Hello, and welcome to the Allegion Q2 earnings call. All participants will be in listen-only mode. Should you need assistance during the conference, you may signal a conference specialist by 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 withdraw 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 Wagnes. Mr. Wagnes, please go ahead.
Thank you, Keith. Good morning, everyone. Welcome, and thank you for joining us for Allegion'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 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 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. Thank you for joining us today. We had modest top-line revenue growth in the second quarter. 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.
Americas 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. Allegion'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, Allegion 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 Allegion'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. We are lowering the outlook for reported EPS to a range of $4.50-$4.65 per share, down from $4.60-$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-$4.90 per share to a revised outlook of $4.80-$4.90 per share. Please go to slide five. 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. Americas organic growth came in at 3.3% in the quarter, driven by strong price realization. The EMEIA region saw modest organic growth, and Asia Pacific total revenue was boosted by the Gainsborough 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 Allegion has laid out are the foundation of our future. The pillars that guide Allegion are: expand in 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. Allegion 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. Allegion 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 over 100 years, and seamless access will define our company going forward. Please go to slide seven. With this continued focus on Allegion'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 position us well in the connected home space. Schlage Encode, our first-ever Wi-Fi-enabled deadbolt, is proving to be an essential part of our portfolio in 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 in a safer world. Patrick will now take you through the financial results, and I'll be back to discuss the full year 2019 outlook.
Thanks, Dave. Good morning, everyone. Thank you for joining the call today. Please go to slide number eight. This slide depicts the components of our revenue growth for the second quarter. I'll focus on the total Allegion results and cover the regions on their respective slides. As indicated, we delivered 3% organic growth in the second quarter. Strong price realization of 2.2% drove the organic increase this quarter. The company will continue to take necessary pricing actions to help mitigate the impact of inflationary pressures moving forward. Also, during the second quarter, acquisitions contributed more than 2% growth, offsetting the substantial currency headwinds we experienced in both the EMEIA and Asia Pacific regions. Please go to slide number nine. Reported net revenues for the second quarter were $731.2 million. As stated earlier, this reflects an increase of 3.8% versus the prior year, up 3% on an organic basis.
Adjusted operating income of $157.3 million increased nearly 5% over the same timeframe last year. Adjusted operating margin of 21.5% increased 20 basis points. Price realization and productivity actions outpaced inflation, which contributed to the operating income increase. Leverage on the incremental volume also contributed to the margin expansion. Headwinds to margin performance included incremental investments, which had a 70 basis point impact on adjusted operating margins and regional mix driven by acquisitions. Please go to slide number 10. This slide reflects our earnings per share reconciliation for the second quarter. For the second quarter of 2018, reported earnings per share was $1.19. Adjusting $0.06 for the prior year restructuring expenses and costs related to acquisitions, the Q2 2018 adjusted earnings per share was $1.25.
Operational results increased earnings per share by $0.10 as favorable price, productivity, and operating leverage on incremental volume more than offset inflationary impacts and unfavorable currency. Favorable year-over-year share count drove another $0.01 increase as we executed nearly $70 million in share buyback in the quarter. The combination of interest expense, other expense and non-controlling interest drove a $0.02 reduction, which was mostly impacted by favorable other income in 2018 that did not repeat. A year-over-year increase in the tax rate had a $0.04 unfavorable impact, primarily driven by the unfavorable mix of income earned in higher tax rate jurisdictions. The impact of incremental investments in the quarter was a $0.04 reduction. These incremental investments are for new product development, channel strategies, and demand creation spending. This results in adjusted second quarter 2019 earnings per share of $1.26, an increase of $0.01 compared to the prior year.
