Good morning and welcome to Allegion's Third Quarter Earnings Call. All participants will be in listen-only mode.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Wagnes. Mr. Wagnes, please go ahead.

Thank you, Keith. Good morning, everyone. Welcome and thank you for joining us for the third quarter 2016 Allegion earning call. With me today are Dave Petratis, Chairman, President, and Chief Executive Officer; and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning and the presentation, which we 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 on today's call that are not historical facts are considered forward-looking statements, and are made pursuant to the Safe Harbor provisions of the federal securities law. Please see our SEC filings for a 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. Please go to Slide number three. Our release and today's commentary include non-GAAP financial measures, which exclude the impacts of impairment, law fund divestitures, restructuring and acquisition expenses in current and 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 third 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 re-enter the queue. We will do our best to get to everyone given the time allotted. Please go to Slide four and I'll turn the call over to Dave.

Thanks Mike. Good morning and thank you for joining us today. I'm pleased with the Company's third quarter results. We continue to deliver profitable growth that reflects continued execution of our growth pillars as well as the benefits of investments in the business. Third quarter revenues came in at $581 million growing 6.7% over prior year and reflecting organic growth of 5% as well as the benefit of prior year acquisitions. Americas had organic growth of 5.6%, which was driven by solid revenue growth in our non-residential business. Europe organic revenues grew at 1.6% and our Asia-Pacific business grew at 7.3% organically. If we exclude the previous fully divested systems integration business, revenues from prior year amounts, the Asia-Pacific business achieved organic growth of 10.6%. Adjusted operating income of $126.7 million increased 8.4% versus the prior year. Overall, operating margin improved by 30 basis points, driven by continued price realization, volume leverage and favorable mix, which was more than offset by incremental investments, which was the headwind of 70 basis points. Americas and Asia-Pacific saw year-over-year improvement and adjusted operating margin with Europe being slightly down. Adjusted earnings per share of $0.93 increased slightly versus the prior year period and driven primarily by improving operating performance. As a result, we are reaffirming our full year guidance of organic revenue growth to a range of 5% to 6% and total revenue growth of 8% to 9%. In addition, we are updating and tightening our full-year adjusted EPS guidance to $3.38 to $3.43 per share. This EPS guidance is inclusive of an estimated $0.03 impact from adoption of a new accounting standard for stock-based compensation in the fourth quarter of 2016. Please go to Slide five. Shifting a bit from the financials I would like to talk about the electro-mechanical convergence in…

Thanks, Dave, and good morning, everyone. Thank you for joining the call this morning. Please go to Slide number six. This slide depicts the components of our revenue growth for the third quarter. I'll focus on the Allegion results and then cover the regions in the respective slides. Total reported revenue growth was 6.7% for the quarter. As indicated, we delivered 5% organic growth, with contributions from all regions. Each region also contributed to both price realization as well as volume growth. Foreign currency was a slight headwind in the quarter, while acquisitions contributed approximately $26 million of incremental revenue, or 4.9% growth, which more than offset the impact of divestitures. Please go to Slide number seven. Reported net revenue for the quarter was $581.1 million, which is a 6.7% increase versus the prior year period. I was extremely pleased with the solid organic growth from Americas and Asia. In addition, the acquisitions completed in the past 12 months have contributed nicely to revenue growth, particularly in the EMEIA region. Adjusted operating income of $126.7 million increased 8.4% compared to the prior year. The benefit of modest margin expansion on incremental volumes net of incremental investments helped deliver 30 basis points of improvement versus the prior year. This reflects the sixth straight quarter of year-over-year margin growth. Of note, volume increases in our Americas non-residential business contributed to favorable mix in the quarter. I'll discuss this in more detail when we're viewing the Americas slide. I'd also note that we improved our industry leading adjusted EBITDA margin to 24.5%, an improvement of 80 basis points versus the prior year. All regions improved on this metric in the quarter. Please go to Slide number eight. This slide reflects our EPS reconciliation for the third quarter. For the third quarter of 2015,…

