Q2 2019 Earnings Call
Hello, and welcome to the Allegion Q2 earnings call.
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I would now it's kinda conference over to your host today, Mike My guess, that's where I guess please go ahead.
Thank you Keith.
Good morning, everyone welcome and thank you for joining us for Allegion second quarter 2019 earnings call.
On the call 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 referred to in today's call.
Are available on our website at Investor Dot Allegion dotcom.
This call will be recorded and archived on our website.
Please go to slide 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 SEC 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 and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.
Dave and Patrick will now discuss our second quarter 2019 results, which will be followed by a Q and a session.
For the Q and eight we ask each caller to limit themselves to one question and 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 four ill turn the call over to Dave.
Thanks, Mike.
Good morning, and thank you for joining us today.
We had modest topline revenue growth in the second quarter, and we saw strength in our Americas non residential business.
Our residential business in the Americas was flat driven by challenging new construction markets.
We also experienced currency pressures in our European and Asian businesses.
Although our Americas business growth was lower sequentially in the second quarter overall growth in the first half of the year was strong at 5.7%.
As we look to the remainder of the year, we continue to see healthy end markets in our non residential business.
Particularly in institutional verticals.
We believe we are positioned well to take advantage of these healthy markets in the second half of 2019.
We also expect that residential markets should start to improve versus what we was what we have seen in the first half of the year.
America's Electronics growth was approximately 9% for the quarter, which was slightly lower than our historical growth rates.
Our electronic growth for the quarter was negatively impacted by a slower than expected ramp up in the new residential construction market and focus channel actions that we started in Q1 to drive more consistency and better alignment with our existing partners.
We believe that with these efforts now complete we are positioned nicely and expect to accelerate electrons electronics growth during the remainder of the year.
This is further supported by the healthy demand for the recently launched Schlage encode residential lock renewed efforts with existing partners and the benefit of new partners, including Lennar.
Allegiance combination of brands expanded product portfolio technical partnerships breadth of channel relationships and a large installed base provide us a great opportunity to take advantage of the electronics market as it as it continues to evolve and grow.
Moving down to slide Allegion was able to drive price realization and productivity actions, which more than offset the inflationary pressures we experienced.
I am pleased with the performance as we saw operating margin increase again this quarter.
During the quarter the company closed as production facility in Turkey.
Some products, formerly produced at this site for brands in the EMEA region are in the process of being transferred to other manufacturing locations in Europe .
We continuously look for ways to improve allegion supply chewed.
This action will help us to streamline our operational footprint in Europe .
Which is necessary to maintain sustainable and profitable long term growth in the region.
It's also a normal part of our enterprise excellence strategy focused on driving cost competitive positions in all elements of our supply chain.
In the second quarter, we delivered a slight increase in adjusted EPS, driven primarily from operations, which was offset by unfavorable comparables in other income.
And the tax rate.
We are having the full year revenue outlook.
We are now projecting total inorganic revenue growth between four and a half and 5.5%.
I'll speak to the individual regions later in the presentation.
Lastly, we are lowering the outlook for reported EPS to a range of $4.50 to $4.65 per share down from $4.60 to $4.75, reflecting the impact of the exiting of the Turkey operations.
We're also tightening the range and raising the midpoint for 2019 adjusted EPS outlook from a range of 475 to 490 per share to revise the outlook of $4.80 to $4.90 per share.
Please go to slide five and I'll walk you through the second quarter financial summary.
Revenue for the second quarter was $731.2 million, an increase of 3.8% inclusive of 3% organic growth.
Acquisitions contributed to the topline revenue expansion offsetting the unfavorable currency impact.
America's organic growth came in at 3.3% in the quarter driven by strong price realization.
The EMEA region saw modest organic growth and Asia Pacific total revenue was boosted by the Gainsborough acquisition completed last year.
Adjusted operating margin increased by 20 basis points, aided by price and productivity, which more than offset inflation.
The businesses continue to focus on driving price realization and productivity savings to combat inflationary pressures.
Adjusted earnings per share of $1.26 increased by a penny versus the prior year.
As mentioned the increase was.
