Good day, ladies and gentlemen. Welcome to the Allegion Q2 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Tom Martineau, Director, Investor Relations. Sir, please go ahead.

Thank you, Nova. Good morning. Welcome and thank for joining us for the second 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 at Allegion. Our earnings release which was issued last night after market close and the presentation, which we will refer to in today's call, are available on our website. This call will be recorded and archived on our website. 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 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. 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 and the 2013 quarterly information in the appendix of today's presentation for further details. Our release and today's commentary also reflects direct reclassification of our United Kingdom Door business to discontinued operations. Please refer to our press release and Form 10-Q filing for the quarter ended June 30, 2014, for additional information. With that, please go to Slide 3, and I will turn the call over to Dave.

Thanks, Tom. Good morning, everyone, and thank you for joining us today. In the second quarter, revenues were $531 million, up 4% on an adjusted basis versus last year and up 2.9% on an organic basis. Adjusted operating income of $101.7 million increased 1.6% versus the prior year and adjusted operating margin of 19.1% was down 50 basis points versus the prior year. Accounting for a $2.5 million bad debt adjustment in the Asia-Pacific region, adjusted operating margin was flat to prior year. We delivered reporting earnings per share of $0.53, which includes an $0.08 of restructuring and one-time separation cost resulting in adjusted earnings per share of $0.61. Organic adjusted revenue in the Americas grew 4.9%, driven by continued strength in our Residential segment. Slightly negative EMEIA revenue growth was consistent with our expectations regarding flat, but stable markets and our decision to exit certain product markets that are less profitable, dilute resources and are not scalable. Although bookings are strong in our China system integration business, the timing of large government related contracts were the main driver in negative 12% revenue growth year-over-year. Allegion repurchased approximately 600,000 shares for $30.3 million in the quarter. This is consistent with our previously communicated capital allocation strategy to offset dilution. We are raising the mid-point of our full-year EPS guidance, which is now forecasted to be $2.30 to $2.40 on an adjusted basis and $2.00 to $2.15 on a reported basis. This earnings forecast assumes adjusted revenue growth of 3.5% to 4.5%, similar to her previous guidance. Please go to Slide 4. We continue to prioritize investments to meet the electromechanical transformation within the security industry. Our ability to provide new solutions that offer innovation and convenience to both, our residential and commercial customers is a pillar of our growth platform.…

Thanks, Dave. Good morning, everyone. Please go to Slide number 6. Reported net revenues for the quarter were $531.5 million, reflecting an increase of 0.5% versus the prior year. Adjusting prior periods for a previously discussed order flow change with our consolidated joint venture in Asia net revenues increased 4% versus the prior year. Organic revenue growth, which excludes the impact of our recent acquisitions and foreign exchange rate fluctuations, was up 2.9%. We realized mid-double-digit growth in residential Americas, driven by the builder, e-commerce and Venezuela segments. The Commercial business had modest growth, reflecting continued softness in institutional markets. EMEIA revenues were consistent with our expectations regarding flat, but stable markets. Although bookings were strong in our China system integration business, the nature of the timing of large government-related contracts drove a large variance in the quarterly growth rate. Adjusted operating income increased by 1.6% compared to the prior year. Adjusted operating margins were 19.1% in the quarter. The results include a $2.5 million bad debt adjustment within the Asia-Pacific region. Excluding this item, operating margin was flat compared to the prior year period. The company continues to invest in future growth platforms, including incremental engineering to accelerate new product development as Dave highlighted earlier and incremental channel development expenditures to accelerate growth in underserved vertical markets. Please go to Slide number 7. This slide reflects our EPS reconciliation for the second quarter. For the second quarter of 2013, reported and adjusted EPS was $0.64, operational results increased EPS by $0.04 as pricing and productivity more than offset inflation. Note that pricing actions were taken in the quarter to offset increased inflation, particularly in Venezuela. The operational results also include an unfavorable $0.02 per share impact related to the bad debt that adjustment from the Asia-Pacific region. The decrease…

