Allegion plc (ALLE)

Investor Day 2019

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Mar 12, 2019

Good afternoon. I'm Mike Wagnes. I'm the head of investor relations and the treasurer here at Allegion. With me today is the Allegion's management team. We want to welcome you to the 2019 Investor and Analyst Day. Before we get started, I want to just go through a couple administrative items. We'll start with safety. As many of you know, safety is a core value of Allegion. We have a couple double doors over here to the right. In the case of an emergency, you can exit in the double doors to the right or behind me to my left is an exit door down to the street. We're going to have some forward-looking statements today. We ask that you read the Safe Harbor provisions in your materials. In addition, we have some non-GAAP financial measures in the presentation. We ask that you also read that on slide number three. With that, I'm going to get into the agenda today. The theme of today's presentation is Access Opens Everything. We're going to start off today, Dave Petratis, our chairman, president, and CEO, will give a company overview as well as the strategic overview of Allegion. Next, we'll have Vince Wenos and Rob Martens. Vince is the head of our engineering department, and Rob is the Allegion futurist, and they'll give a technology and innovation update. We'll take a quick 10-minute break. At that time, we ask that you exit and see some of the products that we have outside. I know many of you saw it already today, but come look at our products that we have and our innovative solutions that we have outside in the foyer. When we come back from break, we're going to have Tim Eckersley, Lucia Moretti, and Jeff Wood, our regional presidents of our respective regions, give an overview and a strategic update of their businesses. Then we're going to wrap up with Patrick Shannon, our CFO, who's going to give the finance overview. We're going to end with the Q&A session at the end. We ask that you hold all of your questions to the end of the presentation. We'll get to questions at the end. With that, we hope you enjoy the presentation, and it is my honor to now call up to stage Dave Petratis, our chairman, president, and CEO. Thank you, Mike. Good afternoon. It's good to have you here at the Grand Hyatt on 42nd Street. I also want to extend my welcome on behalf of the 11,000 Allegion employees. We're pleased to have you here and appreciate you taking time out of your day to hear our story. I got to add my safety pitch to this as well. Mike failed to mention that if you do have to use the exit doors, you'll exit by you exercising those very fine Von Duprin exit devices powered by LCN closers. I think it's amazing the story of Allegion. We touch you in many ways every day, sometimes nondescriptly. Yesterday, we rang the closing bell that signified five years of Allegion as a publicly traded company. We rang the closing bell at 3:45 P.M. at the New York Stock Exchange. The stock exchange also, as you go through that building, and some of you may remember from our last investor day, is completely outfitted with Allegion products. The Von Duprin exit device have proudly served that building since 1920. It's part of the heritage and understanding of this company. We have roots that go back for decades, in some cases over a century. My goals today, as you learn a little bit more about Allegion, is understand the strengths of our business and the durability of our franchise, Allegion, and its performance in up and down markets. Two, how specification and products complexity drives the winning equation at Allegion. It's easy to say, "Hey, these are just locks and exit devices." If you think about the mechanical configuration, which we make hundreds and thousands of variations of, and the opportunity for those locks, exit devices, closers to be more connected in a digitized world, our opportunity, not only for our industry, but for Allegion, I think is outstanding. Third, how smart access, seamless access drives our company. Some comments on our leadership team. We have a very lean board of directors. It's six plus me. It was lean by design. All directors are on all committees. Our non-executive lead is Kirk Hachigian. Some of you may know him from the electrical industry. We track where we spend our time as a board as part of our drive for continuous improvement. 60% of the board's time is on learning about Allegion, and they have traveled the world, as well as a focus on the strategy and future of the company. Over the last 24 months, we've done some retooling of that strategy, driven by access as an opportunity. I think you'll see that reflected and hopefully we can paint that. A lean board driving a lean company. You'll hear from six of my nine leaders today. I want to introduce some of the teammates that you won't meet from. Our presentations will give a geographical view, a technical view, and a financial view. Let's introduce the team members that won't present. Jeff Braun, our Chief Legal Counsel. Jeff, good job. Tracy Kemp, Senior Vice President and Chief Information Officer. Tracy has been a huge driver of our digital experience, our digital learningTechnology is a driver of our business, Tracy, her entire IT team. Our customers of the past have been facility engineers, architects. As access becomes more connected, we'll be selling to the IT community, the architectural community, as well as the physical plant