ALLE
#Thanks, Dave, and good morning, everyone
Thank you for joining the call this morning
If you would, please go to Slide 5. 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 8% organic growth in the first quarter
The strong organic growth reflects healthy markets in the Americas, continued strength in driving electronics growth and the company's focus on channel initiatives
The favorable comparable, driven by last year's ERP implementation, was also a factor in the strong growth
Pricing was favorable in the quarter in all regions, as the company remains disciplined in taking necessary pricing actions to help mitigate the impact of rising commodity prices
During the quarter, acquisitions contributed 2% growth, and foreign currency was a headwind, particularly in the EMEIA region
Please go to Slide 6. Reported net revenues for the quarter were $548.8 million
This reflects an increase of 9.3% versus the prior year, up 8% on an organic basis
I was particularly pleased with the outstanding organic revenue growth from Americas, which adds strong growth in both the nonresidential and residential businesses, as we continue to deliver above-market growth
We also had good price realization in the quarter, offsetting the currency headwind seen in EMEIA
Adjusted operating income of $100.7 million and adjusted operating margin of 18.3% increased 19% and 150 basis points, respectively, when compared to the prior year
All regions delivered improved adjusted operating margins
The operational improvement was driven by solid incremental volume leverage, price, productivity and product mix, which more than offset the impacts of inflation and incremental investments
I'd also note that we improved our industry-leading adjusted EBITDA margin to 21.1% in the quarter, an improvement of 130 basis points versus the prior year
All regions improved on this metric in the quarter
The business continues to execute at a high level, demonstrating both strong organic growth and operational margin improvement, while continuing to make investments for future profitable growth
Please go to Slide 7. This slide reflects our EPS reconciliation for the first quarter
For the first quarter of 2016, reported EPS was $0.60. Adjusting $0.01 for the prior year restructuring expenses and integration costs related to acquisitions, the 2016 adjusted EPS was $0.61. Operational results increased EPS by $0.17, as favorable price, operating leverage and productivity more than offset inflationary impacts
A decrease in the adjusted effective tax rate drove a $0.05 per share increase versus the prior year
The decrease in rate is primarily due to favorable impacts from discrete tax items, including the benefits from the recently adopted accounting standard on share-based compensation
These discrete benefits more than offset unfavorable changes in the mix of income earned in higher rate jurisdictions
Next, a reduction in the number of outstanding shares drove a $0.01 per share increase
Moving on, incremental investments were a $0.04 per share reduction
These investments relate to new product development and channel initiatives, which allow us to grow faster than the market, expand our electromechanical presence and increase our vitality index
Next, interest and other income were a net $0.07 per share reduction
This was primarily attributable to the positive impact from the sale of nonstrategic marketable securities during the first quarter 2016 that did not repeat in Q1 2017. This results in adjusted first quarter 2017 EPS of $0.73 per share, an increase of $0.12 or approximately 20% compared to the prior year, with the growth driven by operational improvements and organic growth
Continuing on, we have a negative $0.02 per share reduction from acquisition and restructuring charges
After giving effect to these onetime items, we arrived at the first quarter 2017 reported EPS of $0.71. Please go to Slide 8. First quarter revenues for the Americas region were $407.6 million, up 12.3% on a reported basis and 10.3% organically
Strong organic growth reflects above-market performance, driven by our new product and channel initiatives, as evidenced by mid-teens growth in electromechanical products
As noted on the chart, we experienced double-digit growth in nonresidential products, driven by strength across the portfolio, as we continue to see solid performance from our organic investments
Delays in shipments in the prior year related to an ERP implementation also contributed to the increase
Residential revenue also grew mid-single digits, with continued strength in electronics
Americas' adjusted operating income of $107.8 million increased 17.7% versus the prior year, and adjusted operating margin for the quarter increased 120 basis points
The increase of adjusted operating income and adjusted operating margin was driven by incremental volume leverage, price and productivity, offsetting the impact from rising inflation and incremental investments
The operational increase, while absorbing incremental investment spend, demonstrate excellent performance by the entire Americas team
Please go to Slide 9. First quarter revenues for the EMEIA region were $118.4 million, down 0.1% and up 1.3% on an organic basis
The reported revenue decline was driven by currency headwinds, which offset the contributions from price realization and acquisitions
The SimonsVoss business continues to perform well and saw strong growth, especially in the dock region
EMEIA adjusted operating income of $8.5 million increased 2.4% versus the prior-year period
Adjusted operating margin for the quarter increased 20 basis points, while price and productivity more than offset the impacts from inflation, investment and currency headwinds
We continue to see margin expansion despite the inefficiencies we experienced associated with the previously announced restructuring plan to optimize our manufacturing footprint in the region
The complexity of the move is challenging
As a result, the benefits we expected to realize are delayed
Please go to Slide 10. First quarter revenues for the Asia Pacific region were $22.8 million, up 9.6% versus the prior year
Organic revenue increased 4.8%, driven primarily by solid growth in the Australia and New Zealand region, as we are seeing good traction on our channel expansion initiatives
