Good morning and welcome to Allegion Q4 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mike Wagnes, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thank you, Keith. Good morning, everyone. Welcome and thank you for joining us for Allegion's fourth quarter and full-year 2017 earnings 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'll refer to in today's call, are available on our website at allegion.com. This call will be recorded and archived on our website. Please go to Slide number 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 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 3. Our release and today's commentary include non-GAAP financial measures, which exclude the impact of restructuring and acquisition expenses, impairment charges, debt refinancing costs, and charges related to U.S. Tax Reform in current year 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 fourth quarter and full-year 2017 results and provide 2018 guidance, 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, then re-enter the queue. We will do our best to get to everyone given the time allotted. Please go to Slide 4 and I'll turn the call over to Dave.

Thanks Mike. Good morning and thank you for joining us today. In the fourth quarter, Allegion posted strong operational results. With one of the most engaged and safest workforce in the industry; Allegion once again delivered a high level of execution and performance. For the fourth quarter, revenue came in at $623 million, growing 6.1% on an organic basis. Total revenue increased 9.4% over the prior year reflecting strong organic growth and the impact of acquisitions and foreign currency tailwinds. The strong organic growth was driven by all regions. Americas organic revenues grew at 4.8% as the business rebounded nicely from softer performance in the prior quarter. Business continued to see solid price performance and again saw mid-teens electronics growth. EMEIA delivered outstanding organic growth of 7.7% driven across most products and geographies. In particular, SimonsVoss, AXA, and Interflex businesses saw strong top-line growth. Asia-Pacific organic revenues grew extremely well at 16.4% driven predominantly by the China hardware and Milre businesses. Adjusted operating income of $135.4 million increased 32.7% versus prior year. Adjusted operating margin increased by 380 basis points, 260 basis points of the improvement is related to an environmental remediation charge taken in the prior year. The operating performance, excluding the environmental charge, reflected continued price realization and solid leverage on incremental volume which more than offset headwinds from inflation and incremental investments. All three regions saw significant improvements in adjusted operating margins. Adjusted earnings per share of $1.11 increased $0.30 or 37% versus the prior year. This includes the environmental remediation charge in the prior year which had $0.10 per share impact. Reported earnings per share of $0.10 decreased $0.67 versus the prior year. The decrease is driven by one-time charges related to U.S. tax reform and debt refinancing cost which had impacts of $0.56 and $0.40…

Thanks, Dave, and good morning everyone. Thank you for joining the call this morning. Please go to Slide number 7. This slide highlights the components of our revenue growth for both the fourth quarter and full-year. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we delivered 9.4% total growth and 6.1% organic growth in the fourth quarter. The full-year delivered total growth of 7.6% with organic growth of 5.7%. I was particularly pleased with the outstanding organic growth from all regions. The strong organic growth reflects the continued execution of the company's growth initiatives, the introduction of new products, and strong growth in electronics portfolio. Pricing was once again favorable in the quarter closing out a strong full-year performance in all regions as the company remained discipline in taking necessary pricing actions to help mitigate the impact of rising commodity prices. Foreign currency was a tailwind in the quarter and the full-year particularly in the EMEIA region, acquisition also contributed to total revenue growth. Please go to Slide number 8. Reported net revenues for the quarter were $623 million. As stated earlier, this reflects an increase of 9.4% versus the prior year, up 6.1% on an organic basis. Adjusted operating income of $135.4 million and adjusted operating margin of 21.7% increased 32.7% and 380 basis points respectively when compared to the prior year. The margin improvement was driven by strong operational results, with pricing and productivity more than offsetting the impacts of inflation and incremental investments. Included in the 2016 numbers is a $15 million environmental remediation charge which had a 260 basis point impact on the adjusted operating margin in that quarter. Our adjusted EBITDA margin of 24.3% was also a 380 basis point increase versus the prior year, and…

