Q4 2019 Earnings Call

David Patrick will now discuss our fourth-quarter and full-year 2019 results and provide an outlook for 2020, which will be followed by a Q&A session for the Q&A would like to ask each caller to limit themselves to one question and one follow-up and then re-enter the Q we will do our best to get to everyone given the time allotted. Please go to slide number for and I'll turn off all over to Dave. Thanks Mike. Good morning. And thank you for joining us today are legion experienced modest top-line Revenue growth in the fourth quarter with strep in the Americas offset by weakness in Europe and asia-pacific.

The Americas region had reported in organic growth of 6.8% in the quarter driven by both the non-residential and residential businesses.

The me Regents are markets often and the complexity of moving our operations from Turkey to Poland negatively impacted the top line as well as operating income.

The level of effort in the executing to move like this cannot be underestimated why we did experience some impact from the transition. We are better positioned after leaving a turkey asia-pacific continue to experience weak markets in Australia and saw deteriorating deteriorating markets in China.

Electronics group in the Americas came in just over 12% in the quarter and increased over 10% for the full year. We continue to see Electronics as a long-term positive trend off as more and more products become connected for ease of access.

They look up to our end markets us non-residential remains healthy and US residential has improved as I mentioned in the asia-pacific are experiencing weaknesses and the markets they serve and we see that continuing in the near-term.

Adjusted operating margin for up 30 basis points in the quarter and 70 basis points for the full-year margin expansion was led by the Americas region which saw full just stood margin top 120 basis points.

Volume leverage was good during the year and the price productivity inflation Dynamic was positive.

In the fourth quarter adjusted EPS growth came in and nearly 5% bringing the full-year increased to approximately 9% available cash flow was up nearly $14 off the 202. 422.6 million for the year.

Overall, I'm pleased with our full year 2019 results.

We saw a good Revenue performance expanded adjusted operating margins delivered solid adjusted EPS growth in generated substantial available cash flow.

Please go to sleep five going to walk you through the fourth quarter Financial summary.

Revenue for the fourth quarter with 719.5 million an increase of 2.4% inclusive of 3.5% organic growth.

Currency headwinds and the impact of the divestiture of our business and turkey offset some of the organic growth.

America's led the way on Revenue growth offsetting the weakness we experience and annia and asia-pacific Patrick will share more detail in the regions and a moment.

Adjusted operating margin increased by Thirty basis points in the fourth quarter as we saw a significant margin expansion in the Americas with declines in Europe and Asia adjustment for sure of a dollar Twenty Eight increased $0.06 or nearly 5% versus the prior-year the increase was driven primarily by higher operating income.

favorable sure account and interest expense offset the unfavorable year-over-year tax rate increase

available

Cash flow for the year came in at four hundred twenty two point six million an increase of nearly fourteen million versus prior year increased adjusted earnings and Improvement in network and capital where the driving factors were the increase.

Please go to slide six.

This year we're recognizing slag for its past present and future innovation.

2020 marks the hundredth anniversary of the brand and we're proud to celebrate this milestone in various ways that support the business and engage the customer non-residential and residential audiences.

As a legacy brand with a rich history, there is no doubt that Schlage is an important part of the Legion story.

Schlage has been providing security style and peace of mind for the last one hundred years.

From the first push button lock Pioneer by Walter second. Nineteen twenty-two the high-tech Global Solutions of today are trusted Brands passion 4 door hardware is rooted in security and strategic intervention.

Do you mean recall we saw a strong Market acceptance of the Schlage in code residential block after it was introduced in 2019, especially because we were the first major manufacturer to bring a Smart Wi-Fi deadbolt to the market.

Why year is in the sling in code was recognized as the Best in Class product by consumer Tech influencers at CNET Digital Trends and Consumer Reports among others. Just last month was named the best smart door lock to keep Intruders up highlighting. The Peace of Mind Schlage is known to bring to homeowners across the globe.

And it's not only and it's not the only one driving recognition. This leg Suite of products are Schlage sense and should connect also continue to receive accolades and the smart homework as the best Smart Lock can buy and the best tech gifts collectively these smart locks along with Schlage and code had been recognized by Tech experts as the best to work with Amazon Alexa Apple and Google home at the power for Brent. We expect Schlage will continue to set the bar poor customer experience in our industry and redefine. What's possible with Security Solutions for seamless access. Please go to slide seven.

