Tom Martineau - Director-Investor Relations David D. Petratis - Chairman, President & Chief Executive Officer Patrick S. Shannon - Chief Financial Officer & Senior Vice President.

Joshua Pokrzywinski - The Buckingham Research Group, Inc. Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker) Steven Eric Winoker - Sanford C. Bernstein & Co. LLC Rich M.

Kwas - Wells Fargo Securities LLC Julian Mitchell - Credit Suisse Securities (USA) LLC (Broker) Jeffrey Ted Kessler - Imperial Capital LLC Jeremie Capron - CLSA Americas LLC Jeffrey Todd Sprague - Vertical Research Partners LLC David S. MacGregor - Longbow Research LLC Robert Barry - Susquehanna Financial Group LLLP.

Good morning, and welcome to the Allegion Reports First Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tom Martineau. Please go ahead..

Thank you, Kaye. Good morning, everyone. Welcome and thank you for joining us for the first quarter 2016 Allegion earnings call. With me today is Dave Petratis, Chairman, President and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion.

Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at www.allegion.com. This call will be recorded and archived on our website. Please go to slide number two.

Statements made in today's call that are not historical facts are considered forward-looking statements that are made pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for description of some of the factors that may cause actual results to vary from anticipated results.

The company assumes no obligations to update these forward-looking statements.

Our release and today's commentary includes non-GAAP financial measures, which exclude the impact of restructuring and acquisition expenses in current-year results and charges related to the devaluation of the previously held Venezuelan business from the prior-year results.

We believe these adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior-year periods. Please refer to the reconciliation in the financial tables of our press release for further details.

Dave and Patrick will discuss our first quarter 2016 results which will be followed by a Q&A session. For the Q&A, we would like to ask each caller to limit themselves to one question and then reenter the queue. We will do our best to get to everyone given the time allotted. Please go to slide three, and I'll turn the call over to Dave..

Thank you, Tom. Good morning and thank you for joining us today. We posted a solid quarter of results delivering organic revenue growth and margin expansion across all geographies. Revenues of $502 million grew 9.5% reflecting organic growth of 3.6%, as well as the benefit of prior-year acquisitions.

Europe and Asia Pacific revenues were in line with expectations from a market and performance level. I would like to note that the Americas organic growth of 3.4% was delivered despite the implementation of a new operating system at our Indianapolis operation facility.

This is part of a natural evolution of an older legacy system that will allow Allegion to continue to deliver best-in-class products and solutions.

I am very pleased with the progress thus far and the speed and flexibility demonstrated by our teams to make the continuous improvements necessary to quickly restore our industry-leading delivery cycles at the Indianapolis plant.

We believe the non-residential markets continue to show stable growth as reflected in the strength of our orders and backlogs in the first quarter. Patrick will provide further details when discussing the America's financials. Adjusted operating income of $84.6 million increased 12.5% versus the prior year.

Overall operating margin improved by 40 basis points with all regions delivering increases versus the prior-year period. We remain focused on our growth strategies and continue to balance ongoing investments with improved operating performance.

Adjusted earnings per share of $0.61 increased more than 19% versus the prior-year period, primarily driven from improved operating performance and acquisitions. This is our seventh straight quarter with double-digit adjusted earnings per share growth. Also in the quarter, the company repurchased approximately 0.5 million shares.

This is consistent with our balanced capital allocation strategy and goal to offset dilution at a minimum. Please go to slide four. In the Americas, Allegion's distinctive position as both a non-residential and residential market leader gives our team the capabilities to leverage technology across both markets.

Utilizing these unique capabilities, we've implemented a new multi-family strategy to drive profit and grow market share, as well as establish thought leadership as the key implementation of multi-family strategy. Allegion has created Schlage Control, the next-generation of electronic access for the world of multi-family.

The open integration capabilities deliver the ability for property owners to manage both residential and common area doors on a single superior system and from anywhere using cloud or Web-based apps. Schlage Control eliminates dealing with traditional keys while providing residents convenient smart card and phone credentials.

Our deadbolts launched in December 2015 and our interconnected locks are set to launch in May. A number of other multi-family growth opportunities are being pursued including accelerating OEM software platforms, leveraging relationships with market influencers and creating standard specification guidelines.

With all these initiatives, Allegion has created a complete solution package to offer multi-family customers. We look forward to watching for more success in the multi-family segment throughout 2016 and beyond. Patrick will now walk you through the financial results, and I'll be back to discuss our full year guidance..