Thank you, Patrick. Please go to Slide number 15. We continue to see favorable trends on our primary end markets in 2018 and it is our expectation that the organic investments, combined with our ability to execute, will again drive better than market growth. We also believe the electronics business will continue to outpace mechanical which additionally benefit our growth as we are well-positioned to continue to take advantage of this industry trend. In the Americas, we see positive indicator in the key verticals within the non-residential and residential businesses and expect both markets to remain solid and grow in the low-to-mid-single-digits. If there is relief in the labor constraints and the supply chain, we would expect better market growth as underlying macro trends are expected to remain strong. Consolidating the market outlook, we project organic revenue growth in the Americas up 4% to 5% and recorded revenue growth of 10% to 11% reflecting the inclusion of the acquisitions of TGP and AD Systems. For the EMEIA region, we anticipate growth in core markets to be low-single-digits as the markets in the region continue to rebound. General macro-economic indicators such as manufacturers' confidence, consumer confidence, and unemployment rates continue to be positive. For the region, we project organic growth of 2% to 4%. When combining that with the impact of currency, and the acquisition of QMI, we project reported growth of 13% to 15%. The Asia-Pacific markets continue to show strength in China and North Asia with a more modest growth outlook for Australia and New Zealand markets. We expect to drive above market growth as we continue to focus our efforts on key vertical markets where we are strong. Organic growth in the region is estimated to be 6% to 8% and the total revenue growth is estimated to…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Jeff Sprague with Vertical Research.

Hi, good morning. This is actually John Walsh on for Jeff.

Good morning, John.

So as we think about well first solid quarter, and then, as we think about the 4% to 5% you're looking for in the Americas in 2018 that 5% is that still like a cap or meaning we've heard in the past around constraints around the market, labor, things like that? Or do you think that if the macro comes in a little bit better there is actually an ability to drive that higher from a market perspective?

I like our opportunities to be stronger. I think we have to be realistic in the labor constraints that I see and have identified for the last year. If those labor constraints work themselves through, we will exceed the market growth. I always believe, and we believe here at Allegion, that if the market is better we will do better than our share. We've also been mindful in the projects that we're quoting and bidding. There is good projects and there is bad projects out there that go on time, trying to pick the right horses, if you will. I would say this John, we've got data out there that says general construction backlogs are at all-time highs, and the opportunity for us to excel in that environment I think is positive.

Hey, thank you for that. And then, I guess just as we think about the investment spend going forward, I would suspect we should continue to model incremental growth but maybe at a slowing rate; is that the way to think about that?

So, as we indicated for 2018, the incremental spend year-over-year is up, but down relative to the prior year. So we look at it relative to opportunities in the marketplace, and as Dave indicated, we're really looking at continuing to expand our channel initiatives, market segmentation, driving demand creation particularly in electronics as well as accelerating new product development. We like the opportunities there and believe to-date the investments have provided a good return on those investments and so to some extent, it does come down to management capacity to be able to execute on some of those opportunities but each year we look at separately and it doesn't mean for example, in 2019, if there is some opportunities that we see in identifying the marketplace that could accelerate grow faster than the broader market that we could step-up those investments. So I would just say, it's dependent upon market situations, opportunities, and what else is going on in the business relative to the incremental spend year-over-year. But thus far I've been very pleased with results we've gotten in terms of driving incremental revenue growth relative to the market.

Thank you. And the next question comes from Andrew Obin of Bank of America.

Just a question on European operations, you sort of highlighted brands that are growing you did not highlight CISA, can you give us a sense as to what's happening in Italy, Spain, and what's happening with production move to Eastern Europe, if you could highlight, if growth rates associated with that and efficiency associated there?

CISA and Italy was the part of the growth we enjoyed in the quarter and the year. The supply chain under pressure all year got better every quarter. We continue to develop that capability and improve customer satisfaction. So I think we're in a good position to take advantage of better Italian markets and regions that CISA fix -- or serves in 2018.

And what about your channel initiative, I know that you guys sort of tweaked the channel going after new projects, are we seeing any outgrowth related to that and I'm speaking about Europe?

Yes, our channel initiatives that we pioneer here in the Americas has been expanded to Asia-Pacific and in Europe. We're in the throes of some channel analysis right now in Europe. And I think as we understand more intimately our opportunities, I think it's reflective in our growth; I think it's reflective in our acquisitions. We're extremely well-positioned in the Middle East, QMI adds to that, and this belief that we can drive granular growth through better challenges, initiatives Andrew is part of the -- I think the success you’re seeing in 2017 that will extend to 2018.

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

On the acquisitions that have been completed, how should we think about the margins here for the business, it looks -- the businesses acquired looks like it's a bit below what you would at least when you look at the Americas piece, I know doors in general tend to carry lower margins, but anything you would note there in terms of cost synergies or revenue synergies which do you think are more important for the various deals?