Driven primarily by operational performance offset by unfavorable comparables in other income and the tax rate.
Year to date available cash flow is down approximately 20 million. The decrease in cash is related to increased capital expenditures and increased working capital to build inventory in advance of the Turkey plant closure.
Please go to slide six.
In March we shared our refreshed corporate strategy with you and we touched on it again in our first quarter call.
We've chosen to a group.
Included again this quarter to highlight our belief that the five strategic pillars that Allegion has laid out are the foundation of our future.
The pillars that guide Allegion are expanding core markets, we continue to broaden the core business to existing and new channel relationships digital demand creation and leading products.
BP the partner of choice delivering seamless access means we're intent on looking beyond our walls and leveraging our partners and ecosystems to drive growth, which includes using open platforms to integrate well with others.
Delivering new value and access our innovation will focus on the user experience for access as well as working with partners to create unique solutions that increase safety.
And speed up productivity, we're also intent on bringing new products to market faster.
Capital allocation Allegion will continue to take a disciplined 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 our company's history from a 100 100 years and seamless access will define our company going forward.
Please go to slide seven.
With this continued focus on Allegion strategic pillars that support our vision and growth strategy. We're excited about the partnership opportunities for the connected home.
To us this means being recognized as experts with innovative products and open standards ultimately, allowing for seamless integration with best in class players.
You might remember from our Investor day event that we showcased a variety of our partners for the us residential market.
Again highlighted on this slide our strong presence with retailers ecommerce and homebuilders position us well in the connected home space.
Schlag encode our first ever Wi Fi enabled Devo is providing is proving to be an essential part of our portfolio and working with our partners.
She leg encode was launched in late Q1 works directly with the key by Amazon App and ring devices and is a market leading part of this leg home experience.
It will also be part of the low NRE standard home automation offering.
Our work with these partners through innovations like slow again code is a Prime example of how we will increase electronic adoptions in the residential market space.
In addition to accelerating electronic adoptions strategic partnerships will continue to help drive our vision of seamless access and a safer world.
Patrick will now take you through the financial results and I'll be back to discuss the full year 2019 outlook.
Thanks, Dave and good morning, everyone. Thank you for joining the call today.
Please go to slide number eight.
This slide depicts the components of our revenue growth for the second quarter I'll focus on the total lesion results and cover the regions on their respective slides.
As indicated we delivered 3% organic growth in the second quarter strong price realization of 2.2% drove the organic increase this quarter.
The company will continue to take necessary pricing actions to help mitigate the impact of inflationary pressures moving forward.
Also during the second quarter acquisitions contributed more than 2% growth offsetting the substantial currency headwinds, we experienced in both EMEA and Asia Pacific regions.
Please go to slide number nine.
Reported net revenues for the second quarter was 731.2 million.
As stated earlier this reflects an increase of 3.8% versus the prior year.
Up 3% on an organic basis.
Adjusted operating income of $157.3 million increased nearly 5% over the same timeframe last year.
Adjusted operating margin of 21.5% increased 20 basis points.
Price realization and productivity actions outpaced inflation, which contributed to the operating income increase.
Leverage on the incremental volume also contributed to the margin expansion.
Headwinds to margin performance included incremental investments, which had a 70 basis point impact on adjusted operating margins and regional mix driven by acquisitions.
Please go to slide number 10.
This slide reflects our earnings per share a reconciliation for the second quarter.
For the second quarter 2018 reported earnings per share was $1.19.
Adjusting six cents for the prior year restructuring expenses and costs related to acquisitions. The Q2 2018 adjusted earnings per share was $1.25.
Operational results increased earnings per share by 10 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 one cents increase as we executed nearly $70 million and share buyback in the quarter.
The combination of interest expense other expense and non controlling interest for only two cent reduction, which was mostly impacted by favorable other income in 2018 that did not repeat.
A year over year increase in the tax rate had a four cents unfavorable impact primarily driven by the unfavorable mix of income earned in higher tax rate jurisdictions.
The impact of incremental investments in the quarter was a four cent reduction.
These incremental investments are for new product development channel strategies and demand creation spending.
