.

From the margin profile, as you know, we have industry-leading margins across the globe.

And these transactions will be dilutive, they're lower than our overall margin profile.

But nonetheless, still strong contributors in terms of operating performance.

So continuous improvement in margins across the globe, but this will dilute, if you will, the overall margin profile of the company in 2018.

Rich, I would add that the spec-driven nature of these products, AV Doors and TGP, are -- would be in the upper -- if you benchmark door manufacturers, those margins would be in the upper end.

And there's clearly a performance basis to this that drives a premium to market versus the door [slot].

Okay.

So it appears like revenue synergies are more changeable, maybe than cost synergies in the next couple of years.

Correct.

Okay.

All right.

And then, Patrick, on price cost for the year, you said you'd be able to cover cost.

How should we be thinking about price contribution at this point for the year?

So for 2018, we'd anticipate that we would continue to offset or be above the commodity cost pressure.

As you know, the commodity costs have continued to increase, particularly in the back end of 2017 and the first part here in 2018.

But we would expect to continue to remain fairly aggressive to recover that cost increase.

So we see it as a net positive for 2018, maybe not to the extent we saw in 2017.

You may recall we were out pretty early with price increases during the course of the year and got really good price realization across the board.

But nonetheless, it's still going to be a net contributor to margin expansion for 2018.

And the next question comes from Jeff Kessler with Imperial Capital.

Could you expand a little bit on what you are doing with your partner programs around the world?

You mentioned, obviously, Europe and Asia Pac taking their cue from the Americas, but I'm wondering if you could talk about what you're doing, what your overall -- what's your overall goal is here to make the channels more efficient and whether or not there are any opportunities in direct as well.

So I'll give one example that will be in the second year here in the U.S., and it's our project-based business.

We think with labor constraint in the marketplace, there's opportunities to streamline specification process, provide total packages, which would include door offerings with ourselves and partners, hardware packages that will reduce cycle times and like commercial and multifamily.

A second example would be partnering with architects and our spec writers in an investment we called [Chorus], which automates spec writings and the takeoff capabilities against shortening lead times and hopefully helping us grow in the marketplace.

So a couple of examples, we've extended a project-based examples to Europe.

We think the addition of QMI helps us there.

Jeff, I don't know if you've ever been to Asia Pacific -- or not Asia Pacific, but the Middle East, I assume you have.

Yes.

You get out the airport there, you see our strength in U.S. specified products.

We believe we're in a unique position to service both European and U.S. specs, that is being done with partnerships here with our spec writers in North America.

So a couple examples there of what we're doing.

Okay.

On -- let's say, on the same line of thinking, is -- have you -- because Europe is somewhat different and almost in every country, nevertheless, you have a history here of being ahead of the game in terms of relationships with architects and spec writers.

What is -- what are you doing in Europe on a -- either on a continental basis or on a country-by-country basis to try to mimic what you're doing here?

So we are making investments in spec writing capabilities.

We're talking bodies, the systems as well as, let's call, digital investments that can help connect that project capability.

We also think some of the success of SimonsVoss, which we're very pleased with.

As we extend out into the regions out of the dock zone, it's helping us have a stronger project-based capabilities.

So again, we've got a long way to go here.

But extending the knowledge and strength that we have from North America into Europe and Asia Pacific, we think is unlocking some growth opportunities for us, Jeff.

One final question that is, over the course of the next year, there'll be several trade conferences, trade shows out there.

What are some of the newer technologies that you are -- that you have -- that you've been messing around with that we may be able to see and touch over the course of the coming 12 to 18 months?

So I'd encourage you to step in and talk to our technical people.

They are on top of it.

We continue to invest.

Our vitality index increases for the fourth straight year.

I think we're really working on this overall customer experience and how digital access, your smart devices, can enable a seamless experience, not only in the home, but in complex buildings.

We think things like ENGAGE, our Sense products, NDE are opening salvos of that, but great capabilities with our SimonsVoss and Milre.

But we think a lot more about the customer experience and access, and this is where our investments are being made, Jeff.

The next question comes from David MacGregor of Longbow Research.

I guess a question on Europe.

First of all, congratulations on achieving that 10% adjusted operating margin.

You inherited a not so great situation, and you've accomplished a lot there.

I guess the question is, where can you take it from here?

What are the capital requirements in order to do that?

And how should we think about the time line?

David, as you said, really good progress on the spend, very pleased with the team and reaching the objective we set when we first spun out from the company.

As we talked about previously, there aren't any significant step-ups relative to the margin enhancement going forward.

I think what you'll see on the basis of our 2018 guidance is continuous improvement.

So we'll continue to push price cost equation, continue to drive productivity, lean out manufacturing efficiencies where we can and those types of things.

