Allegion plc (ALLE) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Allegion's First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Tom Martineau, Director of Investor Relations. Sir, you may begin.

Thanks, Shannon, and good morning, and welcome to the First Quarter 2014 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. We released earnings last night at 5 p.m. The release and presentation that we will refer to in today's call have been posted on our website. If you would like to view this presentation, please go to the Investor Relations section of our website at allegion.com. This call will be recorded and archived on our website. Statements made in -- please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Please see our SEC filings for description of some of the factors that may cause actual results to vary materially from anticipated results. The company assumes no obligation to update these forward-looking statements. Our release and today's commentary includes non-GAAP financial measures, which excludes an order flow change with the joint venture in Asia, restructuring costs and spin costs related to our separation from Ingersoll Rand. We believe these adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior year periods. Please reference our news release and tables, which provide the reconciliation of reported to adjusted results. With that, please go to Slide 3. And I'll turn the call over to Dave.

Thanks, Tom. Good morning, everyone. And thank you for joining us today. This marks our first full quarter as a stand-alone publicly traded company, and we're excited to share our progress as we unlock our potential at Allegion. In the first quarter, we delivered reported earnings per share of $0.37, which includes $0.07 of restructuring and one-time separation costs resulting in an adjusted earnings per share of $0.44. Revenues were $472 million, up 3.7% on an adjusted basis versus last year, and up 3% on an organic basis. All regions delivered positive growth in the quarter. Adjusted operating income of $76 million increased 3.8% versus the prior year, and adjusted operating margins remained flat at 16.1%. We were pleased with the results in the first quarter. And similar to most industrials operating in the U.S., we had to navigate tough weather conditions early in the quarter. March performance in our nonresidential America's business was markedly better than the beginning of the quarter, which we feel is a better indicator of the long-term health of the nonresidential construction markets. This view is also supported by our specification and quote trends, which increased in the mid to high teens as compared to the prior year, a good leading indicator of performance typically 9 to 18 months in the future. We are making good progress on our EMEIA actions and continue to see market growth in the Asia Pacific region. We are also affirming our full-year guidance Please go to Slide 4. By now, you will recognize our key strategies, which we will use to deliver profitable growth in achievement of our long-term objectives. We continue to see great progress on our electronic offerings, both in the residential and nonresidential space. As an example, we recently announced the launch of our new Connected Touchscreen Residential lock, which will add to our already strong growth profile in the electronic locking categories in the Americas. Through our open architecture connected platform, users have the capability to manage their home security from anywhere in the world from an Internet connected device, regardless of their selected home automation platform. Our line of keyless electronic locks offers the strength, peace in mind and ease of installation and retrofit that our customers desire. I've had an opportunity to drill down on our innovation pipeline this past quarter, and I'm convinced that our investment in R&D to drive new innovative products will continue to position us as an industry leader in technology development. I'm truly excited about our future prospects in both the commercial and residential markets. On the M&A front, the overall pipeline is starting to progress nicely. We've been active in the first quarter, and although relatively small transactions, they are aligned with the areas of focus that we previously discussed, emerging markets, emerging technologies and product portfolio expansion. Yesterday, we announced the acquisition of Fire and Security hardware, a leading electromechanical locking provider in Australia. This transaction strengthens Allegion's presence in the Australian security market with a strong brand name and product portfolio, while bringing innovative technologies that can be applied globally. I'd like to take a moment to provide an early update on our EMEIA progress. As of previously announced, Lucia Moretti was appointed as our leader of EMEIA business located in Faenza, Italy. Lucia has wasted no time in adding significant value to EMEIA improvement plans, leveraging her past knowledge and experience in similar situations. In early April, initial actions were unveiled to streamline deployment of assets and resources to improve profitability and customer focus. We continue to strengthen our execution in markets where we have the right products to be successful and have made changes to streamline operating divisions, provide better focus on the customer, and strengthen our leading positions. We've also made decisions to exit certain markets that are less profitable, dilute resources and are not scalable. We continue to identify in which areas we can reduce our overhead cost. We remain on track with respect to the work required, and we'll continue to see operational improvement with a step up in the second half of 2014 after full implementation of these actions. Patrick will now walk you through the financial results, and I'll be back to update our 2014 outlook.