community, IT plays a huge role. Shelley Meador, our Senior Vice President and Chief Financial Officer. Shelley was employee number one in our tax department, she took advantage of an efficient tax structure and helped drive that. Our effective tax rate was 14%. Sometimes in manufacturing, good deeds don't go unpunished. I saw the great team leadership of Shelley, outstanding engagement in her team, I appointed her to the Senior Vice President of Human Resources two years ago. She's done an outstanding job. The last person that will present today is Chris Muhlenkamp. Chris, where you at? The big guy in the back. Any tough questions will be handled by him. Chris leads our global supply chain, brings 38 years of industrial experience like I do, has produced some of the highest efficiency and shortest lead times in our industry. I will talk about some of the work he's done in safety and environmental, but clearly a great job. At Allegion, we've created a vision, seamless access and a safer world. Let's use a video to try and dial you in on part of what we see. Do you ever think about how many doors there are in the world? How many access points? How many openings did you go through already today? In the building, the Hyatt, the Grand Hyatt, 1,300 rooms. You can double the amount of access points. In this building, I have the opportunity for every hotel room door, every exit door. But if you just expand the thinking farther, how many homes in the United States? Homes. 56 million homes, each one having about 2.5 entrance point externally. That's about 140 million doors. If you think about the total doors that just driven by residential, the average American home has about 20 doors. That's over a billion doors that I can serve both mechanically and with seamless access electronic product. Again, do you ever think about how many doors are in the world? 7 billion people on the planet. Just here in the city, the New York metropolitan area, 860,000 structures. You start thinking about access points in the world, you should be thinking 30 to 40 billion. Why access is Allegion's opportunity is less than 5% of those doors are connected, less than 5% are powered, less than 5% electronic. I would present to you today that our opportunity, these doors will become more connected. They will become keyless. Our industry is going to do well, and Allegion is going to do well. An exit device like this will provide seamless access. We showcase it with the RURM. These technologies will proliferate, improve human productivity. I don't have to think about keys. I can go out and have seamless access, and we can provide levels of authenticity and security through edge devices, codes, facial recognition. This is the opportunity that Allegion has, and I think our days are bright as a result of it. Why are we well-positioned for that opportunity? Allegion is a pure-play global provider of global security products and solutions. We've got strong brands. Brands will be important. I hope you'll take a minute to think about the complexity to be able to get an edge device to open a lock. You not only have to have a very solidly engineered lock to keep the bad guys out, you have to have the electronics and durability, connectivity, battery life. You have a set of middleware that carries a heavy level of complexity and apps or connectivity to building systems. Our brands and technology help position Allegion well. We have industry-leading organic growth and profitability. We have a broad customer base and strategic partnership. Our installed base, especially in our key market here in North America, if for some reason the device on the right has to be replaced, it will be replaced like for like. If it's upgraded to be able to have smart access, it will be like for like. We have developed expertise in IoT technology, electric and electronic solutions, connected solutions. We were the first company in the world. Hey, Siri, open the lock. Whose went off? Hey, Siri, open the lock. The first company in the world. You'll see our Wi-Fi embedded Encode, the first company with Wi-Fi embedded capabilities. The first go on and on. We'll talk about this. I think one of the honors I've had is to be able to create a culture at Allegion. We've fueled innovation. An example of that would be our vitality index that we've more than tripled in the last five years by being able to invest. We've also created an engaged environment where I think people can do their best, serve our customers. We've got strong fundamentals in a disciplined industry. I like the setup of competitors that we have globally. It gives us capability I think will serve us well in the future. We have stated a balanced and flexible capital deployment strategy, as well as human capital deployment. You have to set priorities as a $2.7 billion company in terms of how we want to grow organically, where we want to put our human and financial capital. I think we've now got five years that reflects our capabilities. I love the business. I love our opportunities. We're guided by a strategy, a vision, and a set of values that I think are unique to the company. Serve each other, not yourself. Be safe and be healthy. You'll hear that theme. Allegion is one of the safest workforces in the world. We respect the environment that we operate in as well as our people. I think if you're an owner or you're recommending our stock, we come to the top of the list because of that value, be safe and be healthy. Be curious. There's 