Q3 2019 Earnings Call

October 24, 2019

Good morning, and won't do Allegion Q3 earnings call.

Spends will be in listen only mode.

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After today's presentation, there will be an opportunity to ask questions to ask a question. Your press Star then one of your telephone keypad. Good try question. Please press Star then show.

Please note this event is being recorded.

And that will trickle over your host today like likeness, Vice President Investor Relations and Treasurer. Please go ahead Sir.

Thank you Keith.

Good morning, everyone welcome and thank you for joining us for allegiance third quarter 2019 earnings call.

On the call today, or 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 in the presentation, which we will refer to in today's call or available on our web site at Investor Dot Allegion dotcom.

This call will be reported an archived on our website.

Please go to slides number two and three.

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 most recent FCC filings for a description of some of the factors that may cause actual results to differ materially from our projections.

The company assumes no obligation to update these forward looking statements.

Today's presentation in commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.

David Patrick will now discuss our third quarter 2019 results, which will be followed by Q and a session.

For the Q and eight we ask each caller to limit themselves to one question in a one follow up and then reenter the queue.

We will do our best to get to everyone. Given the time allotted. Please go to slide number four and I'll turn the call over to Dave.

Thanks, Mike.

Good morning, Thank you for joining us today.

Allegion delivered great results in Q3, I'm extremely pleased with the revenue growth in operational performance, which has positioned us well to deliver on our 2019 commitments.

Topline revenue growth was strong in the third quarter, particularly in the Americas in EMEA regions.

In the Americas, both nonresidential and residential businesses saw high single digit growth.

In EMEA, we saw solid volume increases across most of the region.

The Americans delivered electronics growth of 10% in the quarter.

Which was a notable performance considering the challenging comparable from prior year, where we grew nearly 30%.

Strong market acceptance of our new highly rated swagger encode residential arc continues to be robust.

And help drive the electronics performance in the quarter.

We were the first major manufacturer to bring a smart way probably doubled to the market and it has a lot of momentum in the residential channel.

We believe our brands expanded product portfolio.

Nickel partnerships breadth of channel relationships, the large installed base provide us with a great opportunity to take advantage of the electronics market as it continues to evolve and grow.

Moving down the flight Allegion was able to drug price realization and productivity actions, which significantly outpaced inflation.

I'm proud of the performance as we saw substantial operating margin expansion up 220 basis points this quarter.

In the third quarter, we delivered robust adjusted EPS growth at nearly 20% driven primarily by operational performance, along with favorable share count and tax rate impact.

We are affirming the full year revenue outlook in which we continue to project total inorganic revenue growth between four and a half and 5.5%.

I'll speak to the individual regions outlooks later in the presentation.

Left we're tightening in the outlook for reported Vps going from arranger fourfifty to for 65 per share to revised outlook for 55 to 465 per share.

The adjusted EPS outlook is also being tightened by raising the low end of the ranch and going from 480 to 490 per share tour revised outlook of $404, an 85 cents to $4 a 90 cents per share.

Please go to slide five.

Revenue for the third quarter was 748 point Threemillion, an increase of 5.2% inclusive of 6.4% organic growth.

Currency headwinds offset some of the organic growth.

The Americas EMEA region were responsible for the organic growth results Patrick will share more detail on this.

Adjusted operating margin increased by 220 basis points aided by substantial contribution from price on productivity outpace inflation solid leverage on incremental volume also provide a benefit to the margin expansion.

Adjusted earnings per share of $1.47 increased by nearly 20% versus the prior year.

As mentioned the increase was driven primarily by operational performance, along with favorable share count and a lower tax rate.

Year to date available cash flows up slightly.

With the increased earnings we have experienced this year being mostly offset by increased capital expert expenditures.

Please go to slide six.

In March we shared our refreshed corporate strategy with you, which centers on our vision of seamless access.

Since that time momentum and market exception acceptance continues to build.

For instance, smartphones and connectivity our the norm this translates to pressure from our customers to meet end users the demand for a mobile connected why well ensuring security.

Allegion is well positioned to meet this demand.

We see strong uptake with are seeing with I'd solutions for universities in edge devices, and adoption of slug, encode and emerging and in emerging technologies and venturing opportunities.

We're confident in the long term electronic opportunity and see that seamless access and safety, we had solid foundation for our future.

As a reminder, our five strategic pillars that guide Allegion are expanding core markets.

We continue to broaden the core business through existing the new channel relationships digital demand creation and leading products.

Be the partner of choice delivering seamless access means were intent on leveraging partners and ecosystems to drive growth, which includes using open platforms that integrate well with others.