Thanks, Dave, and good morning, everyone. Please go to Slide #5. Reported net revenues for the quarter were $472.5 million, reflecting a decrease of 0.2% versus the prior year. In the fourth quarter of 2013, a change was made to the order flow with our consolidated joint venture in Asia. As previously reported, the joint venture acted as a pass-through of products to the end customer. Beginning in the fourth quarter of 2013, products are shipped direct from the supplier to the end customer, with the joint venture receiving a royalty in amount that approximates the loss margin on revenue. Accordingly, the joint venture will no longer recognize the revenue and cost of goods sold on these products. This impacts the revenue comparisons, but does not materially impact income or cash flows in future periods. For the first quarter, the revenue impact was $17.7 million; for the second quarter, $17.4 million; and for the third quarter, $16.9 million, resulting in a full year impact of $52 million. Adjusting prior periods for the order flow change, net revenues for the quarter increased by 3.7%. Organic growth, which excludes the impact of our Colombia acquisition and foreign exchange rate fluctuations, was up 3%. All regions reported adjusted revenue growth in the quarter compared to the prior-year period. We were pleased with the quarterly performance of the business, given the weather induced headwinds experienced early in the quarter. Adjusted operating income increased by 3.8% compared to the prior year. Adjusted operating margins were 16.1% in the quarter, flat to the first quarter 2013. The company effectively managed and implemented price increases and productivity gains to offset inflation, incremental investments and unfavorable business mix. The operational improvements provided the funding for new product development and channel investments. Please go to Slide #6. Now I'd like to discuss our earnings per share performance. This slide shows our EPS walk for the first quarter. For the first quarter 2013, reported EPS was $0.41 per share. Adjusting for prior year restructuring expenses of $0.04, the 2013 adjusted EPS was $0.45. Operational results increased EPS by $0.05 as pricing and productivity more than offset inflation. Note that pricing actions were taken in the quarter to offset increased inflation as discussed on our fourth quarter 2013 earnings call, particularly in Venezuela. The next item on the reconciliation relates to the $0.05 year-over-year benefit related to the foreign currency loss recorded in the first quarter 2013 from the devaluation of the bolivar. We will speak more to the risk of a future bolivar devaluation later in our presentation. The effective tax rate of 30.3% drove $0.01 EPS improvement versus the prior year. The 2014 quarterly rate was slightly better than full-year guidance driven by net favorable discrete tax items. The comparative effective tax rate in the first quarter 2013 of 32.3% was better than the 2013 full year effective rate as it also reflected one-time discrete tax items in the quarter. As Dave will discuss later, the discrete tax items are not considered material on a full year basis, and our full year tax rate guidance still approximates 31%. The next item reflects incremental investment in ongoing growth initiatives, which was a $0.03 reduction. Lastly, a reduction of $0.09 related to the incremental interest expense incurred as a result of the additional indebtedness associated with the spinoff from Ingersoll Rand, this resulted in adjusted first quarter 2014 EPS of $0.44 per share. Continuing on, we have a $0.07 EPS reduction for restructuring and spin-related expenses to arrive at the first quarter 2014 reported EPS of $0.37. The reduction is predominantly driven by one-time separation costs, but also includes a small amount related to EMEIA restructuring. Please go to Slide #7. First quarter revenues for the Americas region were up 3.5% on an adjusted basis, and up 3.7% on an organic basis. Improved pricing, higher volumes and the acquisition of Schlage de Colombia in January 2014 offset unfavorable currency movement in Canada. Residential revenue growth reflected strength in the retail, builder and e-commerce channels. Commercial revenues were up slightly in the quarter and essentially flat excluding the previously mentioned acquisition. And although nonresidential revenue showed growth in March, it did not fully compensate for weather-driven construction impacts early in the quarter. Adjusted operating margins for the quarter were up 30 basis points as pricing and productivity more than offset higher inflation, incremental investment and unfavorable business mix related to the higher growth of residential revenue compared to commercial revenue. Please go to Slide #8. We were pleased with the ongoing progress in EMEIA as reflected in the first quarter results. First quarter revenues for the EMEIA region were up 4.4% and up 0.3% on an organic basis. We see continued indicators of a moderate economic recovery in the region, but improvement remains gradual. The organic revenue growth was driven by moderate price improvements, offsetting slightly negative volume reflecting ongoing actions to selectively exit unprofitable markets. Adjusted operating margin for the quarter was 0.5%, up 150 basis points compared to the prior-year period. The favorable improvement is driven by price, cost containment, productivity and 2013 restructuring benefits. As we did in the prior quarter, we continue to realize the efforts of our focused plan to improve profitability. With the additional actions planned and beginning to be executed, we remain on target to reflect a 300-basis-points improvement and operating margin for the full year. Please go to Slide #9. First quarter revenues for the Asia-Pacific region were up 3.3%, and up 4.5% on an organic basis. Volume improvements in commercial hardware and emerging markets more than compensated for unfavorable currency movements and declines in the system integration business, mostly timing-driven. First quarter tends to be the softest revenue quarter in the region reflecting the holiday seasonality and variability in our system integration business as project awards and order flows are typically completed in the second half of the year. Adjusted operating income for the quarter was down $1.8 million driven by nonrecurring favorable adjustment recorded in the first quarter of 2013. Excluding this impact, the region would've seen a slight increase in income, reflecting favorable volume and productivity, offsetting inflation and investment. Operating margins are scheduled to improve sequentially as revenue increases with the seasonality of the business. Please go to Slide #10. Turning our attention to available cash flow, you will see that we used $10.1 million of net cash in the first quarter. This is typical over historical cash flow and reflects seasonal use of working capital. The decrease in available cash versus 2013 reflects incremental capital expenditures for new systems, new product development and productivity investments. We continue to manage our working capital effectively as our cash conversion cycle has been reduced by 12% compared to the prior-year period, reflecting improvements in both receivable and inventory turnover. I will now hand it back over to Dave for an update on our 2014 guidance.