32 technologies, both internally and externally, that are hitting all businesses today. If we get our head above the fence and understand how technology can improve human productivity, how technology can aid in seamless access, there's great opportunity. It's hard to point at a business that's got 100-year-old roots and is being transformed by the technology of the day. We have done a good job at the company to understand the technologies and how we can manage them. The last I would say is have a passion for what you do. There is a passion at Allegion. It reflects. We try and measure that in terms of engagement that's measured by Gallup, as well as celebrate the performance that we have. How do we compete? We've got a global reach, $2.7 billion in 2018. Three really operating centers, the Americas, about 70%-80% of the revenues. Europe, $590 million. Asia Pacific. Five years ago, when I stood in front of you, we only made money in North America. Today, we're growing and profitable in all regions. I've not pointed out our strength out of Bangalore. Five years ago, I had a decision to make. Does Bangalore go with IR, or do we retain it? I often get challenged, how do you compete against larger global competitors like ASSA and run on technology? Part of the equation is our engineering capability at Bangalore, which we've more than quadrupled in the five years of Allegion. We have the ability from Bangalore to develop new products from conception to delivery. They're driving our software and firmware capability. We have an installed base of engineers coming close to 300, and it's an outstanding capability that's unique in our space. We're a house of brands. I believe brands will be important. 34 brands. 15 of these brands are connected, are powered, are delivering some type of connectivity in broader ecosystems. Electronics is driving this portfolio. If you see the electronics growth at high teens, you feel this. CISA, Interflex, LCN, Schlage, SimonsVoss, Von Duprin are what we would call our leading brands. The complementary capability is part of the complexity we use to drive solutions and specifications. The growth, as we add connectivity intelligence, is helping us grow this company organically. Our global business profile by geography, 73% of our revenues in the Americas, 21% in EMEA, and 6% Asia Pacific. 80% of our revenues today are mechanical, 20% electronics. This electronics growth will continue to advance and be a bigger share of our total revenues. Think both software, middleware, and electronics. As I think about this mix and how we measure freshness of our portfolio, think about electronics growth, think about our vitality index, and think about our organic growth. If I reflect back, we came out with a vitality index early and have done a good job at advancing that from single digits to triple, but I've got products that have long lives. Take the ADCO that you'll see out here, introduced in 2010. That product is growing because of the design characteristics and its connectivity. It's not just about vitality, organic growth in electronics, as well as that vitality index. As this ratio change, you'll see our electronics growth growing, but I think it's important you look at that from various lenses. By end markets, we've got a great balance, institutional, commercial, and residential. The institutional markets continue to serve us extremely well because of the complexity, because of the duty cycles, because of our install base reputation. We're also well-balanced new construction to aftermarket. 50% is new build, 50% is aftermarket. Once we get installed, we stay installed. When a decision is made to retrofit, it's like for like. Winning this on the spec and then have that annuity that continues to drive us is a powerful equation. What drives these markets? We see end markets as healthy. I've spent the last few days here driving around the different boroughs. There is one heck of a lot of constructions going on. As I travel North America, in the last 90 days, I've been to San Diego, Houston, Tampa, Indianapolis, Omaha, Nebraska. There is a healthy pace of construction activity and infrastructure needs that are screaming in this economy. Globally, I see the overall GDP softening. This is such a much better place than it was in 2009, 2010, 2011, 2012. I think we are still capped in terms of the overall construction activity by labor shortages, there's good opportunity as I look out in the year ahead. There's some macro trends. The IoT and the connected world is clearly creating opportunity. Urbanization, people are moving back into the cities. It's not only here in New York, but Indianapolis, where I spend lots of time, or Houston, Texas. I've been surprised by the continued strength of multifamily construction. It's softened slightly, but it remains at historic highs. Multifamily construction is a great opportunity for connected access, where you may enter the parking garage, you enter the opening vestibule, and then get to your apartment. It's much easier to manage that situation digitally than handing out keys. There's increased demand for safety and security. We can look to our K through 12 schools. We can look at violence. People are concerned about safety and security, as well as hacks. One of the great decisions we made three and a half years ago as we thought about cybersecurity for Allegion's infrastructure, we put in a chief security officer reporting to Tracy. They look at the broader