Thanks, Dave, and good morning, everyone. Thank you for joining the call. Please go to slide number five. This slide depicts the components of our revenue growth for the first quarter. I'll focus on the Allegion results and then cover the regions in their respective slides.

As indicated, we delivered 3.6% organic growth in the first quarter with balanced contributions from all regions. Each region contributed to price realization and volume growth was supported by stable markets that performed as expected. Foreign currency remains a headwind but is moderating sequentially when compared to prior quarters.

And acquisitions contributed approximately $46 million or 10% growth, which more than offset the impact of divestitures. Please go to slide number six. Reported net revenues for the quarter were $502.3 million, which is a 9.5% increase versus the prior-year period.

I was pleased with the revenue growth given solid price realization, the benefit of acquisitions, and organic contributions from each region. We continue to experience solid electronic product growth and are realizing the benefits of our new product introductions and channel initiatives.

Adjusted operating income of $84.6 million increased 12.5% compared to the prior year. All regions delivered improved operating margins and this reflects the fourth straight quarter of year-over-year margin and growth.

The benefit of acquisitions, favorable pricing, productivity and net commodity deflation more than offset other inflation and investments. Of note, volume increases were partially offset by unfavorable mix in the quarter most notably related to the mix of products sold in the Americas.

I will discuss this in more detail when reviewing the Americas slide. I'd also note that we improved our industry-leading adjusted EBITDA margin to 19.8%, an improvement of 100 basis points versus the prior year. All regions improved on this metric in the quarter. Please go to slide number seven.

This slide reflects our EPS reconciliation for the first quarter. For the first quarter of 2015, reported EPS was $0.47. Adjusting $0.04 for the prior year, Venezuela devaluation and non-cash impairment charge, the 2015 adjusted EPS was $0.51.

Operational results increased EPS by $0.07 as favorable price, foreign exchange and productivity more than offset inflationary impacts. Although foreign exchange was a revenue headwind in the quarter, this was offset by our foreign-denominated costs resulting in a slight favorability to EPS when compared to the prior year.

Acquisitions net of divestitures added $0.04 in the quarter. Next, interest and other income were a net $0.03 increase. The higher interest expense is related to the issuance of $300 million of senior notes completed in the third quarter 2015.

Favorable other net items primarily reflects the sale of non-strategic marketable securities in a onetime benefit from equity investments. The increase in the adjusted effective tax rate drove a $0.01 per share decline versus the prior year.

The first quarter effective tax rate is higher than the full year guidance, reflecting the timing of certain tax positions. Lastly, incremental investments related to ongoing growth opportunities for new product development and channel management as well as corporate initiatives were a $0.03 reduction.

This results in adjusted first quarter 2016 EPS of $0.61 per share, an increase of approximately 20% versus the prior-year period. Continuing on, we have a negative $0.01 per share reduction for acquisition and restructuring charges. After giving effect to these onetime items, we arrive at first quarter 2016 recorded EPS of $0.60.

Please go to slide number eight. First quarter revenues for the Americas region were $363 million, up 2.5% or an increase of 3.4% on an organic basis. The residential business continues to perform well, delivering high-single-digit growth with strength across all channels.

Our investments in electronic products and style and design solutions continue to deliver strong results. The non-residential segment delivered low-single-digit growth while implementing a new operating system at our Indianapolis facility.

It's important to note that we realized high-single-digit non-residential order growth in the first quarter and associated increase in backlog primarily driven by the system transition. As such, we expect some quarterly timing impacts as we work through the backlog.

We continue to believe that the market fundamentals for non-residential construction remain in place for low- to mid-single-digit growth for the year. Americas' adjusted operating income of $91.6 million was up 3.6% versus the prior-year period. Adjusted operating margin for the quarter increased 20 basis points.

The margin improvement was driven by favorable price, material productivity and material deflation that fully offset unfavorable mix in the quarter. The unfavorable mix was due to the strength of residential growth as well as a mix of commercial product as impacted by the timing effect on shipments related to the operating system transition.

Please go to slide number nine. First quarter revenues for the EMEIA region were $118.5 million, up 45% or up 3.3% on an organic basis. The organic growth reflected solid price realization and good performance across most geographies. Acquisitions delivered more than $36 million in incremental revenue.

Electronic product growth continues to be strong driven by hospitality and CISA products. EMEIA adjusted operating income of $8.3 million increased 219% versus the prior-year period.

Adjusted operating margin for the quarter increased 380 basis points and adjusted EBITDA margin increased 550 basis points, reflecting continued improvements in the ongoing business transformation, as well as contributions from recent acquisitions which were accretive to the region's margins. Please go to slide number 10.