Lastly, we had a $0.10 per share reduction for charges related to restructuring and acquisitions. After giving effect to these one-time items, we arrive at the second quarter 2019 reported earnings per share of $1.16. Please go to slide number 11. Second quarter revenues for the Americas region were $545.1 million, up 3.5% on a reported basis and 3.3% organically. The organic growth was driven by strong price realization of 2.5%. When compared to Q2 of last year, we experienced mid-single-digit growth in the non-residential business and residential was essentially flat. Electronics growth still exceeded total growth in the Americas region, coming in at approximately 9%. On a year-to-date basis, the Americas has delivered total growth of 5.7% and organic growth of 5.3%. Americas adjusted operating income of $162.4 million increased 4.2% versus the prior year period, and adjusted operating margin for the quarter increased 20 basis points.
The increase in adjusted operating margin was driven primarily by price and productivity exceeding inflation. Additionally, leverage on the incremental volume contributed to the increase. Inflationary pressures are expected to ease during the second half of 2019. Combined with our pipeline of productivity actions, this should position us for increased margin expansion throughout the remainder of the year. Incremental investments were a 60 basis point decrease on operating margins. Please go to slide number 12. Second quarter revenues for the EMEA region were $142.2 million, down 3.8% and up 1.7% on an organic basis. The organic growth was driven primarily by pricing and favorable volume in our portable security, SimonsVoss and Interflex businesses offsetting weakness in Southern Europe. Total revenue growth was reduced by significant currency headwinds. As Dave mentioned earlier in the call, during the quarter, we closed our manufacturing operations in Turkey.
There was minimal impact to revenue and adjusted operating income in the quarter. Dave will discuss the full year impacts related to this closure when he discusses the outlook later in the call. EMEA adjusted operating income of $11.4 million decreased 5.8% versus the prior year period. Adjusted operating margin for the quarter decreased 20 basis points. Excluding currency impacts, the region would have seen a 10 basis point increase in margins, driven by price and productivity exceeding inflation. Incremental investments were a 60 basis point headwind to operating margin. Please go to slide number 13. Second quarter revenues for the Asia-Pacific region were $43.9 million, up 45.8% versus the prior year. Organic revenue increased 4.7%. Total revenue growth was driven by the Gainsborough acquisition, which increased revenues in the region by more than 47%. Foreign currency was a significant headwind for the quarter, reducing revenue by more than 6%.
Asia-Pacific adjusted operating income for the quarter was $1.8 million, an increase of $1 million with adjusted operating margins improving 140 basis points versus the prior year period. Similar to the other regions, the price, productivity, and inflation dynamic was positive in the region. Incremental investments were 120 basis point decline on adjusted operating margins. We are pleased with the continued progress in the Asia Pacific region, as the strategy and restructuring initiatives begin to drive operational improvements. Please go to slide number 14. Year-to-date available cash flow for the second quarter 2019 was $77.7 million, which is a decrease of $20.1 million compared to the prior year period. The decrease is driven by increased capital spending and higher working capital requirements to build inventory in advance of the Turkey plant closure.
Working capital as a percent of revenues increased slightly in the second quarter, and the cash conversion cycle was also slightly higher. We continue to remain committed to an effective and efficient use of working capital, and will continue to evaluate opportunities to both minimize investments in working capital and increase available cash flow. Lastly, we are updating our full-year available cash flow outlook to range of $410 million-$430 million. The reduction from the prior outlook is inclusive of the closure of operations in Turkey. I will now hand the call back over to Dave for an update on our full-year 2019 outlook.
Thank you, Patrick. Please go to slide 15. As can be seen on the slide, and was mentioned earlier, we are updating our revenue outlook. The consolidated outlook for total and organic revenue is now at a range of 4.5%-5.5%. In the Americas, we see continued positive fundamentals in our non-residential verticals, led by institutional markets, which we believe will remain strong throughout 2019. In residential, we expect markets to improve versus what we experienced in the first half of the year. In addition, we expect the general positive trend for electronic products to continue for the foreseeable future, and believe we are well-positioned to take advantage of this long-term trend. For the European region, we expect continued strength in our electronics business, led by SimonsVoss and Interflex.
