Good morning, and welcome to the Allegion First Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I'd now like to turn the conference over to your host today, Mike Wagnes, Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Thank you, Keith. Good morning, everyone. Welcome and thank you for joining us for Allegion's First Quarter 2019 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 will 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 Slides #2 and 3. 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 most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Dave and Patrick will now discuss our first quarter 2019 results, which will be followed by a Q&A session. [Operator Instructions]. 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. Allegion got out of the starting gate with a good quarter that has positioned us to deliver on our 2019 commitments. We had solid top line revenue growth in the first quarter, which benefited from strength in the Americas and from the Gainsborough acquisition in the Asia Pacific region. The Americas' growth was driven by the nonresidential business as end market fundamentals continue to be positive, particularly in institutional verticals. Pricing was also strong for the company, led by the Americas region. Electronics growth at almost 10% for the quarter, which was lower than the growth rates we experienced in 2018. While growth improved sequentially from the last quarter, our product portfolio and new market partnerships will drive even better growth in the coming quarters. Allegion's combination of brands, expanded product portfolio, technical partnerships and continuously evolving channel relationships give us a great opportunity to take advantage of this market as it develops. For the full year 2019, we expect the Americas electronics growth rate to be similar to historic levels, which is supported by the healthy demand of the recently launched Schlage Encode residential lock that is ramping up in Q2. Moving down the slide, Allegion was able to drive price realization and productivity actions, which more than offset the substantial inflationary pressures we experienced. I'm pleased with the performance as we saw operating margin increase for the total company and in each of the individual regions. In the first quarter, we delivered a 10% increase of adjusted EPS, driven primarily from operations. This performance highlights our continued focus on accelerating growth, margin improvement and driving increased shareholder value. Last, we are affirming our outlooks for 2019 revenue and EPS. We project total and organic revenue growth between…

Thanks, Dave, and good morning, everyone. Thank you for joining the call this morning. If you would, please go to Slide #7. This slide depicts the components of our revenue growth for the first quarter. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we delivered 5.8% organic growth in Q1. This performance reflects another strong quarter in the Americas region, which includes 7.6% organic growth, led by the nonresidential markets and returns on our channel initiatives. Pricing in the quarter was strong at 2.1%. The company will continue to take necessary pricing actions to help mitigate the impact of ongoing inflationary pressures. Also during the first quarter, acquisitions contributed more than 3% growth, offsetting the substantial currency headwinds we experienced. Please go to Slide #8. Reported net revenues for the first quarter were $655 million. As stated earlier, this reflects an increase of 6.8% versus the prior year, up 5.8% on an organic basis. Adjusted operating income of $112.1 million increased nearly 8% over the same time frame from last year. Adjusted operating margin of 17.1% increased 10 basis points. Price realization and productivity actions outpaced inflation, which contributed to the operating incoming increase and solid volume leverage contributed to the margin expansion. Headwinds to margin performance included incremental investments, which had a 40 basis point impact on adjusted operating margins and regional mix driven by acquisitions. Each of the regions saw expansion in operating margin, which offsets the corporate expense related to deferred compensation plans due to favorable financial markets and accelerated vesting of stock-based compensation for retirement-eligible employees. The incremental cost associated with deferred compensation plans will offset in other income, below operating income such as it had no impact on earnings per share. Please go to Slide #9.…