Thank you, Patrick. Please go to Slide 13. We are reaffirming our 2016 guidance for revenue and updating and tightening our guidance for EPS, as noted on the slide. Total organic revenue guidance remains at a range of 5% to 6%, and total revenue remaining at a range of 8% to 9%. If we look closer at the Americas business, non-residential markets continue to perform well and we expect slow and steady improvement in our core non-residential segment. Modest growth is expected in institutional verticals and solid growth in commercial markets. Residential market indicators still suggest continued growth, as new housing starts remain stable but still remain below historical average, with resilient strength in the multi-family segment. Strength in the housing is offset by challenging conditions in big-box retailers. European markets have stabilized and we continue to see modest growth in our core geographies, which is reflected in the increase in our organic guidance and are leveraging our broader portfolio to accelerate growth. In Asia-Pacific, we continue to make progress with a focus on mechanical and electrical hardware solutions in growth verticals. We are tightening our EPS guidance by raising the low end of the range. We are also updating both ends of the guidance for an estimated $0.03 impact related to the adoption of accounting standards for stock-based compensation. With these changes, we are guiding full-year adjusted EPS at $3.38 to $3.43 compared to guidance of $3.30 to $3.40. As we look to 2017, we see markets remaining steady, with modest expansion globally. North American markets are expected to continue to be solid while European markets are expected to be modest. Additionally, we see growth potential in the Asia-Pacific markets that we participate in. Please go to Slide 14. Let me finish by reiterating that I'm very pleased with our third quarter execution and results. As a summary, total revenue grew close to 7%. Organic revenue grew at 5%. Operating margin increased 30 basis points. It was a sixth straight quarter with year-over-year margin improvement. EBITDA margin grew by 80 basis points. EPS grew year over year despite below the lowering pressure. These are strong numbers. We are reaffirming our revenue growth expectations for the year, have tightened the range for our full-year EPS outlook and have adjusted our available cash flow guidance to the high end of our prior range. Now Patrick and I will be happy to take your questions.

[Operator Instructions] And the first question comes from Tim Wojs with Robert W. Baird.

Hey, guys good morning.

Hey Tim.

I guess, my question just expand a little bit on your thoughts on the end markets. I mean, there's a lot of mixed data points and cross currents that are kind of going on with construction data lately. So could you talk a little bit to your confidence in some of the non-risk growth that you're seeing? And then if you could split it out maybe between commercial and institutional, what you maybe think preliminarily into 2017?

As I stated, we remain positive on 2017. As we look at our core activity, our backlogs going into the year, these are positive. Had spent some time over the last few weeks working with our forecasting team, our outside advisors, and see a positive expansion in the institutional markets as we move into 2017, see some improvement in healthcare. There's some spots of weakness in commercial, but we're net positive. I think second, our attack on segmentation in the market is servicing us well. This is the tenant retrofit/replacement light commercial markets. We think even if the market would soften, which I'm not suggesting, that there's enough self-help out there, convergence that we can put in, growth aspirations that are in line with our long term plan.

That's great. Thanks a lot.

Thank you. And the next question comes from Steven Winoker with Sanford Bernstein.

Thanks and good morning all.

Good morning.

I'd love to get some more detail and color around the EMEIA progress, restructuring, margin expansion, just in light of the performance that I thought came in a bit low versus, at least what I was expecting. So just help us understand the different puts and takes around it.