First quarter revenues for the Asia Pacific region were $20.8 million, down 8.4% versus the prior-year period. As noted on the slide, the decrease was specific to the divestiture of the system integration business, which drove a $9.9 million reduction in revenues year-over-year.

Excluding the system integration business, revenues grew approximately 63%. This reflects the contributions of acquisitions in the region as well as organic growth exceeding 14%. Most sub-regions performed well with notable strength in our China hardware and Australia/New Zealand segments.

Asia Pacific broke even on adjusted operating income basis, which reflects an improvement of $2.6 million versus the prior-year period.

We continue to drive focus on mechanical and electronic hardware solutions, are leveraging the acquisitions made in 2015, and are making good progress in addressing stranded costs related to the system integration divestiture. Please go to slide number 11. Available cash flow for first quarter 2016 was negative $8.2 million, slightly below prior year.

The negative cash flow in the quarter is typical of our historical performance and reflects the seasonal use of working capital. As evident in the increased ratios on the slide, we now reflect the impact of recent acquisitions and divestitures in the current numbers. We remain committed on effective and efficient use of working capital.

Lastly, we continue to guide full year available cash flow of $280 million to $300 million, an increase of 26% to 35% compared to the prior year. I will now hand the call back over to David for an update on our full year 2016 guidance..

Thank you, Patrick. Please go to slide 12. We are affirming our 2016 guidance for revenue and earnings per share as noted on the slide. Our view of the global markets remain unchanged with better confidence given first quarter performance.

The Americas residential markets continue to perform well especially in big box and e-commerce aftermarket segments. And although U.S. GDP growth projections have moderated slightly, we continue to expect slow and steady improvement in our core non-residential markets.

Within major institution of verticals, we still expect modest growth in education with flat to modest healthcare expansion. For Americas' revenue, the heavy lifting of our Indianapolis operating center integration is behind us, and I'm confident in our ability to achieve full year organic growth of 5% to 6%.

I am pleased with growth delivered in the first quarter from our EMEIA and Asia Pacific regions in support of our full year targets. Our acquisitions are delivering growth and the markets are performing as expected. Please go to slide 13.

Let me finish by reiterating that I'm pleased with our first quarter results that deliver organic revenue growth and margin expansion across all of our reporting segments and earnings per share growth of more than 19%.

Allegion is executing on our margin improvement in EMEIA, benefiting from our acquisitions and realizing contributions for our new product introductions especially within the electronic segment. Finally, we remain on track and are positioned well to deliver our original guidance. Now, Patrick and I will take your questions..

We will now begin the question-and-answer session. The first question is from Josh Pokrzywinski of Buckingham Research. Please go ahead..

Hi. Good morning, guys..

Hey, Josh..

Josh..

Just on the ERP implementation, Dave, if I understand you right, it sounds like the high-single-digit order growth that you saw in the quarter would have been converted, so the low-single-digit sales would have been closer to high-single digit. I just want to make sure I understand that right just to start..

I think you read that properly. As we looked at the quarter, January orders were a bit anemic. We would have liked to see that come in a little bit stronger, and we accelerated through the quarter. We turned on the ERP system February 1. With any kind of start-up that reflects – that ERP system, 25%, 30% of our Americas volume.

We had some start-up issues, it got better through the quarter, and we see continuous improvement every day at Indy operations. And today, our output is eating into our backlog..

I guess just as that relates to making up the 1Q difference or backlog build, how does that layer out 2Q versus rest of the year? And how do you tie that out, the high-single-digit you're seeing today, to still that low-single-digit outlook that you guys are embedding in the guidance?.

Yeah. So, just a couple of follow-ons, Josh. So, as Dave indicated, it's primarily a timing issue relative to the shipments not a – what we think is a market share issue. Order activity, probably a little bit north of our full year organic growth expectations that we give 5% to 6% in Americas. The backlog would reflect that.

So, I would say maybe another way to look at it is without this, we certainly would have participated well within that range, probably at the higher end of that full year range. So, as we look going forward, we're making good strides of progress. Production is up relative to year-over-year eating into the backlog every day.

And so, the thought would be to make it up as soon as possible to get our delivery cycles back to customer demand quickly, but it's probably going to be a Q2, Q3 fully caught up..

Got you. And then, just to follow on to that question, I don't know if you answered already, how does that relate to low-single-digit outlook for the year? It seems like orders are a bit ahead of that..

So, order activity is tracking a little bit north of that. The difficult thing to ascertain as it relates specific to our Indianapolis facility is whenever you go out with these changes, you communicate, of course, your customer base.