Thanks, Patrick. Please go to Slide 12. If we turn our attention to end markets in the Americas, we see a shift in growth between residential and non-residential markets as compared to our prior guidance. The non-residential markets will continue to recover at a slower pace. Availability and cost of labor continues to be a challenge and any weather-related carryover from the prior quarter appears to have been modest. We now forecast non-residential 2014 growth in the low-single digits, mostly driven by the commercial segments of the market. We expect the institutional market to be flat to negative low-single digits for the year. When we look at the ABI Index, a long-term indicator for Allegion, we know the institutional sector for ABI has been recovering at a much slower pace than the commercial sectors. June marked the first time the institutional index has reach positive territory since August 2013. We see the growth in traditional commercial segments such as retail, office and hospitality as opportunities to redirect efforts to drive more share of discretionary business coming through those channels. This remains a critical component in our ability to expand in our core markets. The residential multi-family segment continued its strong pace of growth driven by affordability, mobility and uncertainty of the job market. Although we are still below normal levels, the single-family residential markets continue to show solid improvement, driven by continued recovery in single-family construction. As housing prices continued to increase and inventories reduced, we see increases in renovation activity, which will drive demand in our retail channels. With our residential product portfolio of new innovative products, we are well-positioned to support stronger residential renovation activity. Our outlook for European 2014 growth remains subdued and we continue to forecast at Allegion served markets to be flat. For instance in…

Our first question comes from the line of Steven Winoker of Sanford Bernstein. Your line is open.

Thanks very much and good morning.

Good morning, Steven

Nice progress as a team and all the key initiatives that you have been talking about, but one thing it would just be helpful especially is - our net working capital reduction, again, Patrick could you just call out exactly how you are getting that?

Yes. It's coming primarily from improved focus on both receivable and inventory turnover. I think, we have talked about historically, if you looked at the businesses from a regional perspective, Americas has been in pretty good shape. The opportunity was really in the European area. The other team has done a nice job in reducing our inventory there. Continued vigilance and receivable management and just really seeing good progress across the board.

Okay. You expect that to continue then going forward?

Well, you know, if you kind a look at it over the last four quarters, we have continuously made good progress in that area both, in terms of working capital as a percentage of revenue as well as our cash conversion cycle. I think there were some additional opportunities here, but at some point you know it becomes limited in terms of the step improvement, but we will continue to remain focused on it to drive improvement. If you benchmark the business, it shows up extremely well. It will be a high priority for us as we run Allegion.

Okay. Great. Then on the Americas, just digging into that a little bit for now, the 3% pricing growth you called out the Latin American actions being taken, but was the U.S. also getting priced or is this all Latin America and price was maybe other way in the U.S.?

Yes. The majority was Venezuela price-related. It's a high inflation economy as you know and team has done a really good job to offset the inflation there both, in terms of material as well as salaries and those [narrow] both, in terms of material as well as salaries and those types of things there. I would say about 80% is relative to Venezuela. The majority in both, our residential and the rest of it in our residential, commercial, area, so we are getting some pricing improvement. You may recall last quarter we instituted the price increase effective at the beginning of April. It took some time to kind of work out the backlog, but we are starting to see some incremental price now going into the Q3.

You are not seeing additional pricing related competition in the U.S. That's abnormal?

I wouldn't say it's abnormal. It's always a competitive market, but we are getting, I think, our share of price here.

Okay. Just on Venezuela point, again. I am not sure I am clear. What would it actually take to trigger an accounting change, the change to those other rates given you have described it very fully in your prior calls how it's a closed loop and all of that. I mean, what would actually have to happen next externally or what should we look for that would give us a sign that you would actually have the force to take that action.