This resulted in adjusted second quarter 2019 earnings per share of $1.26, an increase of one cents compared to the prior year.
Lastly, we had a 10 cents per share reduction for charges related to restructuring and acquisitions.
After giving effect to these one time items you arrive at the second quarter 2019 reported earnings per share of $1.16.
Please go to slide number 11.
Second quarter revenues for the Americas region were 545.1 million up 3.5% on a reported basis and 3.3% organically.
The organic growth was driven by strong price realization of 2.5%.
When compared to Q2 last year, we experienced mid single digit growth in the non residential business.
And residential was essentially flat.
Electronics growth still exceeded total growth in the Americas region coming in at approximately 9%.
On a year to date basis, the Americas as deliver total growth of 5.7%.
In organic growth of 5.3%.
Americas adjusted operating income of 162.4 million increased 4.2% versus the prior year period, and adjusted operating margin for the quarter increased 20 basis points.
The increase in adjusted operating margin was driven primarily by price and productivity exceeding inflation.
Additionally, leverage on the incremental volume contributed to the increase.
Inflationary pressures are expected to ease during the second half of 2019.
Combined with our pipeline of productivity actions this should position us for increased margin expansion throughout the remainder of the year.
Incremental investments were 60 basis point decrease on operating margins.
Please go to slide number 12.
Second quarter revenues from the EMEA region were 142.2 million down, 3.8% and up 1.7% on an organic basis. The organic growth was driven primarily by pricing and favorable volume in our portable security Simon Boston Interflex businesses.
Offsetting weakness in southern Europe .
Total revenue growth was reduced by significant currency headwinds.
As Dave mentioned earlier in the call during the quarter, we close our manufacturing operations in Turkey.
There was minimal impact to revenue and adjusted operating income in the quarter.
Dave will discuss the full year impacts related to this closure when that when he discusses the outlook later in the call.
EMEA adjusted operating income of $11.4 million decreased 5.8% versus the prior year period.
Adjusted operating margin for the quarter decreased 20 basis points, excluding currency impacts the region would have seen a 10 basis point increase in margins driven by price and productivity exceeding inflation.
Incremental investments were 60 basis point headwind to operating margin.
Please go to slide number 13.
Second quarter revenues for the Asia Pacific region were 43.9 million up 45.8% versus the prior year.
Organic revenue increased 4.7%.
Total revenue growth was driven by the gains were acquisition, which increased revenues in the region by more than 47%.
Foreign currency was a significant headwind for the quarter, reducing revenue by more than 6%.
Asia Pacific adjusted operating income for the quarter was $1.8 million, an increase of $1 million with adjusted operating margins, improving 140 basis points versus the prior year period.
Similar to the other regions the price productivity and inflation dynamic was positive in the region.
Incremental investments were 120 basis point decline on adjusted operating margins.
We are pleased with the continued progress in the Asia Pacific region, as us strategy and restructuring initiatives begin to drive operational improvements.
Please go to slide number 14.
Year to date available cash flow for the second quarter 2019 was $77.7 million, which is a decrease of $20.1 million compared to the prior year period. The decrease was driven by increased capital spending and higher working capital requirements to build inventory in advance of the Turkey plant closure.
Working capital as a percent of revenues increased slightly in the second 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'll continue to evaluate opportunities to both minimize investments in working capital and increase available cash flow.
Lastly, we are updating our full year available cash flow outlook for Ranger for $10 million to $430 million reduction from the prior outlook is inclusive of the closure of operations in Turkey.
I'll now hand, the call back over to Dave for an update on our full year 2009 team outlook.
Thank you Patrick.
Please go to slide 15.
As can be seen on this slide and was mentioned earlier, we are updating our revenue outlook.
The consolidated outlook for total and organic revenue is now at a range of 4.5% to 5.5%.
In the Americas, we see continued positive fundamentals in our nonresidential verticals led by institutional markets, which we believe will remain strong throughout 2019.
In residential we expect markets to improve versus what we experienced in the first half of 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.
For the European region, we expect continued strength in our electronics business led by Simon's Vos and inner flux.
We expect this will more than offset weaknesses, we are experiencing in southern Europe , leading to positive organic growth for the region.