So there maybe some order activity that's trying to get ahead of it, get the products in the queue and so I think it's a little bit too early to adjust our guidance northward. We'll get a better perspective as we progress throughout this quarter..

I would emphasize, too, Josh, we would expect acceleration in this time of the year. As we go into the summer construction season, there's a ramp-up. That's why we implement big changes in ERP in Q1, but that ramp-up is positive and we will give you an update at the end of Q2 how we assess that.

Is it better than we thought? But clearly positive about what we see from an incoming order rate..

All right. Thanks, guys. I'll get back in queue..

The next question comes from Tim Wojs of Robert W. Baird. Please go ahead..

Hey, guys. Good morning..

Good morning..

I've got two separate questions. I guess just first on the ERP implementation.

Are there any heightened costs associated with trying to get that backlog out or you added more labor, shifts, or anything like that to be aware of on the margin side? And then secondly, could you just comment on some of the treasury proposals around inversions and tax stripping, and how we should think about the ongoing tax rate at Allegion?.

So, we have added a little extra labor associated with the implementation. You would have that in any case associated with these transitions, so perhaps a lift in productivity. But in terms of affecting our overall operating results, nothing of significance to highlight there.

As you know, those products have very good margins so it shouldn't be an issue going forward. On the proposed legislation, actually a couple of comments there, you're aware that right now, they are – it is proposed so it's hoping a commentary period. We'll see how it shakes out.

But basis of the current proposed legislation, it's all perspective-looking. And so, when we look at the effect on our business, I would say no immediate impact today for 2015 or our planning horizon over the next three to five years. I would also comment on – relative to the proposed legislation that it has a lot of documentation requirements.

We feel like we're fairly buttoned up in this area. You may recall in 2014, we had some incremental investment associated with some external advisors from both the tax and legal perspective. I think we're on a very solid foundation relative to some of those items that these regulations address.

Going forward, it does require maybe some more rigor and tax planning strategies, but we've got many tools in our toolbox that we'll continue to execute. The regulations, by the way, are specific to U.S. entities or foreign subsidiaries underneath U.S. entities, so it doesn't impact our every entity within our structure.

And it doesn't preclude or eliminate debt transactions with a solid and sound business purpose. So, I just remind you being an Irish-domicile company, I believe we have a very tax-efficient structure. We have a lot of optionality and we have the ability to continue even with these regulations to move cash around the globe tax efficiently.

That gives us a competitive advantage..

Great. Well, that was very helpful color. I appreciate it. I'll hop back in queue..

The next question comes from Steven Winoker of Bernstein. Please go ahead..

Hey. Good morning, guys. And, Patrick, thanks for that. That was probably the best answer on the tax question that I've gotten out of all my companies so far, so it's really helpful. More broadly even (25:15). Listen, on Indianapolis, this is a great plant. ERP implementations now, normal inventory build ahead of that.

I see this happen – I used to see things like that happen very frequently. It's very infrequent in large ERP implementation that I see that across my coverage these days.

What really happened such that you, guys, were caught off guard and had shipping problems beyond what is a normal planned-for ERP transition even in a complex manufacturing environment?.

So, first, we replaced a 29-year-old operating system in our legacy facility. So the change management is huge. We don't underestimate that, but it affects every transaction from order entry to shipment.

Some of the challenges were driven by part location and completed product location that has a higher level of rigor than was operated under the old system. Our configured product is also as complex as anything in the industry. So as we take systems and apply it – I don't care if it's SAP, Oracle.

We chose Microsoft AX, these challenge these systems and that's what we faced. I couldn't be prouder of how our people responded to make sure that we met the needs of our customers. And as I look at April, we are cutting into the backlog at a very fast pace.

And I would say for the size of this conversion, I think it's – and the complexity of our business, we've done a credible job to upgrade..

Okay. Thank you. That is helpful. And what was your electronics growth and penetration? Usually, I think you talked about – I think it was 28% or something last quarter.

Where were you this quarter?.

Yeah. So, sequentially down low-double-digits if you kind of look across the entire portfolio..

Okay, and year-on-year..

So increase year-over-year – sorry. The increase year-over-year was low-double-digits, okay..

All right. Thanks..

But sequential down from the reference you mentioned in the 20%s..

Okay. Thank you..

Okay..

The next question comes from Rich Kwas of Wells Fargo. Please go ahead..

Hi. Good morning, everyone..

Hey, Rich..