Yes, sure, Steve. As you are aware, Q3 normally seasonally is a weaker quarter given some of the shutdowns in the European area. As you mentioned, it was a little bit disappointing to us, I'd say a couple of factors to that specifically. One was, as you are aware with a facility closure we announced last year, moving from Italy to a third party supplier is taking a little bit longer than what we had originally anticipated. We're still getting some benefits, but not getting as much as we had anticipated in the quarter and the year. It's more a timing issue as we finish that transition. At the beginning of next year, we will fully realize the benefits there. Secondly, in conjunction with the acquisition of Trelock completed at the end of Q2, start off problems, the seasonality of the business is lower in Q3. A couple of operational hiccups. Not a big business, but weighed on the margin expectations. A little bit of inflation headwinds as well but I think more importantly, I look at it and step back and say, is the region off on the right trajectory? And the answer is yes. We finished the quarter with really strong backlog and it was one of those quarters that started out slow. It continued to progress positively in the back half of the quarter, so we ended the quarter with strong backlog that supports an improvement in organic growth, sequentially and year over year for Q4, and we would expect the margin dollars and margin improvement to continue in Q4 as what you're seeing historic in the last several quarters. And I would just remind you historically when we started this journey three years ago, it's been -- we had in EBIT margin of like 1% and now we're marching towards the objective of 10% and going forward, we would expect kind of continuous improvement going forward, so...

Are you expecting anywhere near the same magnitude as you start to think about, I don't know, just a little bit longer time period, if you think about last 12 months versus next 12 months or how should we think about that timing of that?

In terms of what specifically...

In margin, I'm sorry. Margin expansion, specifically.

So I think you won't see quite the improvement as what you've seen obviously the last couple of years but there will continue to be improvement, and the margin going forward as we look at the 2017. That's going to come from continuous improvement and productivity, operational excellence, getting some more synergies from the acquisitions that we completed last year and those type of things. The broader market, our larger competitors run between 10% and 15% OI. We're going to be there and we're going to continue to march towards the high end of the range. As we improve the portfolio, strengthen our customer value proposition, we think we're a credible player in that market versus our peers

Okay and just quickly, what was the electronics growth rate overall? It was mid teens last quarter...

Yes, higher than what you saw in our overall growth numbers, so with this electro-mechanical convergence growing faster than mechanical. I think on a year-to-date basis, we're up low teens area so it continues to drive faster growth than the traditional business

So I know it was low teens and -- or roughly low teens in Q1, mid-teens in Q2. If you're saying it's low teens year to date, you're saying it's somewhere between low and mid in this last quarter, just to put a final point on it?

Yes.

Okay and anything accelerating in there? Within resi or non-resi?

Yes, I would say it's a steady growth. We, on the resi side, the electronics adoption continues to expand, seeing really good growth there. The non-residential segment as well so I wouldn't characterize it as significant growth. Remember last year, we had some load ends, particularly on the Schlage Sense product that we introduced in the back half of the year and so that's making the comparisons a little bit more difficult year-over-year. You need to think about this. The mechanical business low single digits, the electronic business globally at high single-digits, so let's say 8%; and I think mid-teens improvement over the long-term in the electronics is a pretty good place to be.

Okay. Great. Thanks.

Thank you. And the next question comes from Joe Ritchie of Goldman Sachs.

Hey, thanks good morning guys.

Good morning.

So I may have missed it in the last question that Steve asked, but the trend in the 4Q, it looks like the guidance implies America is up 3% to 5%. Is there just some conservatism that you guys are baking in there or did trends actually change at all as you guys progressed through the third quarter?

This business naturally winds down as we run into the fourth quarter. I think we're looking realistically at the Americas growth in terms of what it will deliver. I would just add, again, our guidance didn't change in America's and so it was expected that sequentially the growth would be down in Q4 relative to Q3, and again, difficult comparisons, particularly on the residential, we had a lot of load ends associated with our new electronic locks in the residential Schlage Sense products, so that was a primary driver there at comparisons.

Got it. That makes sense. I guess, maybe one last question. On free cash flow, you guys are making some good progress this year, I know it’s the kind of longer-term goal to get to 100% conversion, can you talk a little bit about that and the opportunities that may present themselves in 2017?

Yes, so the expectation is that we would remain at 100% conversion ratio. You've seen that over the last couple of years. You're aware, obviously, that if you kind of look at the components of our cash flow, not a heavy capital requirements. CapEx, we would expect to be, call it, 2% of revenue. Believe we can kind of maintain that level. Working capital, we've done a really good job to accelerate the velocity and turnover of receivables and inventories and so see a 5% to 6% revenue type number there. And so, even with growth continuing going forward, we would expect that we could maintain kind of the 100% conversion ratio, 2017 and beyond.