However, total revenue will be negatively impacted by currency headwinds.
In addition, we have reduced our revenue outlook for in the EMEA region to account for the impacts of our decision to exit operations in Turkey.
In Asia Pacific, We continue to see healthy growth in China with softening markets in Australia, and New Zealand, particularly around residential end markets.
The total revenue outlook reflects the full year impact of the Gainsborough acquisition, which passed its one year anniversary on June Thirtyth.
We are also updating our earnings per share outlook with reported EPS at a range of $4 and 52 $4.65 per share and adjusted EPS to be between $4.80 and $4.90.
This represents adjusted EPS growth of approximately 7% to 9%.
As Patrick stated, we are updating our cash flow outlook to a range of $410 million to $430 million.
With the reduction from prior outlook inclusive of our closure of our Turkey operations.
The outlook assumes no change in the previous in previously provided investment spend of approximately 15 cents per share.
The full year adjusted effective tax rate continues to be approximately 16%.
We are updating our outlook for outstanding diluted shares to approximately 94 million, reflecting the buyback activity completed during the first half of the year and including expected share repurchases for the back half of 2019.
The closure of our Turkey operations is expected to have 14 to 17 cents the impact on the reported EPS some of which has been seen in Q2 and a two cents impact to adjusted EPS in the third quarter.
Please go to slide 16.
A brief summary of allegiance Q2 performance total revenue grew 3.8% in the quarter and 5.2% year to date.
Organic revenue growth grew 3% in Q2, and 4.3% year to date adjusted operating margins were up 20 basis points adjusted EPS was up slightly.
Now Patrick and I will be happy to take your questions.
Yes. Thank you.
We will now begin the question and answer session.
To ask a question you May Press Star, then one and your telephone keypad.
If you're using speakerphone, please pick up your handset before pressing the keys. So anytime your question has been addressed and would like to try. Please press Star then too.
We do asset in consideration of the others yourselves to one question a follow up if you have additional questions. You may reenter the question queue. So those instructions in mind, we will pause momentarily to assemble our roster.
And the first question comes from address participants key from Morgan Stanley .
Hi, good morning, guys.
Hey, Josh.
So.
Steve just back on some of the channel strategies or some of the moves that you made in residential to punch up growth a little bit.
I guess this is the question the follow up wrapped up in one what did that cost you in the quarter, how should we think about that as a driver of the acceleration in the back half and what were those moves specifically.
So the channel plays that we addressed was really what I'd call maintenance.
As we have expanded rapidly.
Especially through E. Commerce, there was some cleanup that we need to do to go do and.
To protect ourselves on pricing.
It clearly was reflected.
In our electronics growth, particularly residential in Q2.
We think thats behind us.
I'd say in an overall backdrop.
Particularly in resi a week.
The channel would perform better in new construction I think.
It's pretty widely seen that there were some challenges in new construction, including.
We expected acceleration with one are.
That's.
Progressing.
But those were the factors that.
That we went in and worked and we think it positions us nicely for the second half.
Any numbers that you can share around where you think that cost and what you think that adds going forward.
I think the numbers are out there in total.
Don't want to get into the specifics specifics of it.
But the work's behind us and you will see that performance improve in the second half.
Okay. Thanks for the color.
Thanks Jess.
Thank you and the next question comes from deeper I have on with Wells Fargo Securities.
Good morning.
Two questions from me.
Looks like Youre thinking of margin assumptions are little better than some of us are expecting.
Can you provide some color on what your expectations are for price realization in second Matt.
Is that going to be at a 2% run rate for the polio.
Also.
The parts that are between resi pricing I mean, Q1 was positive but demand continues to be flattish there.
So how does it compare where he pricing.
Not at this pricing and then I have a follow up.
Yes, so on the pricing front.
As indicated in our comments really strong price realization and Q2.
And just remember relative to our pricing actions you may recall last year.
We implemented a price increase and beginning of July this year, we pulled it forward to may so in effect you had the impact of two price increases for this quarter year over year. So thats why sequentially for the quarter year over year, you had really strong price realization as we look forward to the second half, we still anticipate good price realization, but sequentially will be down.