Thank you, Patrick. Please go to Slide #14. As noted on the slide, we are affirming our revenue outlook. The consolidated outlook for total organic revenue remains at a range of 5% to 6%. In the Americas, we see continued positive fundamentals in our nonresidential verticals led by institutional markets, which we believe will continue to be strong throughout 2019. We expect the general trend toward electronic progress to continue, and we are positioned to take advantage of this trend. For the EMEIA region, we expect strength in our electronic businesses led by SimonsVoss and Interflex to more than offset weaknesses that we are experiencing in Southern Europe. However, total revenue will be negatively affected by currency headwinds. In Asia-Pacific, we continue to see healthy growth in China with softening markets in Australia and New Zealand. The total revenue growth reflects the full year impact of the Gainsborough acquisition, which has another quarter before we pass the anniversary date. We're also affirming our earnings per share outlook with reported EPS at the range of $4.60 to $4.75 per share and adjusted EPS to be between $4.75 and $4.90. This represents adjusted EPS growth of approximately 6% to 9%. As Patrick stated, we are also affirming our cash flow outlook of $430 million to $450 million. The outlook assumes no change in the previously provided investment spend of approximately $0.15 per share. The full year adjusted effective tax rate continues to be approximately $0.16 -- 16% with an anticipated higher rate in the first half of the year than in the second half. We're updating our outlook for outstanding diluted shares to approximately $95 million, reflecting the buyback activity completed in Q1. Please go to Slide 15. As a summary of Allegion's Q1 performance, total revenue grew nearly 7%, organic revenue grew almost 6%, adjusted operating margins were up 10 basis points, and were up in all regions. Adjusted EPS saw 10% growth in the quarter. Access has been an important part of our past and will be more important part of the future, as we connect the world through seamless access and smart devices. Now Patrick and I will be happy to take your questions.

[Operator Instructions]. And today's first question comes from John Walsh with Crédit Suisse.

So I guess, maybe a first question here around electronics, the near almost 10% growth. I think you've been talking about sustaining a mid-teens type growth rate on an annual basis. You have another quarter here of a high teens comp. How should we think about the cadence? And maybe a little bit underneath that number between residential and nonresidential would also be helpful as well.

I would say, continue your cadence or in terms of mid-teens growth for our electronics businesses. As I said in Investor Day, our industry was going to do well with this transformation over the next decade, feel good about the business with the launch of Encode, our partnership with Ring, the conversion of Lennar who is leading on electronics from the launch. We see that the adoption continues to be strong. We have a strong pipeline of new products and partnerships. When I see the 10% growth in the quarter, there was some work behind the scenes that we conducted in the channel that, I think, took some steam out of our sales, but will help us accelerate as we go forward.

And, I guess, maybe can you elaborate on those actions in the channel a little bit?

I would describe it as this. With the advent and growth of e-commerce, it can be at times a little bit of the wild west. And we went in and buttoned up some channel partners that will help us to drive price realization and growth in the marketplace.

Got you. And then maybe just one quick one here. Nice to see the price and productivity net be a 60 basis point contributor year-on-year. How should we think about that cadence as we go through the year? Does that actually pick up?

So as we've commented earlier, well, first of all, was very pleased with the performance in the quarter. It's good to see us turn the quarter on the price productivity inflation dynamic. As you'll recall, last year every quarter, we were a little bit under water. So we turned positive this year, particularly across all regions. So very pleased with the performance as it relates to that. As we look forward during the course of the year, you would see a -- from a margin expansion continued improvement as we progress throughout the year with the margin improvement being more heavily weighted toward the back half of the year, and that's when the comparisons on inflation become a little bit more easier, particularly as we look at input cost on steel and those type of things. So consider continued migration of margin expansion with more heavily back-end loaded in the back half of the year.

And the next question comes from Josh Pokrzywinski with Morgan Stanley.

So I guess, thinking back on 1Q, it seems like every company we've heard from so far has had some mix of inventory and weather discussions. So just wondering as it pertains to residential where the mechanical side looks like it was probably a little bit weaker. Anything that you saw from weather or channel destocking that makes that kind of a less of a trend line and something you can accelerate or at least improve a little bit from here?

I would say, first, look at the macro. We see the renovation of retrofit softened in the quarter. I think you see overall starts down or at least softened, not surprising, I think, again. Third, there are some pretty big players in retail, that have year-ends that tends to wind down the inventory. And then it was a pretty tough winter. I don't like to point at that, but especially in res, north of the Mason–Dixon line people generally don't go out and replace their front door locks when it's below 0. So I think there was a lot of things working in that. Overall, I think we performed pretty well in the quarter with some of those stressors.

Got it. That's helpful. And then just on the price mix in Americas. I think that's the high water marks that we haven't hit in sometime. Just understanding that mix was probably particularly solid given resi versus non-resi and electronics, which probably could have been a little bit better to your earlier point. How should we think about how that paces through the rest of the year? Should that price mix number start to moderate as you lap some of the increases last year?