Yes. Right now, when we looked at that, I think patience is prudent you know there's a lot of potential movement there in the currency, but the triggering event obviously would be a change in the official exchange rate. We would be forced to that point in time to adapt to the new rate, but if our intent or our business strategy changes to the extent we need to go out and exchange local currency to U.S. dollars that would be a triggering event. We talked about previously that if you look at that business it is fairly well self-contained i.e. it sources the product manufacturers distributes in-country. We don't really have a need or nor do we have a desire today to exchange local currency to dollars, so that's why we are sitting on the fence now and we will wait and see you know how this shakes out. I think, we'll all agree at some point there is going to be a devaluation here. This is the question of when is kind of my perspective on that.

Okay.

All right, I will pass it on. Thanks.

Our next question comes from the line of Jeff Kessler, Imperial Capital. Your line is open.

Thinking of the Americas, I am wondering if you could describe the margin differential between commercial and institutional and any government business that you might have as the mix of those, let's say micro-segments changes, how does that affect you?

Yes. Jeff, so, you know, we don't really look at it in terms of specific mix within the vertical markets. You know what we are looking at, obviously, is how the total commercial business is performing. You know relative to residential, I mean, there was a mix change there as the residential volumes were higher proportionate to commercial, but the good news story there is the residential margins are improving. We are getting good throughput in the factory, good productivity there, so that's helping mitigate the mix change.

That was my next question. I mean, it was surprising that given all the emphasis to put on the residential versus commercial mix, with residential having lower margin you have been able to maintain the margin up there. The other question that I had was, again, regarding Europe. I guess, is there any change in the timing of 2015 into 2016, where you want to end up at a margin. What is the processor you are going through to get to a, well it a 10% type of margin in Europe. What is the process and timing of that process?

We have made the big moves with our pruning. You see that in terms of the exit of our U.K. Door businesses. The second step was our internal structural cost. We have tried to move our resources much closer to our markets. The third is really getting enemies five or six markets that I see are strong in our mechanical businesses, in raising the performance and face time of our spec-writers and working with our channel partners to get more of our share in a flat market. The other side of this is the Interflex business, which we were in the search to appoint an entrepreneurial leader there. That business is performing well and understanding the growth opportunities we have got within that space, so that's how I would kind of frame it. I was really pleased with the actions that we have taken to get it to this point. I thought the improvement in margins year-over-year for the quarter were outstanding and we are going to continue to work that to reach the aspirations that we see.

Okay. Just follow-up question, those new Schlage electronic locks, you granted they may be under a different brand name, but are they applicable to the European market or is the European market, let's say, is it resistant to this point to residential wireless electronic locks or is it just going to be three or four years behind just by the normal course of things?

We believe the technology is applicable. I think it's one of the challenges of the new Allegion to think about how we can leverage our technology globally. We are looking at that capability in Europe as well as Asia to be able extend it and we think we have got good opportunities to go there, but work to be done.

All right. Great. Thank you very much.

Thanks, Jeff. Good to hear from you.

Our next question comes from the line of Jeremy Kepron from CLSA. Your line is open.

Hi. Good morning everybody. Question on the margins in the Americas segment, you called it the shifting and the mix here really weighing on the margin. I am wondering if this purely a function of strength in the residential and weaker non-res products. You also called that 20%-plus growth in electronic locks and I am wondering how that would affect margins in a positive way?

Yes, so I would say that, if you looked at the revenue, the top-line, the majority of the volume growth was residential related continue to see strong end market growth there, so that was the primary driver, just the mix. The residential margins as you know are lower than the commercial, revenue margins, so that was the driver there. In terms of electronic locks, it's a good trend for us. We are the category leader in residential electronic locks. We saw good growth there plus-20%. If you think about the margin perspective, I would say equal to maybe slightly better than mechanical traditional locks, but with a much higher price point, so not only are we getting higher margin, but were getting incremental ally dollars as well, because of the higher price point, so that's a good mix shift for us and we see that given our leading position, technology, connectivity we see that growing in the future.