Deliver new value an access our innovation will focus on the user experience for access as well as working with partners to create unique solutions, the increased safety and speed up productivity.

We're also intent on bringing new products to market faster.

Capital allocation Allegion will continue to take a discipline and flexible approach to capital deployment, one that spans organic investments acquisitions and shareholder distributions to optimize shareholder returns.

Last enterprise excellence Allegion is committed to creating value through productivity through excellent customer experience and through a culture of safety health and employee engagement.

Access has been a part of the company's heritage for 100 years and seamless access will define our company going forward Patrick will now walk you through the financial results and I'll be back to discuss some 2019 outlook.

Thanks, David Good morning, everyone. Thank you for joining the call today. If you would please go to slide number seven.

This slide depicts the components of our revenue growth from a third quarter I'll focus on a total Legion results and cover the regions on their respective slots.

As indicated we delivered 6.4% organic growth in Q3.

We saw strong volumes and solid price realization drive the organic increase this quarter.

Led by both the Americas EMEA regions.

Volumes recovered nicely from Q2 levels as market demand was strong.

Also during the third quarter currency in EMEA and Asia Pacific continue to be a headwind on total revenue growth.

Please go to slide number eight.

Reported net revenues for the third quarter were 748.3 million.

As stated earlier this reflects an increase of 5.2% versus the prior year up 6.4% on an organic basis.

Adjusted operating income of 173 million increased more than 16% over the same timeframe last year.

Adjusted operating margin of 23.1% increased 220 basis points and represents our highest quarterly adjusted operating margins and spent.

Leverage on incremental volumes price realization and substantial productivity drove the operating income increased in margin expansion.

During the quarter all regions contributed sizable margin improvements.

And once the margin performance includes incremental investments, which had a 30 basis point impact on adjusted operating margins.

Please go to slide number nine.

This slide reflects our earnings per share reconciliation for the third quarter.

For the third quarter 2018 reported earnings per share was $1.21.

Adjusted to size for the prior year restructuring and acquisition charges as well as adjustments to provisions related to the enactment of tax reform. The Q3 2018 adjusted earnings per share was $1.23.

Operational results increased earnings per share by 24 cents as favorable price productivity and operating leverage on incremental volume.

More than offset inflationary impacts and unfavorable currency.

Favorable year over year share count drove another three cents increase as we have executed nearly 180 million share buyback so far this year.

A decrease in the year over year tax rate improved earnings per share by two cents.

The impact of incremental investments in the quarter was a two cents reduction.

The combination of interest expense other expense a non controlling interest had a negative reset impact.

Which was driven mostly by favorable other income in 2018.

This resulted in adjusted third quarter 2019 earnings per share $1.47, an increase of 24 cents were nearly 20% compared to the prior year period.

Lastly, we had a seven cents per share reduction for charges related to restructuring acquisitions and debt refinancing.

After giving effect to these onetime items you arrive at the third quarter 29 team reported earnings per share of $1.40.

Please go to slide number 10.

First quarter revenues for the Americas region were 567.8 million up 7.1% on a reported basis than 7.2% organically.

Organic growth was driven by strong volume along with continued price realization.

When compared to Q3 of last year, we experienced high single digit growth in both nonresidential and residential.

As non residential market demand remains strong and residential rebounded nicely from the sluggishness, we experienced in the first half of the year.

Electronics growth for the quarter came in at 10%.

As Dave mentioned earlier, we are pleased with this electronics performance given that the quarter was going up against a nearly 30% growth rate compared to last year.

Americas' adjusted operating income of 175.6 million increased 13.8% versus the prior year period, and adjusted operating margin for the quarter increased 180 basis points.

The increase in adjusted operating margin was driven by leverage on incremental volume along with pricing productivity significantly exceeding inflation.

Incremental investments, where a 50 basis point decrease on operating margins.

Please go to slide number 11.

Third quarter revenues for the EMEA region were 137.8 million up 2.5% and up 6.9% on organic basis.

Organic growth was driven by increased volume across most products along with solid price realization.

Total revenue growth continues to be reduced by significant currency headwinds.

EMEA adjusted operating income of 12 million increased 17.6% versus the prior year period.

Adjusted operating margin for the quarter increased a 110 basis points.

Price and leverage on incremental volume contributing to the increase.

Timing of year over year investments benefited operating margins by 80 basis points as startup costs incurred in 2018 related to our new Poland facility did not repeat this year.

Please go to slide number 12.

Third quarter revenues for Asia Pacific Region were 42.7 million down 9.1% versus the prior year organic revenue decreased 4.8%.

Ganic revenue decline was driven by softer residential markets in Australia, along with internal revenue transfer of 1.5 million to the other regions foreign currency was again, a significant headwind for the quarter, reducing revenue by more than 4%.

