Good day, ladies and gentlemen and welcome to the Allegion Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Martineau, Director, Investor Relations. Please begin.

Thank you, Latoya. Good morning, welcome and thank for joining us for the fourth quarter 2014 Allegion earnings call. With me today is 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 you in today’s call are available on our Web site at www.allegion.com. This call will be recorded and archived on our Web site. Please go to Slide two. 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. Our release and today’s commentary includes non-GAAP financial measures which exclude restructuring and spin expenses. Also included in these adjustments are the impacts related to a movement in measuring results in Venezuela from the official exchange rate of VEF6.3 per U.S. dollar to using the Venezuelan governments SICAD II exchange rate of VEF50 per U.S. dollar. 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 and the quarterly information in the appendix of today’s presentation for further details. Also in the fourth quarter of 2014 the Company changed its method of accounting so that all inventory is now based on first-in first-out method from the last-in first-out method. The financial statements for all periods have been revised for this change and recapped quarterly data has been provided in the appendix of today's presentation. The impact of this adjustment was favorable by 1.3 million or $0.01 per diluted share for the year ended December 31, 2013. The impact to the year ended December 31, 2014 was favorable by 0.4 million. As a result our tax and inventory accounting are now on the same basis. And the Company achieves global consistency with one inventory accounting treatment. Please go to Slide 3, and I'll turn the call over to Dave.

Thanks Tom. Good morning to everyone and thank you for joining us today. Allegion posted another strong quarter of organic growth, operating leverage and cash flow generation. Revenues were 573 million up 5.5% on an adjusted basis versus last year and up 7.6% on an organic basis. The Americas region delivered strong organic growth of 8.4% with increases in all segments and the timing of large system integration projects drove organic growth of 17% in Asia-Pacific region. Organic revenues were relatively flat in Europe reflecting ongoing market softness. Adjusted operating income of 106 million increased 9% versus last year and adjusted operating margin increased 60 basis points for the company reflecting solid operating leverage on the incremental volume and improved pricing. Adjusted earnings per share of $0.76 increased 26.7% versus the prior year. Patrick will cover the details later. We're issuing our full year 2015 EPS guidance of $2.65 to $2.75 an increase of 12% to 17% compared to adjusted 2014 EPS excluding Venezuela. The guidance reflect overall organic revenue growth of 3% to 4%. Please go to Slide 4. Now that we've completed our first full year as a standalone public company I would like to take a moment to review our performance. First, it’s hard to appreciate the amount of effort it takes to standup a company. We’re truly fortunate to have a strong team at Allegion that embraces the change necessary, while ensuring we met our customer and shareholder commitments. And although you don’t see it as a metric on the slide, one of our core values is to be safe and healthy, which we focus on every single day of the year. We finished 2014 with a loss time incident rate of less than 1%, 26 locations with zero loss time days, 13 sites celebrated a…

Thanks Dave and good morning everyone. Please go to Slide Number 8. This slide depicts the components of our revenue for both fourth quarter and full year. This is helpful as the impact of pricing in Venezuela and currency headwinds across the business brought quite a bit of noise in the results. If you focus on the organic growth we delivered 7.6% and 5.1% growth for the fourth quarter and full year respectively. Both include 2% of price increase associated with Venezuela, the stronger organic growth reflects improving markets and introduction of new products. Pricing benefits have been mostly driven by Venezuela however we're seeing pricing improvement sequentially and expect to gain improved traction in the first half of 2015 particularly in our U.S. non-residential business. One another things to note is the currency line, we really started to see the impact of a weaker euro in the fourth quarter, adding the impacts of a softer Canadian dollar, Chinese RMB and Australian dollar and you will see a fourth quarter year-over-year impact of a negative 2.4%. Although the strong U.S. dollar will continue to create pressure on the bottom-line, it is important to remember that most of our costs were in the same region with our revenues, which mitigates some of the income pressure. Please go to Slide Number 9. Reported net revenues for the quarter were 573.5 million as mentioned on the previous slide this reflects an increase of 5.5% versus the prior year up 7.6% on an organic basis inclusive of Venezuela pricing. We realized high single-digit growth in the Americas with growth in all segments of the market, U.S. commercial grew low single-digits and residential segments increased mid single-digits. Latin America was up significantly primarily due to incremental price realization in Venezuela to offset inflation. EMEA revenues…