On the margin here, so for Americas, was there – how much negative impact from the conversion here? I mean, there is certainly on the revenue side, but could you quantify the margin impact?.

So, as we highlighted a mix impact, some of that being driven from the residential growth, continued strong growth in that business, and that would have a natural mix impact as we kind of experienced a little bit last year but a pretty sizable mix relative to – within the commercial products.

And if you were to look at our volume leverage growth historically – last year, for example, we delivered 40% for every incremental dollar on revenue. That was way down significantly. I would have expected, again, all things being equal, that we would have been within that range in terms of leverage on incremental revenue.

So, pretty big mix impact on our business..

And so, does that moderate in Q2 and then into Q3 so we should see better incrementals also in Q1 level?.

Yeah. You would anticipate as we eat into the backlog, shipments accelerate, growth, because we're going to make up for some of the difference here in Q2, Q3, you would expect a favorable mix going forward..

Okay. And then....

It's a timing issue. And as those shipments continue to catch up, then we'll have favorability there from a margin perspective, which we didn't see in Q1..

And then, Dave, any concern around the customer – from a customer standpoint with regards to this in terms of lingering impact, not just on getting the orders shipped and whatnot, but in terms of brand management, brand equity, that sort of thing? Any concern around that?.

I'm always concerned. We did extend lead times. We're fighting those back in. The Von Duprin specification capability has huge staying power. I think you understand that when, either in the replacement market or the spec market, it has significant weight. You just can't go and replace it with something else.

The engineer-configured is another aspect of that. I would just – I got no phone calls, which I think is pretty telling. I'm as available to our customers as I am to you. We communicated of the change that we were going through and they understood the need for us to upgrade our 29-year-old system.

So, this business has a lot of credibility with industry-leading lead times. We're going to return to that and we'll provide features and benefits with the new systems that our customers didn't have in the past and I think net-net, it'll be a positive for us..

Okay. Last quick one on Europe core margin.

What was the core margin in the quarter ex acquisitions?.

So, I don't have that information readily available, but the margin accretion, 380 basis points, was driven both from the base business improving as well as the acquisitions which are accretive to the overall European margins. If I were to take a guesstimate here, I'd say it's kind of a 50/50 split in the quarter..

Okay. Thank you..

The next question is from Julian Mitchell of Credit Suisse. Please go ahead..

Hi. Good morning. Just the first question, really, on pricing and how that relates to Europe. Your main peer had seen European pricing get better; I think you have seen that as well. So, maybe give some context around that. And also give any color as to whether you're seeing Southern Europe construction demand improving recently..

I'll take the demand first. Our 3% growth, we feel good about it. I think it's reflective. We've got a Southern exposure and our organic growth reflects better market opportunities. I'd also highlight better execution by our business, on-time delivery, stronger specification is helping us to gain share in a slightly improving environment.

We were able to deliver modest price realization in the quarter, but there's a mix of us being more aggressive, exiting unprofitable business and then just a slight uptick in terms of our overall pricing.

Patrick, anything to add to that?.

No, I think good progress on the pricing. Not only looking at it holistic by market, but within vertical markets and by customer segments so continuous improvement there and it's good as Dave mentioned. The organic growth, 3%, sequentially better than Q4 last year and it's a good sign particularly in Southern Europe..

Thank you. Then my second question would just be on raw materials. I think since you spun out of Ingersoll Rand, you obviously had generally an environment where raw material prices have fallen.

So, if you could give us some context as to – if the recent rise is sustained, how you think about that affecting your gross margins, if at all? And what the sort of best, in inverted commas, "net price environment" for you is when thinking about raw materials?.

So, as you mentioned, the input costs have come down particularly for us brass, zinc, and steel are large input costs. I think the year-over-year decrease in commodities basis of the current spot rates as you call it around 20% collectively, that was baked in to our full year guidance.

We've recently seen a move upward in steel prices so it may put a little pressure there, but you should continue to see deflation in our input cost. One of the great things about this business relative to your comment on pricing, not a significant impact on our pricing strategy, so believe we can continue to execute on that front.

And you're not going to see the full benefit of the deflation in the commodity prices because, again, we lock in the supplier contracts and so over a 12-month period. And so, it kind of worked its way out during the course of the year..

And then just what you're thinking, I guess, further back in the business at times when input costs have been rising, again, when you were part of Ingersoll Rand, how was the ability to pass on input cost increases back then?.

Very, very good. If you go back, call it after the 2008 recession, you saw a much higher price realization particularly given the rise in the input cost. And so, I think the ability to pass that on to the consumer historically has been good.