Last month we announced our business.

Strategy centred on seamless access at a safer World Allegiant has a strong internal Innovation engines creating award winning products. Like the one you just saw as well as over to your specification work for flow and next-generation products like the Slyman's Voss more handle a x

As we look to the future we see the opportunity for technology to drive progress in seamless access when I'd like to highlight today is Edge Computing. We may delete forward and edged choices with the acquisition of by sonus. It was a good technology move and through Allegiant Ventures were investing in companies that approach authentication and people blow a new ways companies like ten drops Robin and open pap. I'm excited to see the ways we can create new value and access by tearing each leg products and the data and analog capabilities of a company like open path.

You'll see us.

Continue to look for opportunities to invest partner and drive progress through internal and external Innovation that aligns with our strategic pillars be the partner of choice. I bought a new value in Access smart Capital allocation expand in our core markets and focus on Enterprise Excellence access has been a part of the company Heritage for more than a hundred 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 our full-year 2020 Outlook.

Thanks and good morning everyone. Thank you for joining. Today's call. Please go to slide number eight.

The slide depicts the components of our Revenue growth for the fourth quarter as well as a full year of 2019.

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

As indicated we deliver 3.5% organic growth in the fourth quarter overall. We saw solid volume and price realization led by the Americas region price continue to remain strong particularly in the Americas non-residential business.

Impact of the divestiture of our business and turkey along with continued currency pressure in a Mia in asia-pacific. We're a headwind a total growth.

With the fourth quarter performance, you can see where we ended up for the full year on Revenue growth total top line revenue Saint increase of 4.5% for the year in organic growth came in at 5.6% led by America's at more than 6% has indicated America's organic growth in the fourth quarter was higher than the full-year results Mia and asia-pacific are weaker. Please go to slide number nine.

Report in that revenues for the fourth quarter or seven hundred nineteen point five million as stated earlier this reflects an increase of 2.4% versus the prior-year up 6.5% on an organic basis adjusted operating income of $151 million increase 4% over the same time frame from last year adjusted operating margin of 21% Increase Thirty basis points. The margin expansion was primarily driven by solid operating leverage on incremental volumes in the Americas along with pricing and productivity outpacing inflation.

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The margin performance include incremental Investments which had a 30 basis-point impact on adjusted operating margins for the full year the company experienced adjusted operating margin expansion of 70 basis points. Please go to slide number ten.

The slide reflects our earnings-per-share reconciliation for the fourth quarter for the fourth quarter of 2018 reported earnings per share was a dollar thirty-nine Cent adjusting $0.17 for the prior-year received expenses integration costs related Acquisitions and benefits related tax reform. The 2018 adjusted earnings-per-share was a dollar twenty two.

Operation results increase earnings per share by 8 cents is favorable price operating leverage on incremental volume and productivity more than offset inflationary impacts and unfavorable currency.

Favorable year-over-year share count drove another $0.03 increase reflective of the $226 million share buyback that occurred during 2019.

A pack of incremental investments in the quarter was a $0.02 reduction and unfavorable year-over-year tax rate drove another negative $0.03 per share impact.

This results in adjusted fourth quarter 2019 earnings per share of a dollar $28 an increase of $0.06 or nearly 5% compared to the prior-year.

Lastly we have a $0.42 per share reduction for charges related to restructuring trade name and pyramids as well as loss on divestitures and turkey and Columbia.

The loss of the best archers was predominantly associated with non cash currency translation adjustments previously deferred an equity and reclassified into earnings upon the sale of the divested business after giving effect to these one-time items you arrive in fourth quarter 2019 reported earnings per share of $0.86.

Please go to slide number 11.

Fourth quarter revenues for the Americas region were 526.3 million up 6.8% on both the reported and organic basis the growth was driven by strong price realization and volume both the non-residential and residential businesses grew nicely and it's similar levels to each other the residential business had strong growth quarter attributed to new products and increase sales in the Builder Channel.