Thanks Patrick. Please go to Slide 18. As we look forward to 2015 we will continue to be faced with current fee volatility and a challenging macroeconomic environment. In the Americas we remain cautious but increasingly positive on the U.S. non-residential market recovery. We're still in the early days of a construction rebound and estimate that we are only 75% to 80% of the pre-recession peak. The recovery will continue at a much slower pace as compared to historic cycles as the economy navigates tight labor availability and modest improvements in public spending. This is especially true as it relates to the institutional segment which is approximately 60% of our non-residential revenue. As such we see the non-residential markets growing at low single-digits in 2015. The commercial new construction markets will continue to grow in low to mid single-digit with the institutional markets beginning to improve. The non-residential after market growth will approximate GDP growth and remain in a low single-digit range. The U.S. residential markets will increase mid single-digit driven by both builder and big box segments as we continue our slow and steady recovery out of the recession. Single-family home construction which remains approximately 30% below historic average will continue its recovery, although we don't expect to see normal levels for a few more years. The multi-family segment will continue to remain strong. Consolidating the market outlooks we project organic revenue growth in the Americas of 4% to 5%. Foreign exchange headwinds from Venezuela and Canada will be about 6 to 8 percentage points leaving us with a reported revenue growth of negative 2% to negative 3%. Our outlook in Europe continues to remain subdued driven by weak GDP growth, political uncertainty and high debt. The Southern markets remain soft with relatively slow growth as monetary policy easing…

Thank you. [Operator Instructions] Due to time constraints, we ask that you limit yourself to one question and one follow-up. [Operator Instructions] And our first question comes from Charles Clarke of Credit Suisse. Your line is now open.

Yes just wondered if you could give a quick update on capital allocation. I think in the prepared remarks you guys have talked about some deals that you were close on, close to getting over the goal line with and then obviously no reduction in share account in the guidance. So if you can just give an update on the capital allocation that’d be great?

Yes sure, so as we indicated basically three pillars in capital allocation, the first being organic growth opportunities and as you saw in the guidance, we’re going to continue to invest in the business for things that we feel are aligned with our strategy obviously and it can accelerate our growth faster than the market. I feel pretty good about those particular opportunities and the fully vetted will provide a good return on capital going forward. As we look at the M&A front, I’d say we’ve got a much broader acquisition pipeline certainly than we did a year ago. I feel very confident that you’ll be seeing a step-up in activity here in the short-term, so we’re still vetting a lot of opportunities. I would characterize the delta between say M&A and share distribution would be if we don’t see opportunities to expand our business and product portfolio in M&A front, we would be looking at accelerating shareholder distribution, but right now that’s not what we’re going to be doing. We will be offsetting our dilution associated with management compensation plans. The idea is not to hoard cash on the balance sheet, so to the extent we’re not increasing our M&A activity, you’d be seeing a further step-up in shareholder distributions.

And just as a question to the ending leverage, 2.9 times gross debt to adjusted EBITDA, does that adjusted EBITDA -- does that exclude Venezuela or kind of including the Venezuelan markdowns, the leverage would be a little bit higher?

Yes so that would be on a reported basis, so including Venezuela, so if you were to kind of take out Venezuela then the ratio would go up a little bit.

And then just maybe a housekeeping, you guys are targeting the 95% cash conversion this year versus just a target of 100. Is that due to some timing on payments or…?

Yes predominantly, so if you look at this business over the last three years we've averaged ACF as a percentage of continuing operations earnings of around 110%. So I would look at 2015 as a unusual year, we've had some one-time tax payments that we need to make as a result of our tax restructuring activities that took place last year. One-off on a go forward basis 2016 forward, as you know this is a great company in terms of cash flow generation and we should be north of 100% on average going forward.

Thank you. The next question is from Steven Winoker of Bernstein. Your line is open.

Lot to cover here, the first one is on the actual price versus volume growth in the US within the Americas. Could you break that out a little bit more for us in terms of what you actually saw in the quarter?

So again all inclusive if you look at including Venezuela good volume growth.

Just the U.S. Patrick.

Just the U.S., bear with me for just a minute, so most of the organic growth there was volume very little price improvement. We were able to get some sequential pricing improvement and leverage from our non-res business from the price increase we put in October last year. Residential not much a price improvement but we did sequentially see some price improvement. So in summary the majority of the increase there was all volume related.

And given the other comments you made, is that low single-digit volume then for the U.S., or low single organic?

Yes, low to mid collectively non-res and res, yes.