Asia Pacific adjusted operating income for the quarter was 4.4 million Ann Inc., an increase of 37.5%.

With adjusted operating margins, improving 350 basis points versus the prior year period.

The region saw strong productivity. The result of restructuring actions taken last year and acquisition integration, which offset the 70 basis point headwind from incremental investments.

No 2019 Q3 operating income includes a 1.1 million favorable recovery of previously remitted non income tax, which had a 260 basis point favorable impact on Asia Pacific margins in the quarter.

Please go to slide number 13.

Year to date available cash flow for the third quarter 29 team was 230 million, which is an increase of 1.4 million compared to the prior year period.

The increase is driven by increased net earnings mostly offset by increased capital spending.

Working capital as a percent of revenues increased in the third quarter and the cash conversion cycle was also slightly higher.

We continue to remain committed to an effective and efficient use of working capital and we will continue to evaluate opportunities both minimize investments in working capital and increase available cash flow.

Lastly, we are forming our full year available cash flow outlook range of $410 million to $430 million.

I'll now hand, the call back over to Dave for an update our full year 2019 outlook.

Thank you Patrick.

Please go to slide number 14.

The consolidated outlook for total and organic revenue remains at a range of four and a half the 5.5%.

Although we are adjusting within the regions.

In the Americas, we continue to see positive fundamentals in our nonresidential verticals led by institutional markets.

Which we believe we'll continue to remain remained solid for the near term future.

In residential we saw Q3 rebound from the sluggishness, we experienced during the first half for the year.

In addition, we expect the general positive trend for electronic products to continue for the foreseeable future and believe we are well positioned to take advantage of this long term trend.

Therefore, we are at a slightly increasing the revenue outlooks for Americas.

For the EMEA region, we expect continued currency pressures for the remainder of the year and have taken down our outlook for total revenue however, organic revenue remains unchanged.

In Asia Pacific, We expect the softness in the Australian markets to continue particularly around residential end markets.

We also expect unfavorable currency impacts to continue.

We are also updating earnings per share outlook, raising the low end to both our reported and adjusted EPS ranges.

Our reported EPS outlook is now at a range of $4.55 to Puerto alerts and 65 cents per share with adjusted EPS at a range of $4, an 85 cents two to $4 a 90 cents.

This represents adjusted EPS growth of approximately 8% to 9%.

As Patrick stated we are affirming our cash for outlook range of 400 tend to 430 million.

The outlook updates the expected investment spend to a range of 11 cents to 13 cents per share.

The full year adjusted effective tax rate is being updated to approximately 15.5% within favorability experienced in Q3, mostly offset in Q4.

In Q3, we delivered our highest quarterly revenue operating margin and earnings per share.

I was looking at future activity for bond issues.

Got you. Thank you.

Thank you and the next question comes from Julian Mitchell with Barclays.

Just wanted to ask about the residential business you did have a good acceleration there in the third quarter.

Whether you see that growth rate is sort of a blip because you were starting a bunch of initiatives.

I think if you compare our first half residential performance, which I believe was plus four was respectable in a soft patch in the market. We also had some self help there are correction that we're we're doing in the channel.

The market improved in Q3, that's reflective I think the best opportunities going forward in rose will be multifamily that continues strong.

I think.

Single family, which is important to us is going to continue to plod, along it's not getting significantly better you add electronics on top of that with some of our leading products are high star ratings, our connectivity and the first wildfire embedded lark I think.

It sets us up for continued solid performance in that segment.

Thanks, and then just my second quick one would be around the implied sort of operating margins in Q4.

We've had some questions. This morning around it it looks as if the implies a softer margin performance than what you saw in this quarter just based on the fully guide.

Just.

Maybe any comments you to ride on that fourth quarter margin trend year on year, any big headwinds or tailwinds you'd call out.

Well, let me first maybe comments on a little bit more specifics on Q3 operating margin performance. So as indicated really strong across the board all regions show in fairly significant margin improvement.

Inflation on you May recall last year was at a peak in Q3, and so the comparisons easier if you will and that gap was extremely favorable in the reported results in Q3. This year, we won't see that favorability as much reflected in Q4 and therefore.

Year over year with margins continue to expand and our full year expectation and again is like an 80 to 100 basis point margin improvement full year. So still anticipate strong operational performance in Q4 finish out here.

Hey, just one point of clarification, Julie Indeed, the number Dave quoted for residential that was year to date for for the resin growth.

Understood. Thanks, very much for the help.

Thank you and the next question comes from Diva Ragavan with Wells Fargo Securities.

Okay.

This is David your line is open.