Relative to what you saw in Q2 year trial, you're probably looking at an overall impact we'll call it around the one and a half a percent counted going for.
As it relates to the Nonresi read the.
Area in terms of pricing most of the price realization is coming from non residential markets given the strength, there and our ability to pass that on to offset inflationary headwinds. So we'll continue to see that you may recall last year, we had some choppiness in the residential segment associated with pricing as related to rebates promotions those type of things.
A lot of that is subsided and I'd say as anticipated kind of a flattish.
Pricing environment as it relates to residential.
To the extent, we can push we will but.
You know its improvement on a net basis after taking into consideration some of those promos and rebates.
So it looks like the not necessarily concerned about nonres.
Even though some of their clients like maybe came in a little anemic.
Just can you talk to the momentum there and non display but here in the U.S. specifically institutional.
Is that backlog with ability to end of the year that gives you the confidence that your organic growth in the second half and Thats really pickup.
Thank you.
Our backlog visibility is clear up in particular with the commercial institutional backlog remember those are long cycle projects and.
We feel very good about the book backlog that's on the business.
I think you other thing Thats important is you will long term trends, particularly in the institutional markets upgrades of schools College campuses.
For higher security needs.
Continued.
Today I'll speak to the Iowa Board of trustees.
On campus security it continues to be a trend I think we continue to see positives in the hospital segments.
And we like our backlog.
And opportunities going forward.
Yes, I would just also add deeper that some of the leading indicators that we look you know relative to our business as well as kind of macro items the order.
Good quote activity specification, writing continues to be positive trending upward and so thats always a good indicator in terms of business down. The road also from a macro perspective and you look at some of the things for example, the number up on referendums, particularly in institutional market continues to remain strong the construction backlog.
Also is at a healthy level.
Some of the things the job openings in the construction markets continue to be very healthy and so all of these things would indicate that.
Market demand continues to remain strong and as Dave indicated, particularly in institutional segment, where we have a obviously a strong market position and its a richer mix of products in our business, which helps us on the margin profile as well.
Great. Thank you very much I will perform.
Thank you.
And once again as a reminder, please limit yourself to one question and a follow up.
And the next question comes from Julian Mitchell with Barclays.
Thanks, Good morning.
Maybe just following up.
Particularly interested in what you're seeing in the commercial markets in Americas non res.
And maybe just help me understand a little bit more clearly what drove that slowdown in the non res growth seen in Q2 was it something that happens.
Late in the quarter or does it just go back to some of those labor shortages you talked about.
Or have you seen some of your commercial customers may be pushing some.
Oh, it is old projects to the right because of the macro factors Robertson labor shortages.
I think if you look at just pure commercial construction there continues to be a healthy environment.
We are obviously like the institutional or college campuses more but as I travel around the nation you see commercial.
Certainly about at its maximum development an output with that said.
Uh huh.
In the upper parts of the Midwest It was extremely wet that delays construction activity.
Shortages of Labor I think our rapid we curtain, we see labor tightness as high as it's ever been.
You know since 2008, so we think those factors actually snowplows the the length of job. We also see some tightness.
And extended lead time in door availability, which impact our ability to drive business through but with that said overall health of the of the commercial and institutional part of the market.
Driven by spec quote and backlog continues to be favorable for allegion.
Thank you and then just my second question, maybe switching to the EMEA region.
Maybe help us understand a little bit of context around the Turkey plant closure understood that there was some specific macro and economic issues in that country over the last couple of years in particular.
The extent to which those played into the plant decision. This is just an overall look at your EMEA regional capacity and trying to get that capacity down may be.
And how happy you feel now post the Turkey plant shutdown regarding your EMEA footprint.
So never happy with any of our footprints in utilities fully optimized. So globally. We continue to work I think second I'd remind you that a lot of our acquisition activity has been in Europe . As we brought on new capacity, we felt the opportunity to optimize that was there.
Turkey also from a macro and political standpoint, a lot of pressure there NFC ended the day, we thought the best move from true Allegion was to consolidate that.
And we've executed that at a very good level I couldn't be prouder of our teams.