And then on EMEA, maybe talk a little bit more detail from Page 12 about the progress that Lucia is making there. It's a little hard to tell, given all the puts and takes that are going on, what is going on with the plan. I know you will give us more detail at the investor day, but I'm just trying to get a sense for where you really are in terms of that comment -- recovery plan accelerating productivity versus the mix impact that resulted in the lower margin?

Well I'll let Patrick give you the some of the financial metrics. But we're on a good track, we doubled the operating income '13 to '14, cost take out -- what we've been extremely aggressive on is prune that business, that was embedded and that pruning is helping us to drive improvement. Our long-term goal 10% OI as we exit the year still stands and move into '16. The end-markets remain difficult.

Yes I would just add Steve ended the year kind of where we had anticipated maybe a little light when we started the year, we did get the 280 basis points improvement we had targeted beginning at around 300. The mix element a little pressure there as the Eastern European sales a little bit softer than what we'd like to see. Whereas Dave indicated still targeting the 10% number by 2016, as I look at 2015 you could assume kind of similar performance in terms of margin improvement year-over-year and a lot of that coming from some of the carryover activities that took place in a restructuring in 2014. Again we're going to take a rifle shot approach on pricing, specific to customers and markets. And then the ongoing productivity and cost containment I think will be primary drivers there.

And if I could to sneak one in back to that capital allocation point you made. Patrick, at the last investor day you talked about a willingness to stretch even up to four times leverage for, quote, the right deal or the right opportunities. Are you guys still feeling confident that you would be willing to go there, or is there a reason to be more conservative these days? How are you feeling?

No, very confident to stretch it to four times for the right transaction would not hesitate given the strong cash flow generation of this business and the earnings obviously we'll be acquiring, so that wouldn't be an issue. When we give the range of debt to EBITDA there, I look at that more on a normalized basis it doesn’t mean we can’t be a little bit outside of the balance there, but over a long-term that’s where we’d like to be and how we manage the business.

And I can’t reemphasize that again for the right opportunity with and right fit with the company, we will stretch.

Thank you. And the next question is from Josh Pokrzywinski of Buckingham Research. Your line is open.

I guess not being able to see some of the specific margin parameters or CorpEx for 2015 some of this is a little backed into, but it looks like your incremental margin assumption in the Americans, ex-investment, ex-Venezuela, is pretty low, call it 30 or below by my math. Is there something else going on in that? It sounds like institutional is getting better, price uptake you expect to be better, and clearly you guys had good progress in 2014 on margin expansion even with investment. So I guess first is, is that math right? And then secondly, is there something I am missing in some of the mix dynamics in the ’15 in the Americas?

Yes so the margin excluding Venezuela improvement year-over-year is higher than what you indicated, so we’ll have to maybe take it offline and look at your assumptions in terms of the mix component and taking out Venezuela. And we should see incremental pricing improvement, we’re in kind of still a low inflationary environment so there should be some incremental leverage there it would be added to that, volume improvement net of investment, so we should still see some continued improvement in the Americas margin there. And the same is true for the overall company as well as the other regions and businesses of the world.

And then I guess as we get out of 2015 I appreciate you guys spiking out the investments and where those are focused. Of those three buckets that you broke down in the $0.15 to $0.20, what stays, what goes, what gets bigger, what gets smaller from here and among the new products, channel marketing and some of the more systems-oriented spending?

Yes so I would say as we look forward to 2016 and beyond sequentially the, incrementally the investments come down okay and the dollars will inherently stay, but incrementally the numbers will come down. So I would be looking at some incremental investment year-over-year, but not to the magnitude of $0.15 to $0.20.

And then just one last one more housekeeping, what are you guys targeting for corporate expense in 2015?

So we ended the year as you saw at 44 million, you should be thinking about an additional 10 million or so on top of the 44, so that would give you a quarterly run-rate around 13 million to 14 million. And let me just add the delta there the increase in 2015 versus 2014, 75% predominantly is investment related, IT systems associated with our ERP deployment and we’re going to continue to invest in incremental tax expense to drive our tax rate lower for 2016 and beyond.

Thank you. And the next question is from Jeff Sprague of Vertical Research Partners. Your line is open.

A couple of other things, just to clarify on the comment on price, it was a little unclear because you mentioned price and then you mentioned deflation. Are you actually talking an improvement in net price as is, or is that kind of a price cost comment you are making there because of some relief on the cost side?

So sorry about the confusion, but the comment was there should be a delta improvement price over material inflation.

And that is driven mostly by materials deflation, though, I would take it?

Correct.