Yes. So you would expect to see kind of a similar type of dynamic maybe for Q2. And then, as you said, the price increase implemented last year beginning of Q2, so that laps beginning -- beginning of Q3, so that laps in Q3. And the price increase that we're going out with this year isn't of the same magnitude. And so therefore, the price increase year-over-year becomes less in the back half of the year.

And the next question comes from Julian Mitchell with Barclays.

Maybe just a first question on your residential business. So, as you said, this is the second quarter in a row of sort of no growth really, a lot of issues in the broader market and also weather. Maybe just update us on what you're expecting your residential business to grow in 2019? And what sort of impact do you think we could see from electronics products within that? And whether there has been any evidence of demand destruction from price increases?

So we don't split out the overall residential growth. I think, as you look at the macro on new build, I think, we're going to continue for single family in North America around 850, a relatively flat market. I think multifamily continues to be robust, that surprises me, but people are moving into the inner cities. These projects tend to be more price competitive, especially on the traditional mechanical hardware. We do like the trend that these are becoming more electronic. We have, over the last 2 years, had a focused effort around this, and we think it will give us some lift. The strength of our company continues to be on the retrofit fit side of this. So I like our opportunities as we go into res, and it will advance -- our growth will advance beyond what we saw in Q1.

Let me just add too on the price perspective, as it relates to residential. It has been a little choppy, not in the sale to price through the distribution channel but more on the rebate side and discounts and those type of things. We actually had positive price realization in Q1 this year as it relates to residential. So there is no deterioration, if you will, in the pricing dynamics and what's going on in the marketplace, and believe we can continue to hold our own particularly as it relates to some of our new electronic products, and I think we'll be, continue to be extremely competitive there.

And then my second question just on those Americas margins, it was good to see the slight increase year-on-year in the first quarter. Based on your comments around productivity efforts in the margin bridge and also acquisition impacts, should we see that, that margin expansion accelerates through the year? And what kind of headwinds from M&A on margin do you expect in Americas?

So we would continue to see expansion throughout the course of the year, again the back half will be, a wider gap there, more favorable than Q2. M&A, as we've indicated, historically, the businesses we acquired, we like very much. We will continue to drive improvement as they become part of the Allegion business operating system and continue to drive synergies on both the top end and the cost side. Those businesses though, when we acquire, had a lower-margin profile. And therefore, by nature they are dilutive to the Americas margin, but we'll continue to get improvement in those businesses and that will help margin performance year-over-year comparisons going forward.

And the next question comes from Deepa Rahgavan with Wells Fargo Securities.

So my question is on the guide, year 2019. There is not much we can glean from this unchanged full year guide. There seems to be some cross-wind; Europe is softer obviously; North America holding better than we thought; Asia, maybe okay there. But let me ask you this way, does the guide at midpoint, say, $4.82 EPS or organic growth of 5.5% for the full year. Does that feel bolstered now where you stand post Q1? Or is it just stable at this point in time, which is what you were thinking prior?

Well, pretty stable, I would say, based on the performance, pretty much in line with what we were expecting. So therefore, you don't really see an uptick relative to the guide. So feel pretty good where we are, and our execution and basis of what Dave indicated the demand, particularly in institutional markets going forward, feel really good about that and feel like we've got good visibility to execute on our guidance for 2019.

Deepa, I would add to that. I'd just say confident now of what we see coming out of Q1. I feel that 90, 120 days ago, a lot of uncertainty about what was going to unfold in '19. And my message to the Street is confidence. We see good solid end markets, as I travel really globally, there is opportunity for Allegion. And as I think about the electronic convergence, I like what I see ahead in 2019.

Got it. My follow on is on Q2. Is there any quirkiness either on year-on-year basis or sequentially or comp wise we should be mindful of?

Nothing comes to mind out of the ordinary. Other than maybe below-the-line items, you're going to see some pressure as it relates to other income expense and then the tax rate, I believe, was anticipated to be higher.

And the next question is from David MacGregor with Longbow Research.

Congratulations on the quarter. Just looking at the Americas non-residential business, the low double-digit growth, is there any way you can separate out institutional versus commercial for us there?