Finally, it perhaps.

Hi, good morning, and congrats on another strong quarter.

Thank you.

Yes, I wonder if he has kind of entirely tried to reconcile some of the softer kind of data points versus what you are kind of seeing in your business and in terms of Nonres overall growth and just kind of curious what kind conclusion you might have.

Noise and.

I see a lot a positive out there.

Including the again I'll emphasize state and local tax revenues.

Then you've got a square that with what's the level of our backlog quote activities.

I would remind.

You, Josh that construction backlog still remain at over eight months that's healthy.

Inventories.

Historic low from my perspective, a four months.

And then.

Nothing really to read into that more but timing item.

When we look at the end markets. There are still many opportunities to continue to invest in our business, particularly route channels demand creation, new product development. This internet of things platform Connectivities seamless access there's there's a host of activities that we can continue to invest in that we.

We believe we'll continue to.

Accelerate our topline performance and so we'll continue to look at those opportunities and give you more specifics relative to 2020 going forward, but theres a lot of activity and things. We can continue to investors continue to drive our per business word.

Okay, great. Thank you for your time.

Thank you and the next question comes from John Walsh with Credit Suisse.

Hi, good morning.

Two questions.

A question really the pricing was was down but pretty much inline with our expectations of the teams across the board I would say, particularly in Americas in Europe continue to execute extremely well on price realization and capturing what they can.

I would say.

Has been robust over the last several years, it's hard to put up 30% growth.

Opportunities are also remains.

I think compelling if you remember at Investor Day, 40 billion openings in the world.

Now, let juice our approach to open protocols with.

Great appreciate it thank you.

The recent just next conference on less than a lot of time.

And going through.

Going through the way the company has potentially changing it.

Sales.

Im wondering if that.

The conversations you had with Brad I think number one partnerships is one of our strategic objectives here working with people.

Anytime you've got an industry like ours, that's got a mechanical heritage and we're introducing electronics and connectivity the high roll theres opportunity to differentiate ourselves and I'm confident Brad talked about this but it's really around customer satisfaction.

And partnering with tools like overture, making sure our connected devices install seamlessly on the on the customer campus or activity with the best products. This is this is our strategy.

And just as a follow on specific.

A follow up to that.

And in in only going to market.

Hi, you'd been able to use.

You are open.

Mark stance.

Compared to basically compared to your major competitor.

Being able to.

Develop.

The partnerships you were talking about.

Indeed, being able to convince people more and more people to use sure people as you do have an open system are you finding that there's any resistance to that.

Does that open system.

That does that open system allow you to be able to talk to the.

A little bit easier.

I believe.

Our position in strategy to be open gives us an advantage.

It's also key that we're flexible there will have customers that want control. They want close systems, and it's really haven't that flexibility with our customers that were not going to drive one connected strategy that we leave that to the customer.

Things like identity.

Okay. Thanks identity, I think is probably going to be step money next steps going forward and aligned.

Yes.

So as indicated our effective tax rate for Q3.

So I came in better than anticipated that turns negative on us in Q4. So that you have a much higher tax rate in Q4 relative to the year to date tax rate, which today stands a little bit south of 15%. So with the full year 15, five you can kind of work the math and so that's going to be a pretty.

Big headwind for year over year comparability in Q4.

Got it my final one sorry, so what anomalies identified yes people were going to ask you to get back in queue, we have to get to other call that no. One is thank you yes. Thanks, so much yet.

Thank you.

And at this time I would like George on the Florida, Mike Wagnes for any closing comments.

Sorry, it was only like deep as she is the last question logic Faraway Deepa. Okay. Just wondering what I'd, let me regulator line plus.

Hey.

I can you hear me.

Hi can you hear me.

Sorry about that yes, no noise.

No just just one on pricing yet I mean pretty strong pricing trends I think they've got asked.

Couple of different ways already but what's a normalized price range do I start new do we start to begin like more 1% to 2% price range going forward and I'd just seems like pricing is at this point in time, a little peakish.

You may have the commodity tailwinds and everything but.

It just given how do we think about it in a normalized.

1%.

Maybe a little bit or for that but that would be kind of a normalized type level.

I would also say.

We'll continue to push allegiance it'd be disciplined and pricing, we're seeing wage inflation I think it's important that our team think about those pressures and make sure that we're responsible.

And going out of there are winning our business driving strong productivity equations and.

Continuing to make sure that were compensated for the value that we create I think with our customer relationship.

Got it thank you so much.

Thank you.

I would like Georgia, and Florida, Michael I guess for any closing comments place we want to thank everyone for participating in today's call. Please contact me for any further questions and have a great day.

Yeah.

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