I would add the Allegion model is set up for cash flow. We have made investments in the business in inventories to support ProExpress new regional warehouse locations and we're continuing to improve the cash flow characteristics of the business. I think we've got a good handle on the equation and that goal of 100% of net earnings is important to our team.

Great. Thanks guys.

Thanks you. And the next question comes from Jeff Kessler with Imperial Capital.

Hi. Thank you for taking the call. How you're doing guys.

Good Jeff.

Can you dive down into a little bit into the types of investments that you're going to be making. Clearly, you're keeping that investment level at a fairly high rate and the return on that investment, obviously, has been pretty good up to this point, but what are you -- going forward, what type of things are you looking at putting money into?

Without showing all my cards, remember we continue to attack the $1.6 billion U.S. market opportunity that we call part of the retro -- repair, renovate light commercial space. Our first move was really after the retrofit and renovate with mid-priced point products that's supported by ProExpress. The next move is more target that light commercial space. We're lightly stacked, fast-moving general contractor decision-makers, is where we think we can harvest some growth, Jeff.

I would just add, too, Jeff, this electronics and the electro-mechanical conversion, particularly on resi and the ability to accelerate the rate of adoption, so you'll see more investment dollars for demand creation, whether it be merchandising, advertising, those type of things on the resi side, continue to invest in our NPD to accelerate New Product Development. Get a higher vitality index is important to us. And like you said, we're seeing incremental revenue growth, a little bit faster than market, and the return on capital on these investments are significant. Very quick cash-on-cash payback and so we'll continue to make the investments to drive top-line growth and return on capital for our shareholders.

Okay. Related to that question, just quickly, mortise versus cylindrical. What's going on there? You have a new product out. How is -- how do you want to balance those two?

We'll balance based on the opportunity that specifiers in the market gives us. You go into the market like Dallas. We really drove that mortise application, so we think adding the LE with the mortise capability and continue to expand a full range of electronic products will help us complement the spec capability and renovations capability that we have in the marketplace.

Okay. Thank you.

Yep.

Thank you. And the next question comes from Joshua Pokrzywinski with Buckingham Research Group.

Hi. Good morning guys.

Hey, Josh.

Just on the -- on some of those residential investments that you talked about, Patrick, that I think -- or even targeted in the fourth quarter, if I remember some of your higher comments right. Any expectation that you would see a pull-through in residential or some sort of acceleration in demand off of this bit of this decel [ph] that we had in the third quarter as a function of that investment?

The types of investments that we will be making in terms of trying to prime the market will be cumulative over time. We think with the electronic convergence and style and design, we have to create market demand and it will build as that awareness grows.

Got you. So, not all at once, and maybe a 2017 opportunity.

I've always said with our Schlage Sense, I want 200 every Christmas tree. That might be Christmas 2018 but this is part of what we're trying to drive in the marketplace. When I go to my college dorm, I can use a credential, a smartphone to get in. When I got home, why isn't my home better connected? And that's what we're trying to move. Second would be style and design. Look at like some of the DIY shows. They're upgrading the whole house and missing the hardware. This is movement that we're trying to make happen in the marketplace.

Got you. That's good color. And then just thinking about more broadly, the 4% to 6% growth algorithm that you guys have over time. When I think about the major inputs into that, between share gains on the $1.6 billion retrofit market; electronic growth, which sounds like its holding in, if not accelerating, again with some of the initiatives you just spoke to. Any reason to believe that, that algorithm will be different into next year, just based on what you're seeing and kind of the broader end market demand, the elements that I didn't just mention, as it relates to that forecast in the next year? Does anything about that look different than it did in 2016?

I don't see it. I never want to get my head in front of my skis. We'll spend some time with you in the first part of next year at our Investor Day to sharpen our perspective on this. I think the Company is well-positioned. I think that the segmented approach that we're taking to the market will export to Asia and Europe and trying to create our own capability that I think our range expectation for growth is in line with what we can deliver.