It depends on particular movements, competition, et cetera, but right now, I'm not anticipating in a rising inflationary situation that we wouldn't be able to do the same going forward..

Very helpful. Thank you..

The next question comes from Jeff Kessler of Imperial Capital. Please go ahead..

Thank you. Across the security sectors that we cover in integration – video access, intrusion – that we've seen some moderation over the course of the last several periods, several quarters.

And yet in the locking area of the mechanical and electronic areas that are specific to you, we've actually seen you've not just maintained, but actually increased growth slightly and margins have improved.

Is this something that you are seeing in the marketplace yourselves or also is it your ability to add? If you could discuss this a little bit, new segment such as the multi-family segment to what had been perhaps almost zero in terms revenue, getting – finding new niches to grow because, again, in other areas where they haven't had those new niches, we've seen some moderation on the more electronic side..

So, Jeff, I may not be as intimate on some of the video stuff and keep an eye on it, but go back 90 days ago with our core guidance, we led – or certainly we're at the top end of the industry in terms of the growth that we saw.

I think we're intimate with our key market's demands and clearly see what's happening in the market in terms of the segmentation and niches in our business. And I would say this globally, we see good upside opportunity. I've talked about some of our channel moves.

We continue to analyze our market positions and opportunities with – in our global positioning to go in and better execute and serve growing niches. That would be true for our traditional mechanical businesses, and we continue to see the electronic side of it growing at double to our mechanical markets.

And we think things like the multi-family segment that gives customers a perimeter security right down to the apartment door will help us to deliver leading industry growth..

Okay. Thanks..

I think China, this quarter, is a good example. Yes, we're small but a focused business. Target with our capabilities, shows growth in Europe, very pleased with our performance, and I have to make long-term improvements in the ERP systems for our employees and customers.

But you look at what went into our backlog; we would've been right at the top of the group in terms of our growth. There's multiple factors working here..

Okay.

I know backlog is not the key KPI in this company, but what are you seeing in the backlog that gives you all the confidence that you seem to be talking about for the second half of the year? What mix is there that is definitely different other than – apart from the ERP system?.

We clearly see quotations, incoming orders supporting the growth profile that we projected in our annual guidance. Stronger in some of the institutional segments, I think it supports our strength in specification.

And then, you've talked to – or I've talked to you about the retrofit market, better service to locksmiths through our channel plays, those investments continue to exceed our expectations..

Okay. Great. And by the way, thank you. You had a great presentation at the ISC West Conference..

Thank you. We'll keep working on it..

Yeah..

The next question comes from Jeremie Capron of CLSA. Please go ahead..

Hi. Good morning..

Good morning..

Following up on the disruption at Indianapolis, are you anticipating any major systems upgrade at other lost plants in the near future?.

Our next targeted upgrade would be in France and that would be late fourth quarter so that's – then as I think about our systems, you need to think about this as an ultramarathon. We clearly created a system – the Allegion system and our IT systems, our infrastructure was underinvested, but this is not a land race or a rush.

We'll very methodically move to a common platform over the next 5 years to 10 years. We think it's important. But we replaced a 29-year-old system. The next system that we'll replace will be a – it's called a Bull (41:57) system. Probably only old guys like me remember this, but it doesn't have near the scope.

But what we installed in Indianapolis is the platform that will replace the Bull (42:11) system. So, logical steps that I think give our people the tools and our customers the capability to expect in a modern marketplace..

Okay.

And (42:23) commented on that already on the year, but can you provide an update on your channel initiative and how you plan on rolling this out through the remainder of the year?.

So, think of our channel initiatives in terms of the retrofit and renovate and better service to partnerships with locksmiths is in year two of a five-year rollout. We continue to strategically evaluate opportunities to extend our specification capability in the commercial segments.

So, there's multiple things working here, but remember in the retrofit/replace market, the locksmith, $1.4 billion to $1.6 billion market that we roll out really over the next three years to five years and pleased with the continued progress..

Okay. Great. And last one for me. Asia, looks like you had a pretty strong organic growth here. Can you comment on where this came from? And also, I was a little surprised not to see a high level of profitability now that the Bocom PC (43:44) got out of the portfolio..

So, thanks for noticing that. The growth really comes, number one, with focus. Bocom and the exit of that business was some heavy lifting, distracting in terms of capabilities we have. Second, especially in China, we're attacking specific niches that we think our capability lines up with. Third is the acquisitions.

Brio, Milre, FSH are improving our product capability and we think we have a value proposition that will help us to grow in the region..

Okay.