So I would look at it from a perspective of just continuous improvement, given our current business profile there in Europe.

You've got a very good free cash flow guide here for 2018.

And I'm just wondering as you think about how like it's put to use, does Europe become more sort of capital-intensive part of the model over the next 2 or 3 years as you address that profitability growth challenge?

We like the cash flow of this business.

We'll continue to have a priority on growth through acquisition, number one.

Europe has one of the best playing fields to be able to do that, but our view continues to be global, what are the smart tuck-ins that make sense.

Second would be technology.

There's a whole world of digitization that's moving in our industry and we'll move over the next decade, so look for us in investments there.

But clearly, I've said, in Europe, we'd like to continue to move North, continue to move technically and find targets that can move us with scale.

So that's how we think about it.

The last question for me is just on the investments and the $0.10 guide.

I know originally, you've started 2017, if memory serves correctly, guiding to $0.15 to $0.20, I think you ended the year at about $0.13.

Now you're guiding to $0.10.

I know you've been asked about this on an earlier question, but in responding to that, David, I think you'd noted that the contributing factor here was just management bandwidth.

Does that raise a question about management bandwidth here?

Do we have to be concerned about your ability to capitalize on opportunities as they present themselves?

Could you expand a little bit on what you meant there?

So I think -- when I think about management bandwidth, the first one is understanding management capacity.

Our ability to efficiently deploy capital, I think, after 48 months as a publicly traded company, I think we know where our boundaries are.

It's easy to spend money.

It's not so easy to do it efficiently.

We think pretty -- we think deeply about that.

I think as I step back and think about the technologies and opportunities that we have going forward, it's important that we know where to invest, how to invest, but also where we can move the bar through M&A and do it smartly.

So I feel good that we know where we're at, but I'm not going to swing the fence or stretch beyond what I think could add risk and potential problems to get a return on that investment.

And our next question comes from Robert Barry with Susquehanna.

Just wanted to clarify the earlier comments about price costs being a net positive.

Is that price plus productivity net of all inflation?

Or just some incremental color there.

Yes.

So that would be our price -- well, price cost.

So pricing would exceed material inflation clearly.

Price productivity together would offset any inflation, including merit and those normal things that occur in the course of the business.

Got you.

And just any color on approximately how big of a net positive that is.

Is that a material contributor?

You'll see it in our 10-K when we file relative to 2017, but a fairly significant contributor.

Again, we'd anticipate 2018 to continue to be positive, probably not to the extent it was in 2017, just given the price realization we got during the course of the year.

But again, favorable for the full -- anticipated for the full year of 2018.

Got it.

And then can you just level set us on the tax rate going forward?

It sounds like we should model 16% for 2018.

But then -- or should we assume that it's rising after that, like to a high teens rate?

Just wanted to clarify.

Yes, I think the best way to look at it, again, every year has some discrete items that play into the effective tax rate.

So you're right, 2018 we anticipate 16%.

Going forward, the higher teens is probably a better expectation, and I would -- we feel pretty good about that over the long term.

And so as you think about 2019 and beyond, you should think about a little step-up in the rate relative to 2018.

Got it.

And then just one last quick one on the cash flow guide, the $380 million to $400 million.

Does that include some onetime cash headwinds?

I just wanted to clarify that.

Yes, it does.

We mentioned in the commentary that relative to the tax reform changes, there's going to be some onetime cash tax payments in addition to the normal kind of repatriation tax.

It is a one-off item specific to 2018.

And so that's a little headwind in our cash flow, that's why you don't see quite the conversion ratio on AC after net earnings.

But believe more importantly that 2019 and beyond, our stated objective of 100% conversion, we should be able to maintain.

So ex those onetimes, you're at or above 100% this year?

Yes.

And the next question comes from Tim Wojs with Baird.

I guess maybe going back to Americas and just maybe more specifically on margins.

Just given -- I think the exit of the year, they're 28.8%.

You've got the incremental investments, but then you also have the -- I think some dilution from the deal.

So what's the right way to think about Americas margins in '18 versus '17?

So I think the way to think about it is like the other regions of the globe on a base business, ex acquisition, continuous improvement.

Again, continue to get pretty good leverage and a pull-through margin on incremental volume, positive contribution on price cost inflation, et cetera.

But the margins on the acquisitions, good businesses, but the margin profile isn't at the 28.8% referenced.

And so you're looking at, when everything's said and done, kind of flattish to slightly up margins for 2018, all inclusive of the M&A activity.

Okay.

And that's just for Americas?

Yes.

Okay, great.

And maybe flipping over to the growth.

The 4% to 5% organically in Americas, what's the right cadence for the year?