Thanks, Patrick. Please go to Slide 11. We are affirming our previous guidance for 2014. Our full year adjusted year-over-year revenue forecast remains up 3.5% to 4.5%. We still see opportunity in North America for full year nonresidential growth in the low- to mid-single digits, weighted to the second half of the year. Of note, market growth continues to be led by traditional commercial segments with institutional segments lagging. Adjusted earnings per share are forecasted to be in the range of $2.25 to $2.40, an increase of 6% to 13% from 2013 adjusted earnings per share. We anticipate earnings growth will accelerate in the second half of this year due to higher volumes, 2014 European actions and a wider spread in the effective tax rate. Restructuring and spin costs are still expected to be $0.25 to $0.30 of impact during the year, resulting in a reported EPS range of $1.95 to $2.15. The effective tax rate in the guidance remains at approximately 31%, reflecting the result of the new tax structure and tax pricing [ph] strategies executed in construction with the spinoff. Finally, the guidance does not reflect the potential risk of devaluation of the Venezuelan bolivar. Currently, there are 3 exchange mechanisms administrated by the Venezuelan government, each with a different exchange rate. Given the uncertainty to predict at what rate would be accepted under any supplement exchange rates, we believe that fixed official rate of 6.3 bolivars per U.S. dollar remains the most appropriate. Aligned with this decision, it is important to note that our Venezuelan business requires minimal imports to operate successfully, which minimizes the exposure that has challenged other companies that have a high dependence on imports. For more information on this topic, please refer to our Form 10-Q filed with the Securities Exchange Commission for the period ended March 31, 2014. Please go to Slide 12. We completed our first quarter as a stand-alone company, and I'm especially proud of our 8,000-plus employees who continue to put into place all the things that are necessary to operate independently, while staying focused on satisfying our loyal customer base. We strive to create peace of mind by pioneering safety and security and we continue to unlock the potential of Allegion. We delivered solid Q1 performance, while investing in the future. We remain committed to executing our long-term strategy of driving organic growth, adding bolt-on acquisitions, executing on operational excellence, EMEIA margin improvement and leveraging our tax structure. Last, we continue to execute a balanced capital allocation strategy to deliver shareholder value. Now, Patrick and I will be happy to take your questions.