Electronics

Quote for the quarter was just over 12% and was sequentially higher than the prior quarter as Dave mentioned earlier the full-year electronics growth in the Americas was solid at just over 10% off Electronics products continued to be a long-term growth driver as consumers and end-users migrate to electronics from solely mechanical products is a value connectivity and convenience.

America's adjusted operating income of 153.9 million increased 16.8% versus the prior year. And adjusted operating margin for the quarter increased to 6:40 basis points strong volume leverage along with price and productivity significantly exceeding inflation drove. The substantial margin expansion incremental wage base is decreasing margins.

With the outstanding Q4 performance full year just operating margins and America's were up 120 basis points.

Please go to slide number 12.

Fourth quarter revenues for the immediate region were 149.6 million down 5% in down 1.5% on an organic basis. The lower volume was driven by we came in markets across the region the impact of the divestiture of the business and turkey and currency headwinds also contributed to the revenue declined Ami adjusted operating in off of 16.7 million decreased 25.8% versus the prior-year. Adjusted operating margin for the quarter decreased by disappointing 310 basis points off during the quarter inflation, exceeded Price Plus productivity and currency headwinds continue to be a drag on margins in addition. Revenue declines also had a negative impact on operating margins.

The plant relocation from Turkey related to the divestiture of that business drove additional costs and the quarter the magnitude of the move while anticipated resulted in some operational efficiencies that are likely to continue in the near-term future but are also expected to be resolved as we progress in twenty-twenty. These types of moves are extremely complex know we did experience increased costs. We are better positioned being out of turkey in the long line with a drag of the Q4 performance full year adjusted operating margins were down ten basis points in the region.

Please go to slide number 13.

Fourth quarter revenues for the asia-pacific region were 43.6 million down 16.6% versus the prior-year organic Revenue was down 13.4% off. The decline was driven by continued weakness in Australian and markets particular on the residential side as well as declines experience in China, attributable two weeks and markets total revenue continue to be affected by currency headwinds asia-pacific adjusted operating income for the quarter was one point nine million a decrease of 4.6 million was adjusted operating margins down eight hundred basis points versus the prior-year. Approximately 1 million of income declined was attributable to inflation exceeding Price Plus productivity.

Significant volume declines and unfavorable mix had a large impact on the reduced income and margin.

We have initiated restructuring actions to lower the cost base and accelerate integration of the gwa business. These actions will better position us to address the market challenges in the region.

4 year

Adjusted operating margins for asia-pacific were down 180 basis points in 2019.

Please go to slide number 14.

Available cash flow for 2019 came in at 422.6 million, which is an increase of 13.9 million compared to the prior-year.

The increase was driven by higher adjusted net earnings and improvements and net working capital partially offset by increases in restructuring span and capital expenditures.

Looking at the chart at the bottom of the slide. It shows working capital as a percent of revenues increased based on a 4.0 average. However, the year-end working capital 2% of Revenue was down at the end of 2019 compared to the same point in time last year. As always. We remain committed to an effective and efficient use of working capital. We will continue to evaluate opportunities increase available cash flow and minimize Investments and working-capital increasing the velocity of asset turnover now now hand it back over today for a view on our full-year 2015 Saturn, please go to slide 215.

We continue to see favorable Trends in our Primary end-markets in 2020.

We also believe growth in the electronics portfolio will continue 8 outpaced mechanical in all regions and we are well-positioned to continue to take advantage of this industry Trend in the Americas. We see continued positive fundamentals in our non-residential verticals.

The residential end markets have rebounded and improved we expect the general Trend towards electronic products in both residential and non-residential businesses continue with these expectations. We project organic Revenue growth in the Americas a 4 and 1/2 to 5 and half percent.

We are projecting America's total revenue expansion to be four to five percent with a slight impact from investing our business in Colombia.

In Europe markets had softened in Germany and southern Europe and remained week in the UK for the region. We project total and organic growth to be 1.5 to 2.5% led by our assignments boss and interflex businesses.

In asia-pacific, we expect weakness in the Australian markets to continue particularly in residential the market in China has also softened.