We expect this will more than offset weaknesses we are experiencing in Southern Europe, leading to positive organic growth for the region. Total revenue will be negatively impacted by currency headwinds. We have reduced our revenue outlook for the EMEA region to account for the impacts of our decision to exit operations in Turkey. Asia Pacific, we continue to see healthy growth in China, with softening markets in Australia and New Zealand, particularly around residential end markets. The total revenue outlook reflects the full-year impacts of the Gainsborough acquisition, which passed its one-year anniversary on June 30th. We are also updating our earnings per share outlook with reported EPS at a range of $4.50-$4.65 per share, and adjusted EPS to be between $4.80 and $4.90. This represents adjusted EPS growth of approximately 7%-9%.
As Patrick stated, we are updating our cash flow outlook to a range of $410 million-$430 million, with the reduction from prior outlook inclusive of our closure of our Turkey operations. 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 16%. We're updating our outlook for outstanding diluted shares to approximately 94 million, reflecting the buyback activity completed during the first half of the year, and including expected share repurchases for the back half of 2019. The closure of our Turkey operations is expected to have $0.14-$0.17 impact on the reported EPS, some of which has been seen in Q2, and a $0.02 impact to adjusted EPS in the third quarter. Please go to slide 16. A brief summary of Allegion's Q2 performance.
Total revenue grew 3.8% in the quarter, and 5.2% year-to-date. Organic revenue growth grew 3% in Q2 and 4.3% year-to-date. Adjusted operating margins were up 20 basis points. Adjusted EPS was up slightly. Now Patrick and I will be happy to take your questions.
Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to withdraw it, please press star then two. We do ask that in consideration of the others, you limit yourself to one question and a follow-up. If you have additional questions, you may reenter the question queue. With those instructions in mind, we will pause momentarily to assemble the roster. The first question comes from Joshua Tekulsky from Morgan Stanley.
Hi, good morning, guys.
Hey, Josh.
Dave, just back on some of the channel strategies or some of the moves that you made in residential.
growth a little bit. I guess this is the question in the follow-up wrapped up in one. What did that cost you in the quarter? How should we think about that as a driver of the acceleration in the back half, and what were those moves specifically?
The channel plays that we addressed was really what I'd call maintenance. As we have expanded rapidly, especially through e-commerce, there was some cleanup that we needed to go do and to protect ourselves on pricing. It clearly was reflected in our electronics growth, particularly in residential in Q2. We think that's behind us. I'd say in an overall backdrop, particularly in resi, we thought the channel would perform better in new construction. I think it's pretty widely seen that there were some challenges in new construction, including we expected acceleration with Lennar. That's progressing. Those were the factors that we went in and worked, and we think it positions us nicely for the second half.
Any numbers that you can share around what you think that costs and what you think that adds going forward?
I think the numbers are out there in total. Don't want to get into the specifics of it. The work's behind us, and you'll see that performance improve in the second half.
Okay, thanks for the color.
Thanks, Josh.
Thank you. The next question comes from Deepa Raghavan with Wells Fargo Securities.
Good morning, all. Two questions from me. Looks like your second half margin assumptions are a little better than some of us are expecting. Can you provide some color on what your expectations are for price realization in second half? Is that going to be at a 2% run rate for the full year? Can you parse that out between resi pricing? I mean, Q1 was positive, demand continues to be flattish there. How does it compare resi pricing versus non-resi pricing? I have a follow-up.
On the pricing front, as indicated in our comments, really strong price realization in Q2. Just remember, relative to our pricing actions, you may recall last year, we implemented the price increase in beginning of July. This year, we pulled it forward to May, in effect, you had the impact of two price increases for this quarter year-over-year. That's why sequentially and for the quarter year-over-year, you had really strong price realization. As we look forward to the second half, we still anticipate good price realization, sequentially, we'll be down relative to what you saw in Q2. You're probably looking at an overall impact, we'll call it around the 1.5% going forward.
As it relates to the non-resi/resi area in terms of pricing, most of the price realization is coming from non-residential markets, given the strength there and our ability to pass it on to offset inflationary headwinds. We'll continue to see that. You may recall last year we had some choppiness in the residential segment associated with pricing as related to rebates, promotions, those type of things. A lot of that has subsided, and I'd say, as anticipated, kind of a flattish pricing environment as it relates to residential. To the extent we can push, we will. It's improving on a net basis after taking into consideration some of those promos and rebates.