So like all of the transactions, I believe good product portfolios, brand positions, very good market position in the respective areas, like the growth prospects predominantly as we look at opportunities to leverage our specification, writing capabilities, as well as getting more throughput through our distribution. So I think we'll see that across all of those acquisition opportunities. So like the upside relative to the revenue and top-line. From the margin profile, as you know, we have industry margins across the globe and these transactions will be dilutive, they are lower than our overall margin profile, but nonetheless still strong contributors in terms of operating performance. So continuous improvement in margins across the globe, but this will dilute, if you will, the overall margin profile of the company in 2018.

Rich, I would add that the spec driven nature of these products AD Doors and TGP would be in the upper -- a few benchmark door manufacturers those margins would be in the upper end. There is clearly a performance basis that drives premium in market versus the door side.

Okay. So it appears like revenue synergies are more tangible maybe that cost synergies in the next couple of years?

Correct.

Okay, all right. And then, Patrick, on price cost for the year, you said you would be able to cover costs how should we think about price contribution at this point for the year?

So for 2018, we would anticipate that we would continue to offset or be above the commodity cost pressure. As you know, the commodity costs have continued to increase particularly in the backend of 2017 and the first part here in 2018 but we would expect to continue to remain fairly aggressive to recover that cost increase. So we see it as a net positive for 2018 maybe not to the extent we saw in 2017, you may recall we're out pretty early with price increases during the course of the year and got really good price realization across the board, but nonetheless it's still going to be a net contributor to margin expansion for 2018.

Great. Thank you. I'll pass it on. Appreciate it.

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

Hi. Could you expand a little bit on what you were doing well with your partner programs around the world, you mentioned obviously Europe, and Asia-Pac, taking the cue from the Americas. But I'm wondering if you could talk about what you were doing -- what's your overall goal this year to make the channel more efficient and whether or not there are any opportunities in direct as well?

So I give one example that we'll be in the second year here in the U.S. and it's our project-based business. We think with labor constraints in the marketplace there is opportunities to streamline specification process, provide total packages which would include door offerings with ourselves and partners, hardware packages that will reduce cycle times in light commercial and multi-family. A second example would be partnering with architects and our spec riders in investment we called Chorus, which automates spec writings and the take-off capabilities against shortening lead times and hopefully helping us grow in the marketplace, so a couple of examples. We've extended project-based examples to Europe; we think the addition of QMI helps us there. Jeff I don't know if you've ever been to Asia-Pacific or not Asia-Pacific but the Middle East I assume you have, you get off the airport there, you see our strengths in U.S. specified products, we believe we're in a unique position to service both European and U.S. specs that is being done with partnerships here with our spec writers in North America, so a couple examples there what we're doing.

Okay. On that same line of thinking is -- have you because Europe is somewhat different and almost in every country, nevertheless you have a history here of being ahead of the game in terms of relationships with architects, spec writers, what is -- what are you doing in Europe on a -- either on a continental basis or on a country-by-country basis to try to mimic what you're doing here?

So we are making investments in spec writing capabilities, we're talking bodies of the systems as well as what's called digital investments that can help connect that project capabilities. We also think some of the success of SimonsVoss which we're very pleased with as we extend that into the regions out of the dark zone is helping us have a stronger project-based capability. So again we've got a long way to go here but extending the knowledge and strength that we have from North America into Europe and Asia-Pacific we think, is unlocking some growth opportunities for us, Jeff.

Okay, great. One final question that is over the course of the next year there will be several trade conferences, trade shows out there, what are some of the newer -- the newer technologies that you are -- that you have been messing around with, that maybe able to see and touch over the course of the coming 12 to 18 months?

So I would encourage you to step in and talk to our technical people if they're on top of it. We continue to invest our vitality index increases for the fourth straight year. I think we're really working on this overall customer experience and how digital access your smart devices can enable a seamless experience not only in the home, but in complex buildings. We think things like Engage, our Sense Products, NDE, are opening salvos of that, the great capabilities with our SimonsVoss and Milre, but we think a lot more about the customer experience and access and this is where our investments are being made.

Okay, great. Yes. Thank you very much.

Keith, is there any other question on the line?

Yes, I'm sorry. The next question comes from David MacGregor of Longbow Research.

Yes, good morning. Thanks for taking my question.

Good morning.

I guess question on Europe. First of all congratulations on achieving that 10% adjusted operating margin you inherited not so great situation and you've accomplished a lot there. I guess the question is where can you take it from here? What are the capital requirements in order to do that and how should we think about the timeline?