Got you. That's helpful. If I could just sneak one more in on the EMEIA margins, what would those have looked like in the quarter absent some of the moving pieces that you talked about there, Patrick, particularly on Trelock?

Absent Trelock, it would have been up 100-plus basis points.

Got you. That's helpful. Thank you so much.

Thank you. And the next question comes from Rich Kwas with Wells Fargo.

Hi. Good morning everyone.

Good morning, Rich.

I wanted to just follow up as we think about 2017. Dave, appreciate your broad comments about underlying demand expectations, and the market. Some of the margin -- it sounds like EMEIA, in terms of improvements, is going to be more of a grind than initially thought. When you think about price cost and then investments, recollection was that you put through some price or started to put through some price but you had some negative impact or expected negative impact on commodity here in the second half. Where did that end up? How are you thinking about next year? Are you putting through price now? And then in terms of investment spend, could we just true up at $0.10 to $0.15, which is the initial target for spend for this year? You talked about impact this quarter. How should we think about framing that for 2017, at least relative to what your target was for this year?

Yes, so on the target this year, I mean you're right. We had range of $0.10 to $0.15, probably mid to high point of that for the full year, so you're going to see a step-up sequentially in Q4 relative to Q3. We're still in the throes of our 2017 annual operating plan and so no specific color on that. We'll continue to invest in the business, if we think it's a good return on capital, and we can drive accelerated growth faster than the broader market, so more to come on that on the next call. Relative to the price inflation and investment equation, I mean, we've always said that we manage the business to ensure that if you look at those components, those inputs, you try to net those out to zero so that -- of the effect of incremental volume, you get margin expansion. That's the financial model that we are trying to drive. You saw that in the quarter. You've seen in the last six quarters, and that's the continuing expectation. To the extent inflation rises faster, and we're seeing that in some of the inputs, particularly on steel, which is up like 40% relative to where we ended Q2, the expectation over an extended period of time, is we'd be able to offset that in price. We've done that historically. There's always going to be a timing gap. You can't go out in the market and do that immediately but that would be the expectation that we could -- we'd be able to offset the inflationary pressure with price, and we can drive productivity, operational excellence, and do some things leaner at our facilities.

So Patrick, would you say that here in the interim that, that's going to be maybe a little bit more of a pressure point until you get deeper into next year, as we think about price cost metrics?

Yes, it would be a little pressure point, but given our guidance, the expectation will be some continued margin expansion in Q4. So you're not seeing the full effect of that and we did go off the price increase in October you don't see the full effect of that, because the bids and order activities protected on some of that into next year. So again, there's always some carryover on that and timing relative to the input cost.

Okay. And just real quick one, Dave on capital deployment, so you continue to look at acquisitions or some higher-profile assets that are apparently on the block, how do you think the -- how are you looking at the toggle in terms of investments and opportunities and size versus scale, et cetera?

So, all toggles are available. Our cash build gives us optionality here and I'd say we're fully engaged on the acquisition front. We're busy. We're looking at files around the world. I was energized by my recent visit to the Essen Trade Show in Germany, plenty of things for us to consider, and -- but all toggle available.

Okay. Thank you.

Thank you. And we do ask having consideration of the others that you limit yourself to one question. And our next question comes from Andrew Obin with Bank of America Merrill Lynch.

Hi, guys. How are you?

Good. Good morning, Andrew.

Just a broader question, not really related to the market, is this better with the echo? No, no, it's not. Just -- have you guys considered some form of quarterly guidance because this is second quarter this year where you disappoint and the stock is not reacting well while the underlying performance of the Company is actually extremely strong. How do you guys think about it and what do you think you're hearing from the shareholders on this subject?

Our shareholders, they manage for the long term. I think my energies and the team's energies are better positioned on annual goals and driving towards that. I think we at the end of the day, are a $2 billion Company and our energies are better focused on the long-term versus and giving you good focus on what we'll deliver on an annual basis versus dancing on a quarterly basis.