Got it. It looks like you're not necessarily concerned about non-res here at all even though some of the recent data points like ABI came in a little anemic. Just can you talk to the momentum there in non-res vertical here in the U.S., specifically institutional? Is that your backlog visibility through end of the year that gives you the confidence that your organic growth in the second half can actually pick up? Thank you.
Our backlog visibility is clear, in particular with the commercial institutional backlog. Remember, those are long cycle projects, and we feel very good about the book backlog that's on the business. I think the other thing that's important is your long-term trends, particularly in the institutional markets, upgrades of schools, college campuses for higher security needs continue. Today, I'll speak to the Iowa Board of Regents on campus security. It continues to be a trend. I think we continue to see positives in the hospital segments, and we like our backlog and opportunities going forward.
I would just also add, Deepa, that some of the leading indicators that we look relative to our business as well as kind of macro items, the order, bid quote activity, specification writing continues to be positive, trending upward. That's always a good indicator in terms of business down the road. Also from a macro perspective, you look at some of the things for example, the number of bond referendums particularly in the institutional market continues to remain strong. The construction backlog
Also is at a healthy level. Some of the things, the job openings in the construction markets continue to be very healthy. All these things would indicate that market demand continues to remain strong, and as Dave indicated, particularly in the institutional segment, where we have obviously a strong market position and it's a richer mix of products in our business, which helps us on the margin profile as well.
Great, [color]. Thank you very much. I'll pass it on.
Thank you. Once again, as a reminder, please limit yourself to one question and a follow-up. The next question comes from Julian Mitchell with Barclays.
Thanks. Good morning. Maybe just following up, I was particularly interested in what you're seeing in the commercial markets in Americas non-res. Maybe just help me understand a little bit more clearly what drove that slowdown in the non-res growth in Q2. Was it something that happened late in the quarter? Does it just go back to some of those labor shortages you talked about? Have you seen some of your commercial customers maybe pushing some orders or projects to the right because of macro factors rather than labor shortages?
I think if you look at just pure commercial construction, there continues to be a healthy environment. We obviously like the institutional college campuses more. As I travel around the nation, you see commercial certainly about at its maximum development and output. With that said, in the upper parts of the Midwest, it was extremely wet. That delays construction activity. Shortages of labor, I think are rampant. We see labor tightness as high as it's ever been since 2008. We think those factors actually snowplow the length of drop. We also see some tightness and extended lead time in door availability, which impact our ability to drive business through. With that said, overall health of the commercial and institutional part of the market, driven by spec quote and backlog continues to be favorable for Allegion.
Thank you. Just my second question, maybe switching to the EMEA region. Maybe help us understand a little bit of context around the Turkey plant closure. Understood that there are some specific macro and economic issues in that country over the last couple of years in particular. The extent to which those played into the plant decision versus just an overall look at your EMEA regional capacity and trying to get that capacity down maybe, and how happy you feel now post the Turkey plant shutdown regarding your EMEA footprint?
Never happy with any of our footprints and till it's fully optimized. Globally, we continue to work. I think second, I'd remind you that a lot of our acquisition activity has been in Europe. As we brought on new capacity, we felt the opportunity to optimize that was there. Turkey, also from a macro and political standpoint, a lot of pressure there. At the end of the day, we thought the best move to Allegion was to consolidate that. We've executed that at a very good level. I couldn't be prouder of our teams to go in and make that move. Overall, our view in Europe is to continue to optimize that footprint, to continue to improve our profitability and ability to serve the customer in the region.
Great. Thank you.
Thank you. The next question comes from John Ross with Credit Suisse.
Hi. Good morning.
Good morning.
Maybe the follow-up first. Just wanted to better understand the electronics acceleration in the Americas you're talking about in the back half. Just looking at Q3, you obviously have a very difficult compare. Should we expect that to happen as early as the current quarter? Or is it more of a back half commentary about trends, just given how it can be kind of lumpy?