[Operator Instructions] Our first question is from Jeff Kessler of Imperial Capital.

First, with regard to Europe, could you get a little more specific as to what types of businesses are you looking for, the characteristics of the businesses that you're looking for to acquire in Europe and the characteristics of the businesses you're looking to or the areas you're looking to get out of? I know you described it a little bit before, but I'm wondering if you can get a little more granular on the types of things that you're looking for to go into and to get out of?

So, our #1 focus in Europe is executing a restructuring plan. We think that's 24 months to get this business at the profitability levels that we think are appropriate with the, really, the 6 markets that I described at Analyst Day that we can be successful with. Second, as we look at our portfolio, we believe there's areas in those markets where we can win, and there's areas in those markets where we do not have the scale or market positions to be successful over the long-term, and we will exit those markets. In terms of acquisitions, the region is not a high priority, but if there's a technology move that will complement the balance of our portfolio globally, we will go down those path.

Okay. And that would include paying up for companies that have that technology?

We will always be mindful of the returns that we can get on an investment like that, that complements our portfolio. But sometimes, in my history, when we see technology that can complement, you pay up for it.

Okay. The second question, my follow-up question is, your U.S. resi business, you described it -- you describe it as one of the drivers in the first quarter, and one of the things that's been out there, particularly in the market, and in terms of some of the, let's say, the buzz that's going on in the industry is this new Schlage electronic wireless lock. Is this a big driver of what you consider to be, let me just put it out there, a residential drive that you're trying to make in the U.S.? I know it's a very substantial portion of Schlage to begin with, but is this going to increase? Does this lock have the potential to increase the percentage of resi business within Schlage?

I believe that we have the strongest portfolio of electronic locks in the North American market, and that's reflected with almost a 50% market share. I'm very pleased with the profitability of this. I think what we're moving to with our new e-lock is a very strong position in open platforms. We were a bit handcuffed with potential buyers because of our lead with, what I'd call, closed platforms. And I believe we've got the best mechanical security, a class I lock with open technology that is purely keyless, and I think it positions us nicely for future growth.

Okay. And I am sorry, just one quick, real quick update on Venezuela. Realizing that many companies have gone to Sicad I or -- which is at a 11, and the Sicad II, which is at 51, I'm curious about your decision to remain at the official government rate.

Yes, so Jeff, let me tackle that a little bit, and just a little bit of background information, as we previously disclosed. Our Venezuelan business in total from a revenue perspective is about $60 million to $70 million per annum, so it's a small piece of our overall portfolio. And as Dave mentioned earlier, most of the business down there is sourced, manufactured, distributed and sold in the local markets. So we don't have a lot of imports. As a matter of fact, it's like $1 million per annum. So we're not really highly dependent upon exchanging local currency for U.S. dollars. If you kind of look at the decisions relative to this, the other thing I would add is that from my dividend perspective, we don't have the capability or ability to dividend money out, so that's one of the factors. The Sicad I rate currently is not available to us. It does come intermittently, but currently it's not available to us. And the Sicad II rate, as we understand, is a very illiquid market. One of which we would not advocate exchanging local currency for U.S. dollars given that exchange rate. So if you kind of look at all these factors, one, we don't have a need to exchange local currency to dollars, nor do we have an intent to do so. And third, it's not available, so our conclusion was it's best at this point, to continue with the official rate. We'll continue to monitor the situation. I think it would be a little bit disingenuous not knowing perhaps, what the devaluation would be at in the future to go forward with the devaluation.

Our next question is from Josh Pokrzywinski of MKM partners.