Appreciate the answer. Just a follow-up question. You highlighted some weakness in U.S. non-res. Can you just -- I don't to harp on it, but can you just highlight what specific markets you are seeing weakness in? Thank you.

Andrew, its big-box and it's opening price point. I look at the overall P&L management of the res segment and feel good about it. Mid-single-digit growth for the year, an improvement in our profitability, you'll look at us investing back in that overall rest segment to accelerate the electronics over the next 12 months, and that's kind of how the -- it places. We look at -- in terms of new construction and renovation on the residential segment, as being positive going into next year. But we've got to pick our spots. The replacement and renovation market is always been good for Schlage brands and we think we have an opportunity with the strength of our electronic products to create some demand as electronics convergence moves forward.

Terrific. Thank you so much guys.

Thank you.

Thank you. And the next question comes from Julian Mitchell with Credit Suisse.

This is Lee Sandquist on for Julian Mitchell. Can you just talk about your updated organic guidance in Asia Pacific and how we should think about the potential margin expansion and organic growth story here over the longer term?

I think -- I hope you have thought about how our repositioning in the market. We're focused. We're going after specific verticals, executing well in Australia and New Zealand, and I think it's going to give us above-market growth opportunities. Patrick, I'll let you talk about the margins.

Yes, margin, as you've seen, has continued to expand some of that, obviously related to that the divested Bocom business last year but organically, getting good top line growth and that's helping to accelerate the margin improvement there. We outlined on the last call, I think, the long-term objective to get to 10%-plus type of OI. I don't think that's in the next 12 months but I would expect to see continued improvement as long as the region continues to show strength and its organic growth opportunities

We are competing in the segments that we attack on spec-driven type work similar to what we do in Europe and the Americas, and high-valued electronics. A lot of the Asian market is opening price point but there's plenty of us room to operate and I think carve out a pretty good business that's been reflected over this year.

Great. Thank you.

Thank you. And the next question comes from Jeremie Capron with CLSA.

Thanks good morning. Can you guys maybe recap the situation with regards to the Bocom business in China and the charge you're taking this quarter? I know you took a pretty sizable impairment charge last year just before selling the business? And particularly from a cash flow perspective, what do you eventually get for Bocom in terms of, again, in terms of cash? Thank you.

Yes, so going back strategically, right decision to divest the business. You may recall long earnings cycle, with government municipalities, bad return on invested capital, and so divesting the business, given that we had nothing really to leverage within our portfolio. Good move there. The write-down last year was just based on the anticipated consideration that we were going to receive. And what's happened since the sale, basically, is the business has deteriorated relative to its future ongoing cash requirements, the receivables, coming in lower than anticipated, again, from the government municipalities and so you look at what the expectation is going forward and we determine that the consideration isn't collectible at this moment, will continue to endeavour to do what we can to work with the business, to collect on those monies. But right now, don't anticipate any collections. It has no impact relative to our available cash flow projections. As indicated, we upped our ACF guidance has no impact, really, going forward. It was not included in our guidance to begin with and so it's just -- it's unfortunate but one of those things that's happened given the deterioration in the business in the broader China economies.

Thanks. And going back to the electronic lock portfolio and the growth you've seen this year. It seems to be slowing a little bit after a strong success of the Schlage Sense about a year ago. I wonder as we go into 2017, how is your product development pipeline looking? Should we expect re-acceleration of -- in the electronic locks side of your portfolio? Thanks.

Electronic development of our entire portfolio and this would include exit devices, locks, the smart closers, will continue to be a high priority in our investment, capital deployment decisions. I think any time when you introduce new technologies, when we have the success, the market tends to normalize. And low double-digit growth is significantly above the 8% -- 6% to 8% growth that is forecasted for growth for this globally. So feel good about the opportunity. There is 1 billion locks in the world and the penetration rates globally are low. We think it's one of the bright opportunities for Allegion going forward.

Thanks guys and good luck

Thank you.