What about the profitability levels? What do you think is holding you back and preventing from having scale margins there?.

So, you saw a significant step-up in our operating income performance, the acquisitions clearly contributing to that. The region has done a really good job eliminating the stranded cost associated with the divestiture through some reduced head count and really cost containment, those type of things.

So first quarter I think in a long time has been at a breakeven. So, sequentially, it will continue to improve throughout the course of the year. We've always said for 2016 kind of mid-single-digit operating income performance for the full year, but putting a path to kind of get us to 10% over our planning horizon..

Thanks very much. Good luck..

The next question is from Jeff Sprague of Vertical Research. Please go ahead..

Thank you. Good morning, gentlemen..

Good morning, Jeff..

Good morning. Just a couple more follow-ups on the ERP, I feel like we're kind of beating a dead horse here. But, David, you did say that this effort impacted, I think, 20% to 25% of your Americas sales.

Does this close the work on Americas or we – so, you told us France is next, but is there a lot more work to do in Americas to get to where you want to be?.

The long-term goal is a common operating system. You need to think about that five years. We will not do that conversion without a solid business case that delivers a return in productivity. You have to think about aged systems, those types of things.

But we believe these systems can enhance our customer capability and our profitability and the business case, in terms of the next steps, got to be there for us to move forward..

And maybe you could address that because we are talking about this as if it's a painful medicine no one wants to take. But maybe you could give us some color on what it means for the speed of product fulfillment, inventory turns, those sorts of things, the reasons you're inherently making this investment..

return on invested capital, high inventory turnover, and time..

And, Jeff, so think about it also back office efficiency moving from multiple systems to one common platform. It just provides all kinds of efficiency, better control environment, et cetera, from a finance perspective, order management, so those type of activities, better customer service.

So there's a whole spectrum of business benefits not just in the manufacturing floor..

I want to add one other point in terms of benchmarking. As we look on our global IT cost, we're at the upper end of the range. And to get that to the benchmarks that we would like, we think we've got to upgrade these systems. And I'd share that just – this is how we think in terms of the overall performance of the business.

We want superior capabilities, but we also want to make sure that the cost structure that deliver that is in line with other industrial companies..

Maybe one other one question with maybe a lot of elements to it, but just thinking about total investment spend, I would assume the ERP stuff is maybe being capitalized but if you could give us a sense of where investment spending looks to track for the rest of the year.

And then I'm also just curious if you do get the related benefits out of ERP that you're hoping for, should we expect that those are actually dropping through to the bottom line? Or is this really a driver of additional investment spending so to speak, that you'd redeploy these savings into something else?.

Yeah. So, on the incremental investment spending, so you're right, a big chunk of that would be captured in capital expenditures and as you capitalize things like license cost, design development, those type of things. So, the bulk of that has already been capitalized relative to our global platform.

So, on a go-forward basis, you would have things like any modifications for local, regional requirements or specific maybe to a manufacturing facility, and those would be capitalized.

But there's also a core team that's been charged with implementing and executing on the implementation of these that is kind of captured in our corporate expenditure as an ongoing investment. That will continue kind of going forward as we roll out what Dave said on the French implementation and then we'll see kind of going forward.

But all that incremental spend has been captured in our full year guidance. And we'll play one year at a time and it depends upon the speed at which we implement and we'll determine how much more or little on that investment dollars..

Thank you..

The next question is from David MacGregor of Longbow Research. Please go ahead..

Yes. Good morning. A couple things, just quickly on the ERP.

The business that you missed there, the shipments that were affected by the ERP implementation, how would that bucket out between specced markets and distribution markets?.

I wouldn't have any factual data, but I would say 50/50..

50/50? Okay. Thanks. And then, we haven't really talked about the residential business here. I can follow up with you later on some other ERP stuff, but could you talk about the residential business and what you're seeing? High-single-digit growth sounds pretty impressive.

Is this kind of where the market is and you're kind of maintaining your share? Are you gaining share in this channel? If so, where and which products?.

Good market. Forecasting says that replace and renovation is going to increase in the year. Remember that we're extremely well positioned to that. Our suite of electronics – Schlage Touch, Schlage Pulse, Schlage Sense – I think are giving us good momentum. We are increasing our work with the large builders.

We think there's opportunity there, but we want to provide that on value. We want to provide that on builders that want to provide an above opening price point products. We think the market – the electronics and increased spend in the renovation markets are all – and then style and design, that was one thing I failed to mention.

We have put more SKUs out there and they're all factors that are helping us grow..