To go in and you make that move I think overall our view in Europe is to continue to optimize that footprint to continue to improve our up our profitability and ability to serve the customer in the region.
Great. Thank you.
Thank you and the next question comes from John Walsh with Credit Suisse.
Hi, good morning.
Good morning.
I think maybe the the follow up first.
Just wanted to better understand the electronics acceleration in the Americas, you're talking about in the back half.
Just looking at Q3, you, obviously have a very difficult compare.
Should we expect that to happen as early as the the current quarter or is it more of a back half commentary about trends just given how it can be kind of lumpy.
So you will you will see improved electronics growth sequentially relative to where we are in the first half of the year beginning in Q3.
But given the tough comp in Q3 last year more of it perhaps weighted in Q4.
And a lot of that growth.
No associated with some of our what Dave talked about in terms of the channel activities that we have now completed thats behind us This new arrangement with Lenore will begin to.
We continue to drive traction there and our Incode product continues to sell through extremely well. So we see continued growth in there. So those three activities will boost the electronics growth, particularly in the residential side and commercial still remains healthy and we have a good.
Backlog of activities and channel partners that will drive that going forward as well.
Great and then you talked about the channel with E Commerce, how about.
Box I mean, it was a different product category, but we have heard de stocking there anything to call out there that would have impacted residential in the quarter.
I would say the big box channel was sluggish.
And we expect performance improvement in the second half I think the Schlage incode and our strength allegion through our slag brand in Big box still has the highest rated.
Products available our partnerships with ring.
Apple Amazon and those integration I think make a great choice for consumers and we expect to improve performance in the second half.
Great I appreciate it thank you.
Thank you and the next question comes from Jim lows with Baird.
Hey, guys good morning.
Good morning.
So maybe just on on Americas margin.
In the back half of the year.
I think just kind of doing some math here, maybe we're looking at an acceleration in the margin improvement from.
Up up above it.
20 basis points in the first half to maybe something like a 100 in the back half and just kind of wondering how much of that do you expect to be driven by just kind of improving price cost and how much of that should be driven by just just core operating leverage.
Yes. So those are the two primary components that will drive operating margin accretion in the second half feel really good about where we are as we look forward.
So those opportunities.
The price productivity inflation dynamic will continue to improve there so recall.
Relative to the inflation, we're getting to easier comps starting here in Q3 as it relates to commodity costs and pricing in that type of thing and you may recall.
Our methodology is try to hedge.
Inflation in terms of not financial hedges, but contracts with suppliers. So we lock into prices on a.
Outward to perhaps 12 months it as inflation subsides, we see that perhaps later than other people might so we're going to start reaping the benefits in the second half as it relates to the reduction in commodity costs. So that's going to be a big driver and then the continued volume leverage and the margin accretion associated with that is a big driver as well and we had a couple of.
One off type of things that are nonrecurring as well so that collectively.
Well served to improve the operating margin performance and I'd, just say as a collective company for the full year and we communicated this at the beginning of the year. The objective is to get close to 100 basis points improvement for the full year, which gets us back to kind of like the 2017 levels and still feel like we have good visibility to that relative to the improvement in the price productivity inflation dynamic as well as the.
Leverage on the incremental volume.
Okay, Okay, Great and then I would add I would add Tim that we were pretty clear that.
We would create a faster dynamic in the second half I was extremely pleased with how we drew drove the equation in the first half and.
I think we're set up nicely with identifiable projects that will help us achieve our goal.
Great. Okay, and then just in a more deflationary environment I just want to make sure I'm thinking about pricing the right way you should be able to kind of in year every year be able to get some modest price realization, but but in.
The environment with lower raw material costs that that Tim.
That traction is probably towards the lower end of your historical range right.
So as you know we have the ability to pass on price, whether an inflationary period or deflationary environment, we've been fairly successful and doing that and we will continue to remain competitive and push that where we can.
So this year for example, the gross price increase was lower than last year and last year being the higher inflation period, but.
On a normalized level, we should always get 1% to 1.5% of price increase across the business.
Okay, Okay, great I will hop back thanks, guys.
Thanks, So much and the next question comes from Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everyone.
Joe.