Just first on European margins. Nice eeked-out profit there in what is typically a pretty big loss quarter. If you could help us maybe on the cadence as we go through the year? I was surprised just given how much you were able to narrow that gap early on, why you're still able to -- or why you're still committed to the 4% target and why that may not move higher? So any understanding of maybe -- particularly, the 2Q to 3Q dynamic with some of the shutdowns later in the summer there of how we should think about the margin cadence the next 2 quarters.

Yes, so as we mentioned, I think we've made some really good progress there in margin improvement, and what you're seeing there is a combination of things. But primarily, you're seeing the benefits of some restructuring efforts we took in 2013, as well as some cost containment. Kind of going forward, we will continue to be profitable in all the quarters, and the step up improvement really begins to accelerate in both the second and third quarters. You may recall last year, 2013, the losses were actually accelerating in Q2, Q3, so the comparisons get easier for us. But we would continue to see margin improvements, and the biggest change you would see would be in Q3. Particularly as we begin to implement some of the actions we talked about, they'll be executed in 2014 in terms of exiting on profitable markets and pruning some of our cost structure further this year.

Got you. So in Q2 then, does that -- is there another big step up just with seasonality? Or how should we think about 2Q?

Yes. It's not a significant step up. It is a margin improvement both sequentially, as well as year-over-year. The step ups, really, from a significant perspective occur in Q3, Q4. We're still on target for the 300 basis-point margin improvement for the full year. And we'll be looking to exit the year on a full-year run rate basis in the mid-single digits from an OI perspective.

Got you, that's helpful. And then, just moving onto the North American business, obviously, a lot of disruption for weather -- from weather. Can you give us a sense of how, maybe, March and April as you see it? Maybe you haven't closed yet -- trended on commercial versus resi to give us a better sense on how those are doing on an underlying basis.

I've got no perspective on April. Clearly, better than what -- in terms of business volumes activity, better than we were seeing in January and February. [indiscernible] into the heart of the construction season and a lot of our activity here is driven by institutional activities that go on, on college campuses and schools, so I feel positive about that. We were out at the ISC West show, that was the best vibe that I've got at a tradeshow in the last 5 years. So no factual view on April, but we continue to be positive on the direction of the business.

Excellent. And then if I can just squeeze one more in. Obviously, a lot of price support in the Americas segment from what you've had to do in Venezuela. Can you give us a sense of what that would maybe look like, ex Venezuela, more the U.S. business?

Yes, you're exactly right. A lot of that increase there was related to Venezuela. We're offsetting the inflation in the market. We were successful, by the way, in doing that. If you look at the price increase for Americas, it's really carryover from the prior year, and I would call it around 0.5% or 1% would be the realization year-over-year and that stepping up a little bit in the back half of the year.

Our next question is from Charles Clarke of Credit Suisse.

Just a question. I think at the Analyst Day, we talked about Europe kind of flattish market for the year, Asia up kind of high-single digits. First quarter just kind of looked a little bit the opposite, kind of Asia kind of slow growth in the beginning and Europe kind of showing some nice growth with revenues up 4% or so. So just as a question, I think relative to then, is there this visibility in the Asia business? Or is that a little weaker? Or does Europe feel a little bit stronger?

A couple drivers in Asia in Q1, the Chinese New Year takes a lot of wind out of our sails. I felt positive about activity coming out of South Asia. Our mechanical business had some decent traction. If we look at the historical trends on Asia-Pac, this is clearly -- we build momentum as we go through the year, and we'll see that. Our Bocom business that we talked about at Analyst Day tends to be more project-driven, and those projects gain momentum as we go through the year. Europe, I -- we label it as stabilization, but I was, again, energized. We're seeing some light in the markets that we participate, and I'm really pleased with Lucia Moretti's aggressiveness in the first month. The actions that we're taking, I think, are sending a strong message to our team and our customers that we're going to be focused on where we can win. And we will make investments and productivity improvements to complement that. So it's still -- we're a long way from recovery in Europe, in terms of the overall economic, and I think we have a little bigger challenge with our Southern European exposure, but we're going to focus on those opportunities and execute.