So, would it be fair to say that within residential that margin performance is improving? I mean, above and beyond just the operating leverage with the volume. But through the style and design and the channel selection, are you – this is a more profitable business for you now..

I would say a slight improvement. We've got price pressures in the market, but we also – if you visited our Baja facilities, the teams there are doing an outstanding job of driving productivity on the factory floor, value engineering, but just straight execution and throughput. Extremely pleased with those teams..

Okay. One last quick one, if I may. You've got a competitor that's publicly discussed the possibility that may sell to commercial security hardware business.

Is that creating a customer migration now that's providing you with share gains?.

I'd always like to think that customers would look at the lack of investment in that product set and our aggressive investment. We're providing better solutions. Uncertainty in the competitive world's always an opportunity for a manufacturer like ours..

Thanks, David..

The next question is from Robert Barry of Susquehanna International Group. Please go ahead..

Hey, guys. Good morning..

Hey, Rob..

Just a few follow-ups at this point. On the investment spending, I think $2 million in Americas in the quarter.

Is that the run rate we should expect there for the rest of the year?.

So, I'll speak to it in aggregate. Americas being the bulk of the incremental investment spend. It's probably a little bit lighter in Q1. I would expect it to increase slightly throughout the course of the year, Q2 through 4, to be kind of straight line for those quarters.

We gave some guidance I think around $0.15 to $0.16 incremental spend relative to our year-over-year investment spend..

Got you. And then on the pricing in Americas, it looks like you got a point this quarter. I think that's up from like 50 bps last year even with the mix perhaps working against you.

I mean, do you think you can sustain that, maybe even do better than that as the year progresses in Americas?.

Well, our hope would be to improve upon it. We like the progress that we saw in Q1, as you pointed out, better out of the gate than last year for the full year. Commercial has been performing well, residential kind of tracking to what we had anticipated.

So, we'll see as the year progresses, but so far, a little bit better than what we had anticipated out of the gate but in line kind of with our full year expectations..

Got you. And maybe just finally, you have this benefit in the quarter below the line from the sales of marketable securities and then equity investment gains. I think some of that, at least, was in the guide.

Can you just refresh our memory how much of that was in the guide and of what's in there, how much might be remaining in the subsequent quarters?.

I think a good way to look at that question is if you look at the full year, 2015, we had other income of roughly $10 million to $11 million. Our full year guidance assumed a similar amount for 2016. We did have kind of a onetime benefit in this equity investment that came through, so that maybe a little upside there year-over-year.

But that would suggest that the majority of our EPS growth, 7% to 12%, all operational performance improvement predominantly. But the full year guide assumed kind of a similar number for the full year that we experienced last year..

I'm sorry, the similar number on other income..

Yes..

Great. Thank you..

Yeah..

And next, we have a follow-up from Josh Pokrzywinski, I'm sorry, of Buckingham Research. Please go ahead..

Hey, guys. Just to follow up on the price cost discussion from earlier.

Maybe just to parse out the 120 bps you got in the quarter, I think, overall that you spelled out there in the Q, should we think about that as being a similar number into the second quarter and maybe a little narrower in the second half just based on comps? Or maybe just help to dimension out the seasonality there..

Was your question specific to pricing? I'm sorry..

The price cost delta. I think you called out in the Q 120 basis points of margin benefit on price cost in the quarter. I would imagine you'll get a similar number in 2Q..

Yeah. Actually, if things hold the way they are today, you'd see a little increase to that because the deflationary benefits would be a little bit stronger assuming commodity prices track where they're trading today. So, hopefully, we see a little bit improvement in Q2, Q3, then it kind of levels out..

Got you. And then just a follow-up on EMEIA since some of the businesses there are still new or new and that we haven't seen them for a full year yet.

Maybe on the seasonality, how should we think about that normal 4Q bump relative to kind of a flattish pattern for the rest of the year that you used to have that probably looks a lot different with AXA and SimonsVoss?.

So, actually not too much different. Q4 will continue to be our strongest quarter for Europe, Q1 being the lightest quarter, Q2 pretty good, and Q3 because of the holiday period, a little lighter than Q2. But the seasonality is fairly consistent.

Even with the margin increase year-over-year lower than what you might expect, remember we have flat amortization expense associated with the intangibles during the course of the year. So that, as the business grows, that kind of levels out and you get improved margins going forward.

So, you would expect improved kind of double-digit margins going forward for our European region..

Got you. All right. Thanks, guys..

Yeah..

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Martineau for any closing remarks..

Thank you. We'd like to thank everyone for participating in today's call. Please call – contact me for any further questions. Have a safe day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..