I think you have a little bit -- the comps I think in the first half might be a little bit more difficult than the second half.

So maybe just level set us on the model around cadence of growth.

So you're right, very difficult comps in Q1, in particular.

So I would anticipate maybe the growth rates being slightly lower in Q1 this year relative to last year, but -- and slightly improving during the course of the year, not that big of a delta during the course of the year, but slightly not as high as what you would anticipate for the back half of the year.

And the next question comes from Josh Pokrzywinski with Wolfe research.

Just a follow-up, I guess, more broadly in some of the M&A announcements here recently, Dave.

I think when you first spun out, there is a bit of a push to get kind of focus more on the hardware, less on the door and the last few deals have certainly been specialty-type products that have included a bit more door-centric stuff.

Is this a change in philosophy?

Should we expect this to continue within some of these niches?

Or how do you view that assessment?

Because I know that was a big difference between yourselves and your largest competitor there initially.

So first of all, think about it as my own maturity in understanding the business.

We think we have a powerful asset in our spec writing capability.

And when we can come in and write a total turnkey spec, especially including specialty equipment and features, we think that's a good place to be.

We also need to look at the competitive landscape and clearly saw where we were disadvantaged, particularly around our steel door offerings with Steelcraft.

And for example, the Republic acquisition that we made last January gives us a better geographical capability to serve customers locally.

These businesses have laid adaptation capabilities, and it's really just thinking that through.

In the Middle East with QMI, we were actually winning jobs and shipping Steelcraft doors from Cincinnati, Ohio.

So it's just -- I think a refinement of our understanding of the market and the points in capital that we think helps our top line and bottom line growth.

Got you, that's good color.

And then on some of these labor shortages that were impacting last quarter, I mean, clearly, Americas volume growth accelerated.

I guess, I don't know exactly what price contributed, but probably not much compared to that, that bigger number in 3Q.

Is that a sign of some of those shortages working themselves out?

Or is it just, hey, in the fourth quarter, seasonally things are slow and there's a bit more slack in the system?

And maybe help us understand that dynamic a bit better.

So as we look back at in Q3, especially as we ended it, we saw an absence of flows through the supply chain.

As projects are pressured to complete on year-end, we saw that slack move through the system.

I think that's going to be something we're going to have to continue to navigate and be aware of as we go into '18 and '19.

I see labor constraints, it's well identified.

I mentioned the high backlog of construction orders put in place, and we think it will create chop in the market and demand as we go forward.

Now with that said, we're not -- we're looking at our value streams and say, how can we invest to better position the company, are there incentive structures that we can use to help move that through to get better and consistent flows.

We're working on it, but we don't have it all figured out.

Got you.

And then just one last one for Patrick.

If -- I apologize for doing this, you probably didn't mean for all of this deconstruction of what I'm about to do.

So organic or volume-based incremental margins, I think net of investment look like they're about 30% in the guide.

If price cost is positive, I think, on a volume-only basis, you'd probably somewhere in the mid-20s.

That seems conservative to me, but is there something on the mix front or something else that we should keep in mind as maybe being an irritant to that?

Again, like I think that's ex acquisitions or FX.

I think that's a pure number that I backed into.

Yes.

So mix, maybe a little bit more unfavorable given the growth in residential relative to the nonresidentials is weighing in on that contribution margin.

Other than that, there isn't really any other significant items that would be weighing down that margin percent.

And the next question comes from Julian Mitchell with Barclays.

Maybe just trying to stick to one question.

It was really on the electronics business.

I think you enjoyed mid-teens growth there in Q4.

Maybe give us an update on what proportion of your total revenue now is coming from electronics and also what you're expecting the growth to be in 2018 and whether you're broadly happy with your organic position, and they shouldn't be a need for a big M&A deal in that segment of the market for you.

Yes.

So again, really good growth in electronics portfolio across both nonresidential and residential products, really like what we're seeing there.

As you know, still low penetration, particularly in the residential markets, so a lot of room to continue to grow there.

The overall portfolio in electronics is mid-teens.

And as far as our global business, that varies a little bit by region.

But we expect the electronics to continue to outgrow the mechanical products, so that percentage will continue to increase.

And as we've talked about previously, good trend for Allegion, higher price points, similar margin profile means more EBIT dollars.

And we'll continue to drive that, particularly as we look to make investments, whether it be demand creation or new product development to ensure that we can be a leader as far as that development in electromechanical convergence.

And since that's all the time we have for questions at the present time, I would like to turn the call to Mike Wagnes for any closing comments.

Thanks, Keith.

We'd like to thank everyone for participating in today's call.

Please contact me for any further questions, and have a great day.

Thank you.

The conference is now concluded.

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