With that backdrop, we expect growth in the region to be flat both on a reported an organic basis with declines expected in the first half of the year and modest recovery in the second half on easier comparisons call in we're projecting total revenue growth for the company at a range of three to four percent with Organic growth between 3.5 and 4.5%

Please go to slide 16.

Our 2020 outlook for adjusted earnings-per-share is $5 and 10 to $5.20 an increase of approximately 46% as indicated. The early the increase is driven by Revenue growth and operational improvements as adjusted operating earnings are expected to increase 6 to 8 % our Outlook anticipated anticipates continued by and leveraging any positive equation for Price productivity and inflation. We also expect margin accretion in our region for the full year, but continued presser in the first month's premium and asia-pacific.

Incremental Investments continue to be a headwind as we remain focused on accelerating new product development and channel initiatives which we believe enable us to keep delivering above market growth and allows us to take advantage of the shifting customer preferences for electronic products.

The combination of interest and other expenses expected to be a slight positive to earnings per share. Our Outlook assumes a full year adjusted effective tax rate of approximately 16.5 to 17% and increase from 14.3% in 2019. It also assumes outstanding weighted average diluted shares of approximately 93 million.

The Outlook additionally includes a $0.10 per share impact from restructuring charges during the year as a result reported EPS is estimated at $5. $5.10. We are projecting our available cash flow for 20 20 to be in the $450 to $470 million range.

please

Go to slide 17.

We're pleased with our 2019 performance with saw top-line growth that delivered organic Revenue expansion of 4.6% adjusted operating margins up 70 basis points adjusted EPS growth of nearly 9% in strong available cash flow.

It's not highlighted on this slide. We strengthen the foundational elements of Allegiance culture that will help Drive our success as a company into this new decade off safety and sustainability and engagement in 2019. We were safer reducing workplace accidents and their cost which were already down below the industry average. We were cleaner reducing energy inputs and waste outputs and we were significantly more engaged meaning our Global employees are more committed to our vision and our work than ever before.

Cuz we looked at.

Twenty-twenty and renew our commitment to safety sustainability engagement. We are well-positioned to drive continued growth in revenue and earnings.

We also expect to deliver solid growth and adjusted earnings per share in generates substantial available cash flow.

Before we take questions. I'd like to take a moment to share some news with regard to the organization changes here at Allegiant. Mike wagness will be assuming a general role within the Americas business. Mike has been Treasurer and head of investor relations since the summer of 2016 since that time Mike has served as a valuable choice for the shareholder Community among the leadership team.

As we move forward Tom Martin a vice president Finance for the entire region will assume the vice president Treasurer and investor relations role. Many of you are familiar with Tom and know that he brings a wealth of financial experience and knowledge that will position him. Well as Allegiance primary representative to the investment Community. I'd like to congratulate with my concern on their new opportunities. This transition has been completed and you can begin contacting time for any investor related questions. Want to go for a walk in basis now Patrick, and I will be happy to take your questions. Thank you. We will now begin the question-and-answer session to ask the question then one on your touchtone know if you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two, please limit yourself to one question and one phone number.

If you have additional questions, please reenter the queue.

At this time, we will pause momentarily to assemble our roster.

The first question today will come from Julian Mitchell with Barclays, please go ahead.

Hi, good morning. And thanks Mike for all the help and the last few years. Just wanted to follow up on the comments around 5 the first half softness particularly the international regions. She just wondered if you could put a finer point on what that means for the earnings Cadence Through The Years where you don't guide quarterly, but I guess in recent years. The first half has been around forty-five 46% of full-year earnings. Do you expect a similar ratio this year? Is it more back-end loaded?

You know, I I would say a similar ratio with just is we kind of highlighted some continued pressure particularly as it relates to the international regions with the sauce in the market trying to recover some of the margin deterioration. We experienced in Q4, you know, America's business, you know will continue to cut up with the same seasonality of the business from a revenue perspective as you guys know, you know stronger Q2 Q3, but overall, you know similar type of profile but but weakness in the international areas.