You will see improved electronics growth sequentially, relative to where we are in the first half of the year, beginning in Q3. Given the tough comp in Q3 last year, more of it perhaps weighted in Q4. A lot of that growth associated with some of what Dave talked about in terms of the channel activities that we have now completed, that's behind us. This new arrangement with Lennar will begin to continue to drive traction there. Our encode product continues to sell through extremely well. We see continued growth in there. Those three activities will boost the electronics growth, particularly in the residential side. Commercial still remains healthy, and we have a good backlog of activities and channel partners that will drive that going forward as well.
Great. You talked about the channel with e-commerce. How about big box? It was a different product category, but we have heard destocking there. Anything to call out there that would have impacted residential in the quarter?
I would say the big box channel was sluggish, and we expect performance improvement in the second half. I think the Schlage Encode and our strength, Allegion, through our Schlage brand in big box, still have the highest-rated products available. Our partnerships with Ring, Apple, Amazon, and those integration, I think make it a great choice for consumers. We expect improved performance in the second half.
Great. Appreciate it. Thank you.
Thank you. The next question comes from Jim Rose with Baird.
Hey, guys. Good morning.
Good morning.
Maybe just on Americas' margins in the back half of the year. I think just doing some math here, maybe we're looking at an acceleration in the margin improvement from up 20 basis points in the first half-
Margin accretion in the second half. Feel really good about where we are as we look forward to those opportunities. The price productivity inflation dynamic will continue to improve there. Recall, relative to the inflation, we're getting to easier comps, starting here in Q3 as it relates to commodity costs and pricing and that type of thing. You may recall, our methodology is to try to hedge inflation in terms of not financial hedges, but contracts with suppliers. We lock into prices onward to perhaps 12 months. As inflation subsides, we see that perhaps later than other people might. We're going to start reaping the benefits in the second half as it relates to the reduction in commodity costs. That's going to be a big driver.
The continued volume leverage and the margin accretion associated with that is a big driver as well. We had a couple of one-off type of things that are non-recurring as well. That collectively will serve to improve the operating margin performance. I'd just say, as a collective company for the full year, and we communicated this at the beginning of the year, the objective is to get close to 100 basis points improvement for the full year, which gets us back to kind of like the 2017 levels. Still feel like we have good visibility to that relative to the improvement in the price productivity inflation dynamic, as well as the leverage on the incremental volume.
Okay. Okay, great.
I would add, Jim, that we were pretty clear that we would create a faster dynamic in the second half. I was extremely pleased with how we drove the equation in the first half, and I think we're set up nicely with identifiable projects that will help us achieve our goal.
Great. Okay. Just in a more deflationary environment, I just want to make sure I'm thinking about towards the lower end of your historical range, right?
As you know, we have the ability to pass on price, whether an inflationary period or deflationary environment. We've been fairly successful in doing that. We'll continue to remain competitive and push that where we can. This year, for example, the gross price increase was lower than last year, and last year being a higher inflation period. At a normalized level, we should always get 1% to 1.5% of price increase across the business.
Okay. Okay, great. I'll hop back. Thanks, guys.
Thanks so much. The next question comes from Joe Ritchie with Goldman Sachs.
Thanks. Good morning, everyone.
Hey, Joe.
Just thinking about the growth for the back half of the year, again, in Americas. I think, this past quarter, you guys did roughly, I think, less than 1% on the volume side, and it seems like this needs to pick up to call it 4%, 4.5% just to get to the low end of the guide. Outside of what you expect to see as increased penetration on the electronic side, what do you think are the biggest drivers that's going to get you there and seeing the acceleration in 3Q and 4Q?
Yeah. Let me take it by segment of the market maybe. On the resi side, it's really a combination of a couple of things. What we talked about previously on the electronics growth and all the activity there relative to the channel, Lennar new products introduction, as well as channel partnerships that will help us drive volume there. Secondly, on the res side, we see a pickup in the builder channel collectively that in terms of push out more volume. On the non-res side, it's continued strength in the end markets and the healthiness of that and the visibility we have relative to, again, the order activity, specification, backlog, et cetera, feel fairly positive relative to the volume expectations in the second half.