I would just add in that Residential segment, the ResPro, which is new construction in our residential activity is very price-competitive, especially in today's market. As we can take e-locks on the residential side, in the retrofit market and move that up, we are going to do better. The second thing that's improving our margins, remember, a year-and-a-half ago, we moved production capability from IR [Fu Hsing] a joint venture to our Baja facilities that team is doing an excellent job of leaning out that capability and it's having a positive effect on our margins.

Understood. Okay. Then looking at the cash flow statement just two things here, one is the step up in CapEx. I think $26 million year-to-date. It's a little bit ahead of what I had in mind. Could you maybe remind us of what the percentage for this year and next?

Yes. Sure. This year, our CapEx plan is to be around $40 million for the year, so the first half is a little bit higher. That was really done purposely. We had some systems related expenditure to get off of our transitional services agreements, particular [HRMS] systems, so we had anticipated to be front-end loaded, but we are planning on $40 million for the year. As we look into next year, I would anticipate the CapEx to kind of stay around that level close to 2% of revenue.

Okay. Great. Question for Dave regarding the restructuring plan in Europe, so I think you laid out the plan, those three steps, but I am wondering if you also have an idea that what be the ideal manufacturing footprint in Europe and would that be a further step in the restructuring plan?

We continue to challenge our manufacturing footprint globally. We certainly hypothesize around what the opportunities are in Europe. We pruning what we did in U.K. was the nice first step. It's always a challenge to restructure in Europe. We think there are opportunities there, but we are also mindful, we need to be close to our end customer, so we are working those alternatives in mind that, how we properly position the business to be successful.

Great. Thank you very much.

Our next question comes from the line of Charles Clarke of Credit Suisse. Your line is open.

Hey, guys.

Hi, Charles.

I guess, first question just on tax. I realize that you guys lowered the rate to 30% from 31%, probably being nitpicky here, but is that a function of ongoing internal efforts, or is that more related to mix?

More related to mix, a couple things we are able to do there from a strategy perspective to have an impact on that. You know, this is an area that obviously continues to heightened focus. It is a strategic asset of the business and we want to continue to leverage this. We have engaged external advisors to help us in this area. The more we look into this, I think, the more we like in terms of potential opportunity. There is a lot of work to be done, so right now our guidance hasn't changed in terms of our tax rate and what we anticipate to reduce it to kind of the mid-20s by 2016.

Great. Thanks. Then just looking at Americas specifically, just looking at the first half of this year compared to the first half of last year just on an adjusted operating profit line, looks like margins were down about 50 basis points. Just wondering if you think in the back half that we should expect Americas' margins to be higher year-over-year just given that blip with the Venezuela pricing that probably won't repeat.

Yes. Absolutely. We are still forecasting and projecting full-year margins to be up year-over-year, so consequently the second half margins would be a stronger to mitigate for the first half shortfall there and that's primarily a couple of things. We are looking at strong growth, a better mix in the commercial markets. We are anticipating improved pricing. We have some price increases that went into effect and we are starting to see that come through in our order book and getting good leverage on the incremental volumes as well as you may remember fourth quarter last year had a little noise in it, so the comparisons get a little bit easier in Q4 and that will help us as well for the full-year margin comparisons.

Great. Thanks a lot.

(Operator Instructions) Our next question comes from the line Jeff Sprague of Vertical Research. Your line is open.

Thank you. Good morning, everyone.

Hi, Jeff.

Hi. Good morning. A couple things, I know you didn't want to really get into the margin difference within commercial, commercial versus institutional, but I wonder if you could speak to the kind of product intensity difference, you know, kind of value per square foot or anything like that where you have been able to kind of size the difference, so I would assume your value intensity is much higher on institutional. Just wondering how much lower commercial might be.

Institutional versus commercial?

Yes.