Thank you. Then on the point. You just made you mentioned in a pack the restructuring initiatives something we can understand what's happening there. Maybe just within the mayor region office understands. You know, how much of a surprise it was that inflation exceeded Price Plus productivity in Q4 and maybe what are the measures if any Beyond wage the turkey plant relocation that you're implementing in the Emir region to turn that business around.

Yeah, so if we look at the European business, you know from a margin perspective in Q4, you know, I'd say disappointing operational performance package really driven from weakness in in the end markets particularly in Germany, UK, you know, we saw some softness and and Germany's you know is is a real strong point for our business office particular the electronic side with higher-margin profile. So we had somewhat of an unfavorable mix as well that that negatively affected us and then you throw on top of that summer in efficiencies with moving the plant from Turkey to Poland and just trying to work through that, you know both from an operational perspective as well as supply chain, you know third-party providers we will work through that and it's going to take some time but there's going to be some, you know kind of continued pressure on that. So we'll we'll continue to work through that dog.

forward your question relative to actions, you know, we will

Can you to evaluate our business and size it accordingly to market demand, but that's just the kind of a continuation of what we're going to do to to operate the business. So long will be some activity there to recover margins particularly in in the back half of the year.

Great. Thank you.

Next question comes from Jos tan with bared, please. Go ahead. Good morning and congrats Mike on the new role. Thanks Josh. It's first come back on the Americas just on your organic guidance for 2020. Looks like the growth is slightly lower than the 2019 growth. But is that mainly due to the price maybe not being up as much money and then pretty steady volume type of growth Outlook. Just wondering how you're feeling about the decadence of growth in the Americas. So so feel really good wage particularly on the performance and then Q4, you know, they put up another strong grow organic grow 6.8% So I think we're entering twenty-twenty in good shape, you know, all the indications, you know, is Dave highlighted in markets continue to remain strong particular in the institutional segment, which you know favors our business. Well as we look into 2020

It's I think more.

What you highlighted not as strong of a price profile for a 2020 Outlook will continue to drive it but you know from a material input cost, you know, in a deflation are environment probably won't get as much price in twenty20s what you saw in 2019, but we'll continue to work that but you know, I would say hey 5% organic growth midpoint of guidance is still strong. It's just you also have tougher cops in the back half of the year. And so maybe a little conservative down there but feel good about where we're entering twenty-twenty, you know basis of the markets and and how we're performing.

It's that's that's definitely a solid growth there. And my my follow-up is on the Amia region. You mentioned that the transition from Turkey kind of impact that you in in a month or just wondering you know, how much of the demand weakness was because of some of that transition and and how much of that would you say. It was was the End Market in the corner.

so

Good morning, Josh. I would number one European in markets definitely softened. I think if you look at Industrials and automotives, which were particularly something wrong with that still that softened our Electronics businesses and then I'd say General decline in our mechanical side of a regional weakness. UK Italy, uh and others so clear Market weakness second is the move from from Turkey to Poland a good productivity play for us over the long term, but we moved a lot of jobs a lot of tools change of the supply base, uh home and that's certainly ugly impacted, you know, our ability to serve our customers and drove inefficiency. Yeah, I think as you think about 20-25

get better every month, but

We're talking, you know, almost a hundred and forty new new roles in Poland good productivity inside that but as an old manufacturing guy who will get better, you know, week-to-week month-to-month and I think have this operation in pretty good order by mid-year.

All right. Thanks, Dave. Thanks Patrick in 2020. Thank you.

The next question comes from Andrew open with Bank of America, please. Go ahead. Good morning gentlemen.

Andrew hey, Mike congrats and Tom. Are you sure you want back? So my thanks for all the help and Tom look forward to working with you again, So a couple of questions first in terms of your on the electronics died. Do you guys have you know, we've heard some concerns about second and third-tier suppliers. How comfortable you guys with your supplier and for the electronic components for the lock business, you know going into first and second quarter given what's happening in China.

so

We have an outstanding Supply team team here, you know, they've been working, you know with the events in China and the coronavirus I would say this Andrew every week that China stays shut down. It will put pressure on our supply chain. Remember we typically produce in region, but we still do a lot of sourcing out of China probably more concerned about second-tier suppliers, you know providers that could Supply subcomponents to final borders, so we're well out in front.