Okay. Okay, got it. That makes sense. I guess, and my follow-on there is as you're thinking about this seasonality, last year things were roughly, from an earnings standpoint, in line 3Q versus 4Q, but seasonally things kind of shift year-to-year. How are you guys thinking about the composition of the cadence for the second half of the year, 3Q versus 4Q? Is there an expectation that one quarter will be much stronger than the other?
We don't normally provide the quarterly guidance, but you should anticipate perhaps maybe a little bit higher in Q4 than Q3.
Okay. Got it. Thanks, guys.
Yeah.
Thank you. The next question comes from Jeff Kessler with Imperial Capital.
Thank you. Could you go through some of the new products that you believe, particularly on the electronic side, that you think are going to boost growth in the second half, particularly those that are aimed at the institutional market, where you seem to be the most optimistic?
Encode on the red side would be what we'd lead with. Second, maybe not so much in terms of new products, but the partnerships that we're continuing delivery with Apple and seamless access on college campuses. You've seen some of our wins. I think Mercer University is a clear example. Second, work with Lennar. I think early on, we said that we would be open, and our ability to go in and partner is providing wins in the marketplace. We've also got our exit devices that are wireless, that are driving in the institutional phase. We think we're set up well. I would also go back to some of our earlier generations of products. The AD-CO has been out several years but is positioned to be able to provide that open integration and communication capabilities that customers appreciate.
There's already installed base of that, and our ability to be able to leverage that in new electronic applications is why we're winning.
Okay. My follow-up question is around Turkey. Could you get a little bit deeper into what are your goals in terms of moving production from Turkey to where, essentially, what are the driving forces that makes you think you're going to become much more efficient in having a plant that is not in Turkey?
Through the acquisition pipeline, we developed a capability out of Poland. In 2017, 2018, we announced a new facility there. We are filling up that facility. Some of that will come with Turkey, and it's really optimizing the supply chain from where we believe is a competitive price market to be able to serve Western Europe. We think we're nicely positioned. If you look at the history of the last five years of the restructuring that we have driven across Europe, it has significantly improved our profitability, and we think this is the next step in that. Our ultimate goal is to continue to incrementally improve operating income year-over-year, and this is another step in that process.
Okay, great. Thank you very much.
All right, Jeff.
Thank you. The next question comes from Andrew Obin with Bank of America Merrill Lynch.
This is David Ridley-Lane on for Andrew. Good morning. Maybe just following up on that comments on the Turkey operations. Could you quantify sort of a payback period for the about $20 million in cash cost relating to that closure?
Anytime you close a facility in Europe, it's going to have an extended payback period. It's the right thing to do. It's more of, I'd say, a risk mitigation activity than a significant payback on a cash basis. Right thing to do, as Dave mentioned, to serve our customers with expedited supply chain capability. There are some benefits throughout the supply chain, not so much from a labor arbitrage, but it's definitely the right thing to do, and we'll continue to look at opportunities to leverage our footprint going forward.
Then on your comments about optimism for new residential construction, are those mainly tied to weather, or are you seeing other reasons why new residential homes in the U.S. would be picking up?
First, adoption of electronics, especially Encode 2. We're going through a conversion with Lennar, which will give us top-line revenue expansion as we provide them exclusively to their home-starts. We continue to have a focused effort on that pro build, driven by those electronics. I think the overall market, and it's no surprise as you look at other companies reporting the new home construction was soft, driven by a variety of factors. We don't see a big rush to recovery. We think that it runs flat, but we think our self-help will help us both on new construction and retrofit as we move into the second half.
Appreciate the color. Thank you very much.
Yeah.
Thank you. The next question comes from David MacGregor with Longbow Research.