David, as you said, really good progress since the spin, very pleased with the team and reaching the objective we set when we first spun out in the company. As we've talked about previously there aren't any significant step-ups, relative to the margin enhancement going forward. I think what you'll see a basis of our 2018 guidance is continuous improvement. So we'll continue to push price cost equation, continue to drive productivity, lean out manufacturing efficiencies where we can, and those type of thing. So I would look at it from a perspective of just continuous improvement, given our current business profile there in Europe.

You've got a very good free cash flow guide here for 2018 and I'm just wondering as you think about how like it's put to use, does Europe become a more sort of capital intensive part of the model over the next two to three years as you address that profitability growth challenge?

We like the cash flow of this business. We'll continue to have our priority on growth through acquisition number one. Europe has one of the best playing fields to be able to do that, but our view continues to be global, what are the smart tuck-ins that makes sense. Second would be technology. There is a whole world of digitization that's moving in our industry and will move over the next decade, so look for us in investments there. But clearly, I'd said in Europe, we'd like to continue to move north, continue to move technically, and find targets that can move us with scale, so that's how we think about it.

Okay. Last question for me is just on the investments of the $0.10 guide. I know regionally you started 2017 if memory serves correctly guiding to $0.15 to $0.20. I think you ended the year at about $0.13. Now you're guiding to $0.10. I know you asked about this on an earlier question but in responding to that, David, I think you had noted that a contributing factor here was just management bandwidth. Does that raise a question about management bandwidth here? Do we have to be concerned about your ability to capitalize on opportunities as they present themselves, could you expand a little bit on what you meant there?

So I think when I think about management bandwidth, the first one is, understanding management capacity. Our ability to efficiently deploy capital, I think after 48 months as a publicly traded company I think we know where our boundaries are. It's easy to spend money; it's not so easy to do it efficiently. We think pretty significant -- we think deeply about that. I think as I step back and think about the technologies and opportunities that we have going forward it's important that we know where to invest, how to invest, but also where we can move the bar through M&A and do it smartly. So I feel good that we know where we're at. But I'm not going to swing the fence or stretch beyond what I think could add risk and potential problems and get a return on that investment.

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

Hey, I just wanted to clarify the earlier comment about price cost being a net positive; is that price plus productivity net of all inflation or just some incremental color there?

Yes, so that would be our price cost, so pricing would exceed material inflation clearly. Price productivity together would offset any inflation including merit and those normal things that occur in the course of the business.

Got it. And just any color on approximately how big of a net positive that is; is that a material contributor.

You'll see it in our 10-K when we file relative to 2017 but fairly significant contributor. Again would anticipate 2018 to continue to be positive probably not to the extent it was in 2017, just given the price realization we got during the course of the year, but again favorable for the full -- anticipated for the full-year of 2018.

Got it. And then, can you just level set us on the tax rate going forward it sounds like we should model 2016 for 2018 but then or should we assume it's rising after that like to a high-teens rate just wanted to clarify?

Yes, I think the best way to look at it, again every year has some discrete items that play into the effective tax rate. So you're right 2018 we anticipate 16%. Going forward higher teens is probably a better expectation and I would -- we feel pretty good about that over the long-term. And so as you think about 2019 and beyond, you should think about a little step-up in the rate relative to 2018.

Got it. And then just one last quick one on the cash flow guide the $380 million to $400 million does that include some one-time cash headwinds? I just want to clarify that I feel. Thanks.

Yes, it does. We mentioned in the commentary that relative to the tax reform changes there's going to be some one-time cash tax payments in addition to the normal kind of repatriation tax. It is a one-off item specific to 2018. And so that's a little headwind in our cash flow and that's why you don't see quite the conversion ratio on ACF to net earnings, but believe more importantly that 2019 and beyond our stated objective of 100% conversion we should be able to maintain.

Got it. So ex those one-times, you're at or above 100 this year?

Yes.

Thank you. And the next question comes from Tim Wojs with Baird.

Hey guys nice job.

Thank you, Tim.

I guess maybe going back to Americas and just -- and just maybe more specifically on margins. Just given I think you exited the year at may be 28.8%. You've got the incremental investments but then you also have I think some dilution from the deal. So what's the right way to think about Americas margins in 2018 versus 2017?

So I think the way to think about it is like the other regions of the globe on a base business ex acquisition, continuous improvement, again continue to get pretty good leverage and pull-through margin on incremental volume, positive contribution on price cost inflation etcetera. But the margins on the acquisitions, good businesses, but the margin profile isn't at the 28.8% referenced. And so you're looking at -- when everything is said and done kind of flattish to slightly up margins for 2018 all inclusive of the M&A activity.

Okay. And that's just for Americas?