Thank you. And the next question comes from Jeffrey Sprague with Vertical Research Partners.

Thank you. Good morning, everyone.

Hi, Jeff.

I was wondering if you could just provide a little bit more color on [Indiscernible] pick up my handset, too, here. A little bit more color on what you're seeing in the non-res markets, institutional, in particular? I think you mentioned healthcare strength, but if you can go around the verticals and give us a little color, that would be helpful. And also in the past, you've talk a little bit about your front logs and bidding activity. Any update there would also be helpful? Thanks.

So, not going to give specific numbers on our research but total institutional, as we move into 2017, positive, education, positive, I think, builds on our comments. The state budgets, municipalities budgets are in line. We've been pretty active in K-12 security. Tim Eckersley, our Head of the Americas, was just given a national award on this. We participated in a forum with government officials. There's tightness of funds but K-12 security, infrastructure, we see as a positive as we move into 2017, including higher aid [ph]. Hospitals, our total healthcare, a bit of a mixed bag. We see 2017 as a positive in hospital construction, but I would say modest. What's happening there, more medical office and clinics but that typically comes at a lower price point and lines up nicely with our initiative to go after some of this light commercial. So total institutional, as I look from 2016 to 2017, positive. The commercial, we'd say slightly flat to slightly up, but the Allegion perspective, as we move into 2017 at our core markets in the U.S. is positive, Jeff.

Would you say there's preponderance towards retrofit activity right now in those markets? Or can you address the mix, new versus retrofit as you see it?

The retrofit market chugs along. Even when in the bottoms of the recession and budgets are tight, it's the gift that keeps on giving. If you've got a lock, exit device or closer, I think, my view on the retrofit replacement market is, again, net positive.

Thank you.

Thank you. And the next question comes from Robert Barry with Susquehanna International.

Hey, guys. Good morning.

Hey, Rob.

Could I just clarify that comment on that Bocom receivable? It sounds like it's not impacting the cash flow outlook but is it a receivable you had expected to collect on and now you're not or could you just clarify that?

Yes, exactly. So at the time of disposition, again in Q3 last year, the expectation was there would be some consideration to be received from the collection of receivables on that divested business that would then funnel to us, and now the outlook we're saying it's unlikely that we will have any monies coming our way associated with that.

Got you. So some of the compensation you received effectively was this receivable so the sale proceeds are lower?

Correct.

Is that fair? Okay, I guess just a couple of housekeeping items at this point. On the tax rate, should we carry this 18% rate forward into 2017, and if it's 18% for the year, does that imply a particularly low rate in 4Q? And then on the performance comp accounting change, does that add $0.09 next year and $0.12 in future years? Thanks.

Yes, so on the taxes, so the 18% full year guidance includes the $0.03 one-time benefit from the accounting change on the stock-based comp, so you'd really have to back that out and you get to a range that's really closer to our original guidance, the top end of 19%, so that would be kind of the going forward position, if you will. And then, as we put together our budget and plans for 2017, we will give you more guidance on that going forward.

I see so it's like a one-timer for now.

Exactly.

Right. Okay. Thank you.

Yep.

And this morning's last question comes from Brandon Rolle with Longbow Research.

Hi this is Brandon Rolle on for David MacGregor. My question was surrounding the America's incremental margins. How much of this do you think is based on temporary weakness and the year-ago compares and how sustainable are these levels? We normally think of your business as having a 40% incremental margin on volume but you have been well above that for the past few quarters. Is that 40% becoming a larger number?

Well, I think long term, 40% probably a good expectation is what we would anticipate. You're right. We got really good leverage at our operating facilities on the incremental volume but long-term, 40% probably a good barometer to use. As we mentioned previously, as the business continues to grow, and we can manage the inputs, inflation, productivity, pricing, investment, et cetera, we should continue to get some incremental margin improvement going forward.

All right. And as there are no more questions right now, I would like to return the call to Michael Wagnes for his closing comments

We'd like to thank everyone for participating in today's call. Please contact me with any questions and have a great day.