Allegion plc

Hello, and welcome to your Legion Q2 earnings call. All participants will be in listen-only mode. Should you need assistance during the conference, you can be signaled to a conference specialist for pressing the star key and zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To answer your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to your host today, Mike Wagnus. Mr. Wagnus, please go ahead.

Thank you, Keith. Good morning, everyone. Welcome and thank you for joining us for Allegiant's second quarter 2019 earnings call. On the call today are Dave Petratis, Chairman, President, and Chief Executive Officer, and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegiant. 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 investor.allegion.com. This call will be recorded and archived on our website. Please go to slides number two and three. 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 second quarter 2019 results, which will be followed by a Q&A session. For the Q&A, we ask each caller to limit themselves to one question and one follow-up, and then reenter 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. We had modest top-line revenue growth in the second quarter, and we saw strength in our Americas non-residential business. Our residential business in the Americas was flat, driven by challenging new construction markets. We also experienced currency pressures in our European and Asian businesses. Although our Americas business growth was lower sequentially in the second quarter, Overall growth in the first half of the year was strong at 5.7%. As we look to the remainder of the year, we continue to see healthy end markets in our non-residential business, particularly in institutional verticals. We believe we are positioned well to take advantage of these healthy markets in the second half of 2019. We also expect that residential markets should start to improve versus what we have seen in the first half of the year. America's electronics growth was approximately 9% for the quarter, which was slightly lower than our historical growth rates. Our electronic growth for the quarter was negatively impacted by a slower than expected ramp up in the new residential construction market, and focused channel actions that we started in Q1 to drive more consistency and better alignment with our existing partners. We believe that, with these efforts now complete, we are positioned nicely and expect to accelerate electronics growth during the remainder of the year. This is further supported by the healthy demand for the recently launched Schlage ENCODE residential lock renewed efforts with existing partners, and the benefit of new partners, including Lennar. Allegiant's combination of brands, expanded product portfolio, technical partnerships, breadth of channel relationships, and a large installed base provide us a great opportunity to take advantage of the electronics market as it continues to evolve and grow. Moving down the slide, Allegiant was able to drive price realization and productivity actions, which more than offset the inflationary pressures we experienced. I am pleased with the performance as we saw operating margin increase again this quarter. During the quarter, the company closed its production facility in Turkey. Some products formerly produced at this site for brands in the EMEA region are in the process of being transferred to other manufacturing locations in Europe. We continuously look for ways to improve Allegiant's supply chain. This action will help us to streamline our operational footprint in Europe, which is necessary to maintain sustainable and profitable long-term growth in the region. It's also a normal part of our enterprise excellence strategy focused on driving cost-competitive positions in all elements of our supply chain. In the second quarter, we delivered a slight increase in adjusted EPS driven primarily from operations, which was offset by unfavorable comparables in other income and the tax rate. We're updating the full-year revenue outlook. We are now projecting total and organic revenue growth between 4.5% and 5.5%. I'll speak to the individual regions later in the presentation. Lastly, we are lowering the outlook for reported EPS to a range of $4.50 to $4.65 per share, down from $4.60 to $4.75, reflecting the impact of the exiting of the Turkey operations. We are also tightening the range and raising the midpoint for 2019 adjusted EPS outlook from a range of $4.75 to $4.90 per share to a revised outlook of $4.80 to $4.90 per share. Please go to slide five, and I'll walk you through the second quarter financial summary. Revenue for the second quarter was $731.2 million, an increase of 3.8%, inclusive of 3% organic growth. Acquisitions contributed to the top-line revenue expansion, offsetting the unfavorable currency impact. America's organic growth came in at 3.3% in the quarter, driven by strong price realization. The EMEA region saw modest organic growth. and Asia Pacific total revenue was boosted by the Gainesboro acquisition completed last year. Adjusted operating margin increased by 20 basis points, aided by price and productivity, which more than offset inflation. The businesses continue to focus on driving price realization and productivity savings to combat inflationary pressures. Adjusted earnings per share of $1.26 increased by a penny versus the prior year. As mentioned, the increase was driven primarily by operational performance, offset by unfavorable comparables in other income and the tax rate. Year-to-date available cash flow is down approximately 20 million. The decrease in cash is related to increased capital expenditures and increased working capital to build inventory in advance of the Turkey plant closure. Please go to slide six. In March, we shared our refreshed corporate strategy with you, and we touched on it again in our first quarter call. We've chosen to include it again this quarter to highlight our belief that the five strategic pillars that Allegiant has laid out are the foundation of our future. The pillars that guide Allegiant are expanding core markets. We continue to broaden the core business through existing and new channel relationships, digital demand creation, and leading products. Be the partner of choice. Delivering seamless access means we're intent on looking beyond our walls and leveraging our partners and ecosystems to drive growth, which includes using open platforms to integrate well with others. Delivering new value and access. Our innovation will focus on the user experience for access, as well as working with partners to create unique solutions that increase safety, and speed up productivity. We are also intent on bringing new products to market faster. Capital allocation. Allegiant will continue to take a disciplined and flexible approach to capital deployment, one that spans organic investments, acquisitions, and shareholder distributions to optimize shareholder returns. Last, enterprise excellence. Allegiant is committed to creating value through productivity, through excellent customer experience, and through a culture of safety, health, and employee engagement. Access has been a part of our company's history for more than 100 years, and seamless access will define our company going forward. Please go to slide seven. With this continued focus on Allegiant's strategic pillars that support our vision and growth strategy, we're excited about the partnership opportunities for the connected home. To us, this means being recognized as experts with innovative products and open standards, ultimately allowing for seamless integration with best-in-class players. You might remember from our Investor Day event that we showcased a variety of our partners for the U.S. residential market, again highlighted on this slide. Our strong presence with retailers, e-commerce, and home builders positioned us well in the connected home space. Schlage ENCODE, our first-ever Wi-Fi-enabled dev build, is proving to be an essential part of our portfolio and working with our partners. Schlage ENCODE was launched in late Q1, works directly with the Key by Amazon app and Ring devices, and is a market-leading part of the Schlage home experience. It will also be part of the Lennar Standard Home Automation Offering. Our work with these partners through innovations like Schlage ENCODE is a prime example of how we will increase electronic adoptions in the residential market space. In addition to accelerating electronic adoptions, strategic partnerships will continue to help drive our vision of seamless access and a safer world. Patrick will now take you through the financial results, and I'll be back to discuss the full year 2019 outlook.