view. How are our Allegion infrastructure and what are those potential threats, as well as to our products. We were not the first to say, "Alexa, open or close the door. Lock or close the door." There were products out there that had flaws. We worked through those flaws, eventually arriving with a product that our customers can trust. Those demands for increase in safety will continue, but the keyless world is not going away. E-commerce and services, the last mile delivery, is a trend that opens up tremendous opportunity. We partnered with the various mega techs to be able to provide those services. Think about e-commerce will continue to grow. Think about the challenges it poses right here on 42nd Street. Are cities going to allow deliveries between 8:00 and 4:00 while the population's moving? I'd argue no. We can see examples where United Parcel Service is already negotiating with their unions to have more access in early hours and the weekends. How are they going to get in the buildings? It's going to be through seamless connected access and partnerships. It's another just e-commerce, we all use it, but there's consequences. It clogs big cities like this. How will we solve that problem? All of us want our package tomorrow. It's going to be done with seamless access, the ability to be able to get in a loading dock, to get in a high-rise building when the traffic is less. There won't be a security guard there to drive it. We like those types of solutions. Digitization, we all think about connected access, our edge devices. It impacts inside Allegion, as well as our products. Digitization is affecting how we communicate with customers, how we manage specifications, how we run inside our factories. It can be a productivity driver and help our margins, and it can help drive our sales in terms of new products. As we think about market dynamics in the security industry, codes and standards will continue to be important. Remember the building that burned in London. People were killed because of inferior products. Codes and standards will continue to be important. They're well developed in the Western world, still emerging in the growth markets globally. We positively influence, through specification and code development, a variety of different codes that help strengthen our value proposition. That could be the noise generation from an exit device in a maternity ward, in a nursery. The hospital example is a good one. If I can reduce the amount of ambient noise, healing goes up. Our devices contribute to that. It can be part of the hospital specification code and standard. ADA codes and standards, accessibility for people that are in walkers in an aging population. These are drivers. A door with our closer, if you saw an 80-year-old individual with a walker, can knock you on your ass. A closer with an exit device. These are challenges that we use automatics to help overcome. They're solutions that help solve those problems, and they develop and accelerate with codes and standards. We believe very strongly as a company in open protocols and devices. Electronics adoptions will accelerate. Connected building and homes will continue to grow. Last, the needs for aging infrastructure. The average K through 12 school in the United States is 40 years old. This building, built in 1923. There's continued infrastructure needs. Our industry's going to benefit from it. As you add connectivity, access is our moment of opportunity. As we think about access as a point of opportunity, how do I, the leader of Allegion, get a company with 100-year-old roots like Von Duprin or 140-year-old roots like Bricard to think about how new technology can impact our customers, our business? First, it started with me. I had to look in the mirror 24 months ago and question my own capability to be able to lead the company. 32 technologies hitting the company. I went to the board, said, "I look like a piece of barbed wire, and I need to look like a piece of fiber optic cable." Myself and our leadership team went on a journey to reinvent ourselves, chaired by Tracy Kemp. Traveled the world to understand how technology would implement us and how we could get faster, how we could move at the speed of China, be able to introduce new products and connect. One of the things that we created was a venture group. I went out and benchmarked some different companies. I attended some seminars. One of the propositions is in front of Allegion, think about this, visualize this, we needed to put out a vacancy sign that said we're open for new ideas, new technologies. We created Allegion Ventures with that in mind, to observe, learn, partner, invest, and potentially own technologies that would help drive our company. I was clearly out on the edge when we went through it. It's exceeded my expectations. Rob Martens, our futurist, will talk a bit about it. We have companies coming in to the Carmel headquarters and pitching technologies that are impacting K through 12 security, pitching how we can drive edge devices to have higher levels of authenticity that will be important to our interaction and device. It's not just the ability to walk up to a lock and say, "Oh, that's Dave Petratis." How do we assure it's Dave Petratis? That could be through image, it could be through voice, it could be through other factors of authentication. This will be important to all vectors of our customers, whether it's residential, commercial, institutional. Technology will be a part of