And then the comment on non-resi pricing, that sounded like it was specifically targeted on pricing. Is there some particular area within U.S. non-res where you see price opportunity, or what is really going on there?

We got traction in Q4 on our pricing initiatives and we feel that that will carry into 2015.

And on currency, are there hedge benefits that we should expect coming through below the line as a partial offset to some of the headline translation impact that we see? Or what, if anything, are you doing on hedging?

So we do hedge our cash flow exposures, all the known exposures. You’ll see some favorability on what I call transaction exchange, but only minimal amounts. The majority of our cost and revenues are kind of in the region and so there is a natural hedge there, so we don’t have a lot of exposure relative to transactional gains or losses.

And then just finally on the growth spending is there a figure you have in mind or something you could guide us to think about impact on the top line from actions you started taking in ’14 and now ramping up in ’15? Is there a discernible impact on your organic growth in ’15 from these actions and how would you expect that to play out going forward?

I would like to maybe reserve that for midyear. We made significant investments in '14 the NDX would be a good example of that, those are going on the shelf of our wholesalers and I would like to see the actual pull through. I would say new products should help us grow as those get into the market on both the residential and non-residential. Second is a longer term investment is in our channel development and this is where we think in the light commercial repair and replacement that we’re getting less than our share, so I am investing and we should be able to see traction as we move through 2015.

Thank you. The next question is from David MacGregor of Longbow Research. Your line is open.

David, you talked about aggressively pruning bad businesses in Europe. I wonder if you could just go back and maybe dig in a little further there for us and give us a sense of what you have still on the books there that would be unprofitable business. What would that represent in terms of revenues and what would be the loss or the burden to the P&L right now?

So if we said our mechanical side is 300 million it’s 5% to 10% of that top-line.

And can you give us a sense of what it means at the operating line?

So, first of all when we made the comment pruning bad business, it's not surely a business it's sale through to particular distributors or customers and that type of thing. So it’s normally at a margin lower than what we realized for the full year this year, so call it basically a breakeven type of scenario. And would be baked in to our plan to get 10%, some of those are OEM commitments that you just don’t get out of overnight.

And then I guess on the U.S. business you talk about organic revenue growth of 3% to 4%. You talk about slow and steady improvement in the US non-res construction business. In your 2015 guidance what are you assuming for non-res remodel growth? I wonder if you could just remind us again what the mix percentages are for new versus remodel in your non-res business.

So we define the new construction in the commercial as where square footage is added. And so we think of that R&R it's 50% 55% of our top-line. As we think about that growth we see activity picking up over the next three years in that institutional new construction phase that will help us, but specifics in terms of that elements of growth don't have it at the top of my mind.

And then just a big picture question, I guess you have talked in the past about trying to grow your spec writing capacity. I guess I just wanted to check in with you and see if you are where you need to be at this point or where you may still have some work to do?

We're strengthening our spec writing capability with tools that we believe that we're the leader in the market in terms of spec writing, so generally pretty comfortable with that. I think some of our competitors potentially are envious of our position, but our investments along that line are more in configuration tools that help us to be more efficient at serving that construction market.

Are there still feet on the street that you need to add, or are you satisfied with where you are there?

We're satisfied our investments will be in the management of the channel, making sure that our through stock businesses in the local markets are meeting the expectations of a market leader.

Thank you. The next question is from Jeff Kessler of Imperial Capital. Your line is open.

With regard to the partnership with iDevices, we actually spent a long time with them at CES. Given iDevices close tie to Apple and home automation, what type of lock and non-lock wireless solutions could we expect from Allegion from this during 2015-2016? You don't have to give me the exact product, obviously, but the types of things you are going to be doing?

Number one our Schlage Sense that will come out later in the year, well positioned to line up and serve that market. A couple of things as we thought about iDevices they've got some history working with Apple, we think we can learn from that. We think they can also benefit from some of our supply expertise. And then collaboratively sharing technology in this Internet-of-things if you would have noticed Jeff iDevices are coming out with some electrical switching, and it's indicative of this collaborative capability that we think is important to our core lock business. I think the other thing that you may have picked up at the Consumer Electronics Show was our partnering with Honeywell, Chamberlain, iDevices and others, we really believe that our products have to operate in a community of technologies and it will help us refine those roadmaps.

With regard to your development of your channel, you have been talking about a bifurcated area here. One, that you are trying to build or wait for pent-up demand coming out of the institutional market where you have been negotiating deals for some time now. Number two, developing a channel -- better channel capacity for the small business area. Can you talk about number one, because these are both areas where you have been under capacity in terms of number one, revenues in the institutional area? How are you developing the channel to pull that through? And number two, on the small business area, how are you developing the channel to pull that through?