We don't. I would say, as I look at our execution in those markets, we continue to perform at a high level. I think, that's reflected in the number. We see strength in the institutionals especially around K through 12 and college campuses. But as I look at those segments, I think, we see the electronic trends that are driving us, things like Overtur that we've rolled out help us to better connect with specifiers and contractors to drive that growth. And I think fundamentally, the market is strong and we're executing at a very good level.

Okay. And, I guess, just as a follow-up. Just talk about the electronics business and the profitability there. Any notable change in terms of the profitability of that business, it sounds like maybe there were some investments this quarter in the residential electronics? Just how should we think about the profitability? And then how you're thinking about that as it extends to the balance of the year?

So profitability really similar to prior years as we've indicated similar margin profile, but a higher ASP meaning more EBIT dollars. And so this whole trend of electronics growth really positive for Allegion and will continue. There is nothing in the horizon that would suggest any margin deterioration, relative to the new products we've introduced, similar margin profiles, and we believe we can sustain that going forward.

Patrick, as the new product cadence accelerates, does that profitability improve? Or how should we think about that?

No. Similar margin profile.

As we think about that pipeline of new electronic products, our desire is to use design innovation, standardization of global platforms to be able to maintain that margin profile.

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

First question is, this year or over the last 1.5 year, we've seen an acceleration in companies that have been doing, let's call it, enhanced card access, companies like you just mentioned like one, Identiv, but some of them compete with you on card access, some of them have things that are actually outside of what you've been doing. Are you looking at expanding into that business a little bit further? And I'm not just talking about generic card access, I'm talking about card access that actually has permissions on it that gets you in, that has some maybe federal attachments to it. I know you're mostly commercial, but there are other vertical markets that the entire access business gets involved with and brings in -- involves new technologies like audio over IT, things like that. So the question -- the bottom line question is, are there card access areas that interest you to expand the business in that area?

I think a couple of ways we think about that. Number 1, with acquisition, ISONAS was part of that. We think we got some nice IP and capabilities. I think second partnerships, I am really excited with our venture group and potential partners and new technologies that walk through. And I think partnership is not a bad place to position. I also think edge devices will also be with layers of authenticity, will be an important part of that equation to be able to drive access through cards and readers.

Okay. Quickly on Overtur. I'm just wondering if you're thinking about Overtur as a service, the fact that you can now have a collaborative capability that brings in a number of parties, which really does, I think, create some value added to your ability to bring a group of people to design something and help you get that product out faster. Is there a way to make that some type of a service or other parts of Allegion a service subscription -- subscription but, yes a service, I would call recurring revenue subscription-based way to get involved in working with Allegion in some way, shape or form, if something like Overtur becomes ubiquitous?

So the answer would be, yes. However, our first priority is to make sure the user satisfaction and adoption is at a high level. So why would my answer would be, yes? I think as you think about institutional campus, a hospital, K-12 schools, the ability to digitally capture access, workflows and keep that updated is attractive to an operator of that hospital or college campus. Think about the system Overtur keeps those things current, it's not easy for a campus administrator to go out and access those multiple documents would be one example. Another is what's installed on that door as the potential is needed for service in a variety of areas. So I'd say, we're trying to stretch our thinking of what the possibilities of digital systems like Overtur can mean to the business, and I think it's -- there is positive opportunity as we go forward, Joe.

I'm just kind of following up. You have futurists who work with you and who are working beside you, and I think there is a lot of things that they can think about right now with given the base -- the broader base of your products and if something like this were to get a higher -- a very high user rate, you could probably move forward with a recurring revenue type of program.

I hope all of our listeners will take a look at our Investor Day presentations and our view on seamless access. There is great opportunities for us to redefine our industry and develop new ecosystems that will benefit Allegion in a variety of ways beyond Overtur, and we are excited about it.

And the next question comes from Josh Chan with Baird.

My first question is on the non-res business in the Americas, growth is obviously very strong. Just wondering, you talked about visibility through the whole year. Just kind of could you give us some color in terms of what you're hearing from the channel or contractor backlogs or anything like that, that kind of lends you that confidence regarding growth for the rest of the year?