Yes, and Charles, I would just add, in terms of the revenue growth that you see year-over-year in Europe, the majority of that on a reported basis was exchange related in the strength in the euro and the British pound relative to the dollar. If you exclude that, it was basically flat year-over-year.

Okay. And just one housekeeping question, just because most of my other stuff's been answered. Interest expense just looked a little high to me in the first quarter just looking at what I was expecting. Is 13 a good run rate going forward?

Yes, 13 is a good run rate. People sometimes forget some of the debt issuance cost that are amortized over the life of the debt, and that's the other component that's working in there.

Our next question is from Steven Winoker of Sanford Bernstein.

Just first, few clarification questions on Venezuela. And I know it's only 3% of sales, but still want to try to understand this. The pricing actions you took, were they just enough to offset the official exchange rate that you are talking about, or a little bit more? Should we think about that as something that is actually capable of covering some of those other potential outcomes that are described in the Q?

Yes. So the pricing action, predominantly, was taken to offset the inflationary pressures that we're seeing in the market there. The -- it's not really tied to the exchange rate per se. But in the event there was or will be a devaluation, we do believe we could perhaps be a little bit more aggressive in the pricing front to offset some of that impact on a going-forward basis relative to the translation of those results.

So you didn't get ahead of that? That's something that would be on -- to come?

That's correct.

Okay. And then in the event that the risk that you called out in the Q were to play out at those -- at other devaluation levels, just so we understand it, would there be 2 effects here between an asset write-down and a translation effect, or just 1 that you called out?

Yes, so there's a nonrecurring charge and those numbers are reported in the 10-Q at both the Sicad I and Sicad II rate. But there would also be an ongoing impact on the translation of those results back to U.S. dollars.

And you did not explicitly call that out, as I recall, right?

No, because again, we're not going to be sitting on our hands doing nothing. We would help mitigate that with what we just discussed in terms of pricing actions and those type of things.

Okay, great. On Asia Pacific, you talk about, I guess a sequential improvement, but year-on-year, I guess it was down 2.5%, I was -- your margins Q2 of 2013 were minus 2.5%. So even if -- and it was minus 5% right before that, and given the minus 13.5% -- 13% adjusted now, even a slight improvement could still mean a significant -- significantly lower than the prior year. Is that what we should be thinking about? Or what kind incremental -- how should we be thinking about that for Q2?

No, not really. The comparisons do get easier beginning in Q2. As we kind of laid out, this is an unusual business where roughly 1/3 of the revenues in the first half of the year, 2/3 in the second half of the year, we don't have a lot of variable cost structure in this business. But relative to what we're seeing in the marketplace, we would expect the margins to be somewhat close to last year in Q2 and then really starting to expand in the back half of the year.

Okay. And then just one last one. On productivity, you called out $0.08 for the quarter. Does that include the volume leverage on the 3.5% growth, ex pricing, I guess? And regardless, where are you getting -- maybe a little more color on where you're getting that? How much of that is in the Americas?

So we're seeing productivity improvements throughout the globe. We are seeing it primarily through many things, but the value stream analysis that continues in our operations, the VAVE work that's being done by the engineering group, we're getting really good traction with that. So we're also seeing the benefits of the improvement in the margins in Europe associated with the 2013 restructuring activities. So that's lumped in there in terms of productivity benefits. And all of that is exceeding both our material, as well as labor inflation.

[Operator Instructions] Our next question comes from Jeremie Capron of CLSA.

A question on volume. If I look at your EPS walk on Slide #6, do I understand correctly that essentially volumes were flat year-over-year?

Yes. So up slightly, a lot of the movement in revenue was driven from price.

Okay. And then you mentioned a few times that the electronics business obviously, was seeing positive growth. I wonder if you could give us a sense of that growth rate for the electronics and obviously, the mechanical business must be down then year-over-year?

So our Electronics business growing at low double digits, we believe we've got a nice market-leading position there. And with our new products, we're going to continue to look at the opportunities to enhance that globally.