So so just just thinking about the growth for the back half of the year again in Americas.
Yes, I think this this past quarter you guys did roughly I think less than 1% on the volume side. It seems like the seem to pick up to call. It four four and a half just to get to the low end of the guide.
So how.
Outside of like what you expect to see as increased penetration on the electronic side. What do you think are the biggest drivers that's going to get you there and seeing the acceleration in Threeq and Fourq.
Yes, So let me take it by segment of the market may be so on the resi side, it's really a combination of a couple of things what we've talked about previously on electronics growth and all the activity there relative to the channel on our new product introduction as well as a channel partnerships that will help us.
Drive volume there secondly on the risk side, we see a pickup in the builder channel are collectively that will help us.
In terms of push out more volume on the non res side. Its continued strength in the end markets and the healthiness of that in the visibility we have relative to again, the order activity specification backlog et cetera.
Feel fairly positive relative to the volume expectations in the second half.
Okay.
Okay got it that makes sense and I guess and Mike maybe my follow on there as to how you're thinking about like the seasonality.
Last last year things are for roughly from an earnings standpoint.
Yes.
In line Threeq versus Fourq, you, but seasonally things kind of shift year to year. How are you guys thinking about the composition or the cadence for for the second half of the year Threeq versus Fourq is there an expectation that one quarter it will be much stronger than the other.
So we don't normally provide the quarterly guidance, but you should anticipate perhaps maybe a little bit higher in Q4 than Q3.
Okay got it thanks guys.
No.
Thank you and the next question comes from Jeff Kessler with Imperial capital.
Thank you could you go through some of the new products that you believe are going on particularly on the electronics side.
That you think are going to.
Sure Paul boost growth in the second half, particularly those that are aimed at the institutional market, where you seem to be the most optimistic.
So our incurred on the red side would be.
What we lead with a second you know maybe not so much in terms of new products, but the partnerships that were continuing delivery with Apple and.
Seamless access on college campuses, you've seen some of our wins I think Mercer colleges is a clear example.
Second work with one our I think early on we said that we would be open in our ability to go in partner.
Is providing wins in the marketplace.
We've also got our exit devices that are our wireless that are driving in the institutional food. So.
We think we're set up well.
I would also go back to some of our earlier generations of products. The CEO has been out several years, but is positioned to be able to.
Provide that open integration and communication capabilities that customers appreciate that there's already installed base of that and our ability to be able to leverage that in new electronic applications is why we're winning.
Okay.
Follow up question is around Turkey, because you have could you go a little bit.
Is it a little bit deeper into what are you.
What are your goals in terms of moving.
Moving production from Turkey to to wear and.
And essentially what is what are the driving force is that.
Will allow you makes you think you are going to become much more efficient in having a plant that is not in Turkey.
So through the acquisition pipeline, we developed a capability out of Poland and 20, a 17 18, we announced a new facility. There. We are facility. We are filling up that facility some of that will come with Turkey, and its really optimizing the supply chain from where we believe is a competitive.
Price market to be able to serve.
Western Europe , and so we think we're nicely positioned.
Our ultimate goal is to continue to incrementally improve operating income year over year and this is another step in that process.
Okay, great. Thank you very much.
All right Jeff.
Thank you and the next question comes from Andrew Obin with Bank of America Merrill Lynch.
Hi, This is David Ridley Lane on for Andrew.
Good morning.
Maybe just following up on that.
Comment on the Turkey operations.
Could you quantify sort of the payback period for the about 20 million in cash cost.
Relating to that closure.
So anytime you close a facility in Europe , it's going to have an extended payback period.
But it's the right thing to do it's more of a I'd say, a risk mitigation activity and a significant payback.
On a cash basis right thing to do as Dave mentioned to serve our customers.
Expedited.
Supply chain capability and so.
There are some benefits throughout the supply chain not so much from a labor arbitrage, but it's definitely the right thing to do and we will continue to look at opportunities.
To leverage our footprint going forward.
And then on your comments about.
Optimism for new residential construction.
Are those mainly tied to weather or are you seeing.
Other reasons why new.
Residential homes in the U.S. would be picking up.