Yes.

Okay, great. And then maybe slipping over to the growth the 4% to 5% organically in Americas, what's the right cadence for the year? I think you have a little bit that the comps I think in the first half might be a little bit more difficult than the second half so just may be just level set us on the model around cadence of growth? Thanks.

So you're right very difficult comps in Q1 in particular. So I would anticipate maybe the growth rates been slightly lower in Q1 this year relative to last year, but and slightly improving during the course of the year, not that big of a delta during the course of the year but slightly not as high as what you would anticipate for the back half of the year.

Okay, great. Good luck on 2018 guys.

Thank you.

Thank you. And the next question comes from Josh Pokrzywinski with Wolfe Research.

Just a follow-up. I guess more broadly on some of the M&A announcements here recently, Dave. I think when you first went out there is a bit of a push to get kind of a focus more on the hardware less on the door and the last few deals have certainly been specialty type products but have included a bit more door-centric stuff; is this a change in philosophy should we expect this to continue within some of these niches or how do you view that assessment because I know that was a big difference between yourselves and your largest competitor there initially?

So first of all think about it as my own maturity and understanding the business. We think we have a powerful asset and our spec writing capability and when we can come in and write a total turnkey spec especially including specialty equipment and features we think that's a good place to be. We also looked at the competitive landscape and clearly saw where we were disadvantaged particularly around our steel door offerings with steel craft and for example the Republic acquisition that we made last January gives a better geographical capability to serve customers locally. These businesses have laid adaption capabilities and it's really just thinking that through. In the Middle East with QMI we were actually winning jobs and shipping steel craft doors firms Cincinnati Ohio. So it's just I think a refinement of our understanding of the market and the points in capital that we think helps our top-line and bottom-line growth.

Got it. Thanks for the color. And then on some of these labor shortages that were impacting last quarter, I mean clearly Americas volume growth accelerated, I guess I don't know exactly what price contributed but probably not much compared to that that bigger number in 3Q; is that a sign of some of those shortages working themselves out? Or is it just, hey, in the fourth quarter where seasonally things are slow and there is a bit more slack in the system, maybe help us understand that dynamic a bit better?

So as we look back at Q3 especially as we ended it, we saw an absence of flows through the supply chain, as projects are pressured to complete on year-end, we saw that slack move through the system, I think that's going to be something we're going to have to continue to navigate and be aware of as we go in to 2018 and 2019. I see labor constraints as well identified. I mentioned the high backlog of construction orders put in place and we think it will create shock in the market and demand as we go forward. Now with that said, we're not -- we're looking at our value streams and say how can we invest to better position the company, our incentive structures that we can use to help move that through to get better and consistent flows, we’re working on it, but we don’t have it all figured out.

Got it. And then just one last one for Patrick, I apologize for doing this, you probably didn't mean for all this deconstruction of what I'm about to do. So organic or volume-based incremental margins I think net of investments looks like they're about 30% in the guide, if the price cost is positive, I think on a volume only basis you'd probably be somewhere in the mid-20s, that seems conservative to me but is there something on the mix front or something out that we should keep in mind as maybe being an irritant to that again? Like I think that's ex acquisitions or FX I think that's a pure number that I backed into?

Yes, so mix maybe a little bit more favorable given the growth in residential relative to the non-residential is weighing on that contribution margin. Other than that there isn’t really any other significant items that would be weighing down that margin percent.

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

Thank you very much. Maybe just trying to stick to one question, it was really on the electronics business, I think you enjoyed mid-teens growth there in Q4, maybe give us an update on what proportion of your total revenue now is coming from electronics? And also what you’re expecting the growth to be in 2018 and whether you're broadly happy with your organic position and there shouldn’t be a need for a big M&A deal in that segment of the market for you?

Yes. So again really good growth in electronics portfolio across both non-residential and residential products really like what we're seeing there. As you know still low penetration particularly in the residential markets, a lot of room to continue to grow there. The overall portfolio in electronics is mid-teens as far as our global business and that varies a little bit by region. But we'd expect the electronics to continue to outgrow the mechanical products, so that percentage will continue to increase. And as we've talked about previously good trend for Allegion, higher price points, similar margin profile means more EBIT dollars. And we will continue to drive that particularly as we look to make investments whether it would be demand creation or new product development to ensure that we can be a leader as far as that development in electromechanical convergence.

Thank you. And since that's all the time we have for questions at the present time. I would like to turn the call to Mike Wagnes for any closing comments.

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

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