Okay. And on pricing, are you seeing any change in terms of the pricing environment, be it in North America or Europe?

I would say it's steady. We're in competitive markets, but the market appears to be disciplined. Typically, we're competing on advantages in our product portfolio that allow us to be rewarded for the quality and engineering that we're putting in our product.

Okay. So and then a final one for me. Can you give us a sense of the size of the acquisitions that you've announced so far this year in terms of the revenue contribution we could expect in 2014?

We have not disclosed that. They're -- collectively they're smaller transactions, each one kind of the 10 to lower-type of revenue numbers. So not a significant impact on a full-year basis.

Our next question is from Steve [indiscernible] of Gates Capital Management.

I'm just curious what the potential restructuring cost estimate will be for EMEIA and over what time period?

Yes, so we would be looking to move forward in booking a charge. Most of that would be in Q2, and still working on the number. What we've kind of indicated in terms of our spent and restructuring cost, $0.25 to $0.30 per share. So the restructuring would be included in that, but not a significant charge.

Our next question is a follow from Josh Pokrzywinski of MKM partners.

Just a couple of quick follow-ups here. First, on the tax rate, you guys look like you're running a little bit ahead of the 31%, and I would imagine there's still some levers to pull as we move through the year. Any sense of timing as when you'll have the critical mass or have the pipeline of action to give us an update on that?

Yes, I would just say nothing has really changed today from our last guidance, which you may recall, that we're looking to move our effective tax rate currently at 31% down to the mid-20's in the next couple of years. As we look at the land landscape of opportunities, I'm getting better clarity in terms of what those opportunities are. There's still lot of work to be done, too early, obviously, to declare victory. But I'm feeling pretty good in terms of the opportunities. As we continue to work on those, we'll provide more clarity as we go forward in terms of timing, magnitude, et cetera.

I would add, in terms of Patrick and I and leadership of the business, this would be one of the key priorities for us. And we -- Patrick in particular, Shelly Metter [ph], have dedicated significant time, and we got our eye on it. And we'll continue to make sure that we've got a competitive tax rate.

Great. And then just on the spec and quote comments that you made, being up in the, I think you said mid-teens, and that tends to be a 9-month-plus forward indicator, any change in cadence as that moves through 2013 that could signal an inflection in 2014 that we should be aware of? Or was that just kind of a steady grind last year?

In terms of quotes?

Yes, the -- you mentioned the spec and quote as a forward indicator so I'm trying to use it, I guess, as the -- a forward indicator more near term.

I would use of that as a positive view on our survey of the landscape that we continue to go through a recovery. It's going to be gradual. This is not a bounce back, but I like the indicators. We're sharply focused on the markets where we see there is opportunity. I think there is also areas of the geographical landscape that we could do a better job of getting our share or better. And we're investing to go after that, we are drilling down deeply to understand the market segment opportunities where we're performing well. And if there's gaps, what do we have to do to fill that. And I like our opportunity there. In a softer market, if it gets stronger, we're going to do even better.

And could you just remind us what percentage of that commercial business, or I guess nonresidential business in the Americas is keyed off of some of those early indicators on spec and quotation activity?

I would say 60% of our business is heavily driven by spec writers and quotation activity. These are projects, these are construction retrofits, and it's a clear driver.

Got you. So that comment is a pretty decent analog for your visibility into next year at this point?

I like what I see, and I think that's been a consistent message over the last 6 months.

Our next question is a follow-up from Jeff Kessler of Imperial Capital.

I just basically want to get some clarification on what you just -- you said a little bit earlier about Europe and the way Europe looked in the first quarter and that the gains came -- the margin gains, but that the revenue gains in -- specifically, were mainly related to ForEx and not actually the unit volume. Am I mistaken in hearing that?

No, that's correct.

I'm showing no further questions at this time. I like to turn the conference back over to Tom Martineau for closing remarks.

All right, then. We'd like to thank everybody for joining today's call. Have a safe day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.