Yeah, good morning, everyone. One of the things that, I guess you're talking about price productivity versus inflation. Price and inflation are always a challenge to forecast. Productivity is presumably something you've got a better handle on. I was wondering if you could just help us better understand what productivity should represent quantitatively, if you can quantify for us, over the next few quarters.
I would characterize it this way. As you would expect in any company, it's all about having a robust pipeline in terms of productivity actions, and those would occur either on the sourcing material side and/or at the factory level, labor efficiencies, cost reductions, those type of things. We've got very good visibility in terms of we've already executed. That will take place in the back half of the year, as well as opportunities for improvement going forward, and that's across all our facilities globally. Feel really good about the healthiness, robustness in terms of our productivity pipeline, both the sourcing material side as well as the throughput in the factory. Then you get the normal leverage, volume overhead leverage equation on the incremental volume that kicks in as well.
As you know, we have very high contribution margins that will contribute to the margin expansion. It's a combination of a lot of activities that are going to help us going forward. On the productivity pipeline visibility, we've got very good clarity and expectations on that and good visibility.
Is there any way you can quantify that for us, Patrick?
I'm sorry, what's the question?
Is there any way you can quantify that for us? At least give us some sense of directionally how productivity should compare year-over-year over the next few quarters?
Yeah. I'll just say it's increasing year-over-year, and would expect that to continue. The other thing I'll mention here too, that we sometimes forget about relative to the productivity, but we're starting to reap benefits from the acquired businesses last year. The margin profile attached to those will increase as we get more volume leverage through our integrating with our sales channel. Integrating some of our enterprise excellence methodology there at those facilities are helping us. The acquired businesses is part of the equation, and building them in to our company and methodology will help our productivity as well.
Okay, thanks for that. Second question is just, I guess, on price elasticity and specifically maybe with respect to the non-specified commercial business and maybe mechanical residential as well, but it would seem that with the pricing, you're seeing a growing gap between opening price point. I just wonder if you're seeing people mixing down or if that's creating a little more of a headwind for you from an elasticity standpoint, if you could comment on that.
Haven't really seen it in the marketplace. Normally, the price movement on the low end and the high end, we look at it by product, but it stays relatively close, so the differential doesn't move that much between the product categories. We're not seeing a migration at all relative to the low price point. From our perspective, it's been one of our channel strategies to have a broader breadth of products in that price point that we could sell through the discretionary market. That's been something we've continued to drive for the last several years.
Okay. Thanks very much.
Yeah.
Thank you. The next question comes from Jeff Sprague with Vertical Research Partners.
Hey, good morning, guys. It's Brett hopping in for Jeff here. Just a question on the Falcon brand. Obviously, a relatively newer initiative for the company on the value side, but how has the Falcon category grown through the first half of the year relative to some of the traditional mid to premium brands? As you think about the spec business and some of the bids that are coming in, have you seen a change in the quality preference, specifically for interior doors, but with the Falcon brand, where you now might be able to meet some of those requirements?
Remember, we have positioned with three brands, Dexter, Falcon, and then our premium Schlage, Von Duprin, and LCN. We see nice growth in the Falcon brand, maybe a little bit less in Dexter. What's happening there, when a project gets valued engineered and we need to compete, we'll pull in those products. You see it a lot in light commercial, and you'll see Falcon exit devices, key ways. Glynn-Johnson would be another brand that we would use. I think it depends on where you're at in the market segmentation. Hospitals, college campuses are going to go for our performance products, and we are going to continue to use our global capability to offer customers choice.
Okay, thanks for that. Then just looking at the Americas non-res business up mid-single digits, is there a way you could separate institutional versus commercial in the quarter, how those performed? Then thinking about the second half, do you think commercial can eke out some growth, or is institutional basically going to carry the day here?
I think we'll see growth across all verticals. Institutional should be a little bit stronger. Again, that's a richer mix product for us holistically. All strength across all verticals is the way I would be thinking about it.
Okay, thanks, guys.
Thank you. As there are no more questions at the present time, I would like to return the call to Mr. Wagnes for any closing comments.
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 your lines.