I have not done the value intensity analysis. It's a good challenge to get to. I would describe it this way that the margins are not significantly lower. What has driven the success of the company in the institutional side is a built-to-order model and our opportunity lies in what I called through stock distributor business, inventory in the shelf, so that we first focus on what I would call the retrofit market, let's say 10-office doors in New York City. We are doing some test cases and see opportunity to do that. There could be a bit less margin, but I don't think it's significant. We are challenging ourselves and our U.S. the Americas team that there's significant opportunity in this retrofit fast-moving market and how can we do that with our leading brands as well as our price siding brands and growth in that space?

I was also just wondering on Europe with the U.K. move, is there a substantial amount of, call it, addition by subtraction that could happen as you right size that portfolio. Is there more revenue that comes up through divestiture?

I believe we are done. I think it's now continuing to optimize the structure and really working the channel relationships, driving more specification capabilities in front-end of the business. We have lost some of that capability over last five years and that's how you win. We are looking at our opportunities with Interflex. That's been a good engine for us and you think in the bigger world of connected security, the Internet of things, we think there is good opportunity there, so I would say we are done at least for now.

Then just more for me, just the bad debt expense in Asia, where was that? What was it? Was it distributor, a retailer or project that you completed that you didn't get paid on? Can you give us a little more color there? Is there anything else there we ought to be mindful of?

Yes. Jeff, it's primarily related to our system integration business there, which as you know has long tails to the contracts and no payouts from customers accordingly. You know, unfortunately, we had a change in some of the payment history from a couple of primary customers. I would say, this is not a systemic problem. We did a comprehensive review of both, our receivable portfolio as well as the unbilled receivables and reserve there what you see was kind of a fallout of that comprehensive review. You never want to have these things, but I think we addressed it properly and hopefully we have got it behind us now.

Okay. Thank you, guys.

Our next question comes from the line of David [MacGregor] of Longbow Research. Your line is open.

Yes. Good morning. I guess, the question is with respect to your ability to flex your operational excellence programs. Specifically, the second half top-line growth in U.S. commercial and institutional is below your expectations. To what extent do you the ability to accelerate your cost reduction and value stream initiatives to protect the margins? I think this businesses been modeled and built on its ability to flex up and flex down. I would be critical of our performance in the first half that we anticipated it being the touch stronger and maybe stood at readiness, so we have got our eyes focused that if things don't materialize, we will flex down faster.

Okay. I guess, second question is just with regard to the mix. If you could talk specifically with regard to the Americas, what kind of growth you saw in your opening price point brands versus your premium brands?

I would say generally disappointed in the opening price point brands. I think that's reflective the replacement market, the retrofit market. There is part of a channel that we are not as well positioned in. Jeff Kessler asked the question about the [true stock]. I can name several industries where the actual true stock business carries a higher margin. Our challenge is to position ourselves in the channel to enjoy a bigger part of that space.

Thank you very much.

We have a follow-up question from the line of Jeremy Kepron of CLSA. Your line is open.

Yes. Thank you. Just a follow-up on Jeff's question regarding the Asia-Pacific business and system integration projects over there. Could you tell us a little more about those projects that you expect to come through in the second half and precisely the nature of them. Thank you.

You may remember from Analyst Day, we gave an overview. These are typically seven-figure projects, our backlog of those projects are up 20%. This would be providing higher definition cameras in the Pudong airport. These are safe city projects, where we are pulling together systems, a video, car counting, vehicle recognition. If you look at the Bocom business over the last five years, it tends to be second half-loaded, so normal from our perspective. We think our ability to execute on that is right. We are trying to drive more of our operational excellence initiatives to make sure we apply the same techniques on this more service-oriented capability as we do in our manufacturing capabilities, so we feel good about our ability to bring that moment in second half.

All right. Thank you.

I am not showing any further questions in the queue at this time. I would like to turn the call back to you, Tom, for closing remarks.

Okay. We will wrap it up. We would like to thank everyone for joining us today and have a safe day.

Ladies and gentlemen, thank you for participating in today's conference. This does concludes the program and you may all disconnect. Everyone, have a wonderful day.