So and what we call the light commercial R&R we size that market let’s say $1.4 billion to $1.6 billion and we believe we’ve got a high single-digit market share and compare that to the presence that we have on new construction. It’s apparent to us that we have to develop stronger channel policies, inventory requirement in the local market and work with our channel partners to get more of that through stock business to compliment what’s already going through on a new construction basis. I like to think about it as we’re flexing our muscle we should be getting more of that through stock in places like Miami or the Washington DC area. We’re putting in the systems and processes to be able to get our share of that market which we think is naturally ours.

Does that also include working with distributors?

Yes sir.

Okay.

And potentially changing our lineup of distributors, I feel one of the strengths of Allegion when we win a major hospital job and we run that through wholesale distribution that allows us to require the stocking of inventory performance on small project jobs that will help us grow.

And also just to follow-up on that, my institutional question?

Yes please. I may restate your institutional question please.

The institutional question, again just similar question in that there has been some pent-up demand in institutional business. It hasn't come through yet. You've been talking about negotiation now for probably about six months. Are we at a point now at which you are more positive for 2015 or 2016? Obviously the turnaround time on these negotiations are quite long, but that is out there and the question is how far do you think you are into that process?

I’m more positive on the improvement in institutional spending as we move into ’15 and ’16 and we’ll talk about that at our Investor Day.

Thank you. And the next last question is from Jeremie Capron of CLSA. Your line is open.

I wanted to go back to earlier questions on pricing. Could you talk about what you are seeing in the marketplace at this point and what are your expectations in 2015 in terms of potential price gains?

So we had price increase announcements in the second half specifically around our commercial businesses in the Americas we felt we picked up traction in specifically late Q3 and Q4 and those will carry in. We still feel that it’s a positive price environment it’s going to be 1%-2% as we move through 2015. We think Europe will be difficult.

So within your overall 3% to 4% organic growth guide for 2015 you have more than one point of price gains in there?

No, it’s a little bit under 1% if you look at it across the globe, Americas specifically which is the lion share obviously a little bit under 1%.

And on the material cost side of things, metal prices are obviously coming down. Can you talk about what you are seeing and how you expect commodity prices to affect your cost base in 2015?

Yes so if you look at our commodities the important ones would be steel, brass, zinc and aluminum. Steel you kind of look at the spot rate today relative to the average in 2014 I think very consistent. Brass which is a big spend for us is down so that would be beneficial, aluminum and zinc flat to little bit up. So collectively right now on basis of the spot rates, I would say kind of the same as 2014. We do hedge commodities in terms of supplier lock contracts, so it’s not a financial hedge or instrument, so any further decrease in the spot rates would kind of come into our results over an extended period of time.

And maybe lastly on CapEx and R&D spend, obviously a significant step up in 2014 compared to previous years. What should we expect in 2015 in terms of CapEx intensity, I know you are running at about was it 2% to 2.5% of sales. Are we seeing more increases going forward and then similarly if you could comment around R&D dollar spend?

So on the CapEx side you are right there was a big step up in 2015, 10 million of that 50 million in total spend, related to spin-related projects IT specific on a more normalized basis we're looking at 40 million per year which is our plan for 2015. And that would include IT spend associated with our ERP system, maintenance and NPD kind of programs, productivity et cetera. So I look at capital 40 million kind of a normalized level. One thing to keep in mind is this business and we get a recovery in the non-res area, we do not have significant capacity constraints that would require additional incremental capital expenditure. So feel pretty good that we can manage it at 40 million. In terms of R&D we stepped it up in '14, we're generally holding at that level into '15. If we see the opportunities are out there we'll invest but we'll inform you of that.

What about the effective tax rate? It looks like we are looking at a lower effective tax rate in 2015 than what you guys had in mind just a few months ago? Where do you think we ultimately settle say in 2016 or 2017?

So I think aspirationally we've said aspirationally less than 20, if you go back 15 months ago I have got to reemphasize we didn’t have a tax department. We've invested here and aggressively it's part of our corporate cost step up and it's delivered a good return. But we think long-term high-teens aspirationally could be possible.

Thank you. There are no further questions at this time. I will turn the call back over to Tom for closing remarks.

Yes, and we just want to say thank you and appreciate everybody joining today's call and have a very safe day.