So first adoption of electronics, especially incode too, we're going through a conversion with Lamar.
Which.
We will give US you know topline revenue expansion as we provide them exclusively to their home starts. We continue to have a focused effort on that probuild driven by those electronics and I think the overall market and its no.
It's no surprise as you look at other companies reporting the new home construction with soft driven by a variety of factors, we don't see a.
A big rush to recovery, we think that it runs flat, but we think our self help will help us both on new construction and retrofit as we move into the second half.
Appreciate the color. Thank you very much.
Good.
Thank you next question comes from David Macgregor with Longbow Research.
Yes, good morning, everyone.
One of the things that I guess, you are talking about price productivity versus inflation and price and inflation are always a challenge to forecast.
Productivity is presumably something you've got a better handle on it.
Help us better understand.
What productivity should represent quantitatively if you can quantify for us over the next few quarters.
So I would characterize it this way.
It's all about having a robust pipeline in terms of productivity actions and those would occur either on the sourcing material side.
And or.
At the factory level, what labor efficiencies.
Cost reductions those type of things and we've got very good visibility in terms of we've already executed.
That will take place in the back half of the year as well as opportunities for improvement going forward and thats across all our facilities.
Globally.
So feel really good about the healthiness robustness in terms of our productivity pipeline of both the sourcing material side as well as the throughput of the factory and then you get the normal leverage.
Volume overhead leverage equation on the incremental volume that kicks in as well and as you know we have very high contribution margins that will contribute to the margin expansion. So it's a combination of a lot of activities that are going to help us going forward and.
We've got very good clarity and expectations on that and good visibility.
Quantify that for Us Patrick.
Im sorry whats. The question is there any way you can quantify that for us or at least give us some sense of directionally help productivity should compare year over year over the next few quarters.
Yes, so I'll, just say, it's increasing year over year and would expect that the Kenya continue.
Today I'll mention here too.
That we sometimes forget about relative to the productivity, but we're starting to reap benefits from the acquired businesses last year. So the margin profile.
Attached to those will increase as we get more volume leverage through our integrating with our sales channel and also integrating some of our enterprise excellence methodology. There at those facilities are helping us and so the acquired businesses as part of the equation and building them in to our company and methodology will help our productivity as well.
Okay. Thanks for that second question is just I guess on price elasticity and specifically maybe with respect to the non specified.
Commercial business, and maybe mechanical residential as well, but it would seem that with the pricing you are seeing a growing gap between.
And so.
We're not seeing a migration at all relative to the low price point, it's actually from our perspective, it's been one of our channel strategies to have a broader breadth of products and that price point that we could sell for the discretionary market and so thats been something we've continued to drive for the last several years.
Thanks very much.
Yes.
Thank you and the next question comes from Jeff Sprague with vertical research partners.
Hey, good morning, guys it spread to happen in for Jeff here.
You now might be able to meet some of those requirements.
So remember we have positioned with three brands Dexter Falcon and then our premium slug von Duprin LCN.
We see nice growth in the Falcon brand, maybe a little bit less in Dexter, but what's happening there when a project gets valued engineered and we need to compete will pull in those products you see it a lot in light commercial and you will see Falcon exit devices key ways.
Glenn eyes would be another brand that we would use I think it depends on where you're at in the market segmentation hospitals College campuses are going to go for our performance products and we are going to continue to.
Use our global capability to offer customers choice.
Okay. Thanks for that and then just looking at the Americas Nonres business up mid single digits is there a way you could separate institutional versus commercial in the quarter. How those performed and then thinking about the second half I mean do you think you think commercial can you give us some growth or is institutional basically going to carry the day here.
I think we will see growth across all verticals.
Institutional should be a little bit.
Stronger and again Thats, a richer mix of products for us Holistically and so.
But all fall strength across all verticals is the way I would be thinking about it.
Okay. Thanks, guys.
Thank you.
And as there are no more questions at the present time I would like to turn the call Mr. Magnus Frank closing comments.
We'd like to thank everyone for participating in todays call. Please contact me for any further questions and have a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation, you may not have centralized.
Yeah.
Okay.
[laughter].