So contractor backlogs close to 9 months, historically that's extremely healthy. I think, we continue to see -- labor in the construction markets is tight. I think that continues to snowplough as you heard me say. I think the adoption of electronics continues to be an attractive trend. You get into the K-12 opportunity, bond issuance is on the rise. And the other one that a little bit more sobering, the average age of a K-12 school is 40 years old. And the need for upgrade with the opportunity or drive around campus security continue to be good for our business. You move over to healthcare, we see some softening in the big hospitals, but we see uptick around what we call medical offices and specialty clinics. There is a repositioning here, but these medical clinics still drive the same complexity of code and specification, product enhancements that we think drive growth. And for me as well, the commercial market continues to have legs, so we like the overall view, we think things like Overtur, our spec writing capability and then adding electronics bode well for 2019.

And then, Josh, just as an add on. Some of our leading indicators, so big code activities, specifications written, those type of things, very strong, trend continues to be up. And normally, there is a lag obviously between the time you get those and when the products are put in place. So feel really good relative to the market demand and the feedback we get from our customer base.

And then my second question is on the buyback. It seems like the pace in Q1 was maybe slightly above what you normally do in Q1. So just wondering if buybacks are -- is this more of a focus this year than in the prior years?

Well, we indicated during our Shareholder Day, capital allocation is the key strategic pillar for the company. As you know, we are in a really good financial position. Our balance sheet is the healthiest it's been since then, with a 2x debt-to-EBITDA, cash flow will continue to increase as our business grows and expands. So we have a lot of optionality and the key message is, we're going to deploy capital, put it to use for our shareholders to drive shareholder returns. Last year, as you know, we're extremely busy and adding some really good businesses to the portfolio. We're still integrating those. Our pipeline from an M&A perspective remain active and busy. We'll remain disciplined, but if we're not active in M&A, we've always said, we would provide incremental shareholder distributions either through dividends or share repurchases. You saw the dividend increase executed in Q1. So we're more active now in share repurchase. We have available cash to put it to use, and we'll continue to do so.

And the next question comes from Joe Ritchie with Goldman Sachs.

Dave you've became a friend, my friends typically will refer to me by both names. I don't know why, but it's been a trait since I've been in high school. Anyhow, going off on a tangent. The question I have is really regarding trends. So if we think about the first quarter, we've heard like a varying degrees of trends throughout the quarter, because of weather, because of tariffs. And I'm just wondering as you guys progress through the quarter, how did your trends either improve or decelerate as we move through the quarter?

I think there was a vulnerable flaw in the year that was called the government shutdown. I think, clearly, as we went through the quarter, things got better. And it's always -- there is a hangover after the New Years, things pick up, but felt good with the momentum. I felt better about our execution on price and productivity. We put up, I thought, an aggressive 2019 plan with margin expansion, and I was very pleased with our ability not only to put up good organic growth, but more pleased by our execution on the price and productivity side.

But I guess, specifically though, Dave, I mean as we kind of progress through March, did things get any better? Did they get worse? Like how did things progress?

As we went through March, and it's normal with the thawing of the ground, things get better. That's happened for the last 38 years in my exposure to building products. And in my mind, it's just a part of the spring routine, it gets better.

That's helpful. And if I could just kind of follow on, on your investment spending. I saw that you did $0.02 this quarter, still looking to do about $0.15 for the year. And so how does the -- Patrick, how does the cadence come through for the rest of the year on the investments? And perhaps maybe some color around the investments that you're doing for the rest of the year?

So obviously it's going to pick up here, think heavily weighted towards the back half of the year, which kind of matches our improvement and margin expansion. The incremental investments or the same kind of criteria, new product developments or acceleration of products, particularly around electronics, feel like we're getting really good demand from those going forward. Channel development, continued investment in the channel, underserved market opportunities around the globe, we'll continue to do that. And then demand creation as related to trying to accelerate adoption, centered around electronics. Those are kind of the 3 primary categories, all kind of front-end loaded in terms of revenue, driving growth and we'll continue to do that and again it will expand during the course of the year.

And this concludes the question-and-answer session. I would now like to return the call to Mike Wagnes for any closing remarks.

We would 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 your lines.