Total revenue was also supported by favorable foreign currency impacts and contributions from acquisitions
Asia Pacific adjusted operating income for the quarter was $0.6 million, with adjusted operating margins up 260 basis points versus the prior-year period
Strong volume leverage and improved operational performance led to the adjusted operating margin expansion
Please go to Slide 11. Available cash flow for the first quarter was negative $48.7 million, which is a decrease of $40.5 million compared to the prior-year period
The decrease is driven by the $50 million discretionary pension funding payment that was made in the quarter, partially offset by higher net earnings
Working capital, as a percent of revenues and the ratio for the cash conversion cycle, increased in the first quarter 2017 when compared to the prior-year period
The increase is primarily driven by planned increases in inventory levels in certain areas to improve customer fulfillment requirements and the inventory build related to the EMEIA manufacturing move
We remain committed to an effective and efficient use of working capital
Lastly, we are affirming our full year available cash flow guidance of $300 million to $320 million, which is net of the $50 million discretionary pension funding payment
I will now hand the call back over to Dave for an update on our full year 2017 guidance
Yes
It's heavily weighted towards Americas
That trend will continue
As we kind of indicated last time, it's probably 80:20, Americas versus rest of the world
Similar ratio for Q1, and we'd expect that to continue throughout the balance of the year
I would - we had a strong quarter
As we indicated, some of that strength, just driven primarily from the - not only growth and the initiatives and the returns on investments we're making, but some of it because the easier comparison because the delayed shipments last year, as you're aware of
Tougher comps in Q2, but markets remain fairly strong and tracking towards the organic revenue growth we had indicated at the beginning of the year, 6% to 7% for the full year
Probably a little bit because of tough comps in Q2, I would anticipate a lower revenue growth
But the outlook for the full year still remains fairly positive, just given the activity in the marketplace, response from our customers, order intake, et cetera
So you're right
We've seen a significant movement in commodities across the board
The biggest impact for us relates to steel, brass and zinc
Steel, year-over-year, is up, at least at the end of the quarter, over 40%
And it's moved since then, another like 20%, so significant movements
And as you indicated, we've been able to move faster in price to offset the commodity headwinds
What I would see through the balance of the year, just kind of given where the current commodity prices trade today, is continued pressure on the cost side
It will escalate a little bit in Q2, Q3 because if you recall, we hedged some of our exposure on a forward-looking basis
And so we're protected
And to the extent the commodity prices stay in place for an extended period of time, the exposure becomes greater
So continued pressure, Q2, Q3. The comps get a little bit easier in Q4 because that's when we start seeing big movements in the cost base
But we will endeavor to mitigate that, offset it, et cetera
And that's our current plan through pricing actions
<UNK> <UNK> Got it
That's helpful, <UNK>
And just maybe that - is the base case there that price cost stays positive as we progress through the year? Or is it possible that in the next quarter or so, you could go negative there, and then you'd make it up in the back half of the year?
It could be a little negative, but I would think we'd be neutral to slightly up is the expectation, certainly as we look on a full year basis
And maybe if I could sneak in one more
When I went and visited you guys, spent time with you guidance at ISE West, it seems like you guys were really excited about the - your ENGAGE platform
I'm just wondering, like how much opportunity is there with the platform? How much is that adding to your share gains in recent quarters? Just maybe expand more strategically, that would be helpful
So I would characterize it as every year, we - particularly in Americas, we go out to price increase in Q4. And so we start realizing the benefits basically beginning of the following year, as a lot of the activity is price-protected, if you will
So what you saw in Q1 was in line with our expectations in the market
We are not - I'd say we're competitive in the market
We're not being overly aggressive from a discounting perspective, either on residential or nonresidential products
I would anticipate the pricing improvement to continue throughout the course of the year, maybe get a little bit better than the 1-point improvement that we saw in Q1. And that kind of continued throughout the course of the year
They were actually fairly equal in Q1. But normally, you're right
I mean, we get - we have the ability to push price a little bit stronger in non-res than res
That is still the case
As we continue to invest in both our channels and new products, there's, obviously, carryover from the prior year
But funding the new initiatives starts to really ramp up more so in Q2, Q3. So you see a little bit heavier investment in those quarters relative to Q1.
So no change in the outlook in terms of our available cash flow for the full year
The long-term target is to continue to drive cash flow to be at 100% plus of net earnings
Feel good that that's sustainable, given the low investment requirements, particularly in working capital and CapEx
So we'll continue to drive that
And the deployment of the capital, as we indicated in Investor Day, is we've got certain things that are designated, whether it be CapEx, dividends, debt repayment, et cetera, but we've got a big bulk of capital available for strategic investments, either through M&A or opportunistic share repurchase
And we'll continue to look at those opportunities as we progress throughout the year, but no change relative to our short-term or long-term guidance in terms of cash generation going forward