that. Our investment in Pindrop would be a good example of that. Allegion Ventures, we've made three investments. Yonomi, that helps us with the cloud, the middleware stuff. Nuki, which you can see outside, robotics and robotic capability to be able to operate a lock, and then Pindrop, which is around voice authenticity. Since our beginning, we launched Trailblazers, which bring in innovative ideas from our teams. It does a couple things. Number one, it unleashes innovation, and we give time. We have regional contests, almost like a Shark Tank. They come in and present globally. The winners are rewarded Allegion stock, and those products, like the Quiet Closer, are out on the market today. Inchiza, another example, where the exit light and the exit device with lighting is embedded in the unit. Think about that. The exit light, where's the smoke going to be? Up at the top. We put the light, the exit sign to be able to guide you out of the room, an example of a successful Trailblazer project. We also have invested digital technology to be able to improve our spec writing collaboration with architects and specifier. We call it Overtur. It's innovative. I encourage you to go out and understand this. Tim will talk about it further. There's many ways to be able to modernize an old company like us. You've got to get your head above the fence. You have to be open to new ideas, and you have to empower people to go make it happen. It's working at Allegion. How do we win? One of my goals here was to help you understand the complexity of specification. What is a spec? When I build a complex building like this, there's 16 divisions, which is everything from the foundations to the electrical system. Section eight is doors and windows. We have dedicated employees globally that focus only on moving Allegion products into the specification of a building like this or a hospital that I show in front of you today. Think of this as the Buffett Cancer Center in Omaha, Nebraska. I spent some time there a couple weeks ago. We are hanging on every door, the hinge, the kick plates, the closers, the exit devices. The spec begins with us helping the architect to meet the requirements of the hospital, the building codes, the fire requirements, and the work that goes on in complex spaces like patient rooms or the nursery center, where you have multiple challenges of moving small carriages or neonatal in. If you go into the psychiatric part of a hospital, you have what I call anti-ligature, which prevents someone from hanging themselves on a doorknob. These are part of the complexity that goes into a bill of material that we load in upfront in partnering with the architect. The better we perform at that, we become a trusted partner. Some of the critical outcomes, I want high security in that nursery. I want high security in parts of certain areas of the hospital, maybe the pharmacy. You have ADA requirements. You have egress and evacuation requirements. All of that goes into the complexity and why specification wins. I remind you, hundreds of specifiers that help drive this that are employed by Allegion that only sponsor our products and work with our partners on these codes. Let's go deeper. How do the product ranges and the complexity drive for solutions in this space? Von Duprin and LCN devices for cross-corridor openings on every opening. You may have Steelcraft doors that are specially engineered to be able to seal in the case of a fire or improve the energy efficient. Glynn-Johnson push-pull locks that are easy to operate. AD Systems, a recent acquisition of sliding doors. Why are sliding doors important? We can better optimize the square footage of a medical suite of a medical floor by the use of sliders, optimizing the construction cost per square foot. We go in and work with the architect to be able to drive that equation. I can get more in here when I eliminate that swinger, and you'll see it's very popular in medical suites, X-ray labs, scanning centers. TGP, another example, where we're using shielding glass to be able to enter light into a CAT scan room, giving protection along with the other specified complexity that can go in to be able to solve a problem as in a hospital. Other needs in K through 12 schools, other needs in computer data centers, millions of SKUs that we're able to prevent. I think there's another point it's worth thinking about. The mechanical hardware makeup that goes into these specifications are often unique to the North American markets. In North America, we call them ANSI standards. If you go to the rest of the world, it's EN or European. If you go into a building design, it's generally one or the other. We have the specification capability for both, but it puts a barrier around this continent. It's not a homogeneous market worldwide. It becomes even more stratified as you get to Europe. When you go from Spain to Germany to the Netherlands, the door configurations, depths, width, size, materials are different. That complexity is part of what we manage through specification. It drives a winning equation. We have deep relationships and customer base, the largest specifying team in North America, which I talked about, that's being augmented with digital technologies. Our architectural relationships, whether it's HKS, who wrote the specification for the Buffett Hospital, Gensler, AECOM. You'll see this architectural influence go worldwide, because often, whether it's here with stringent building codes or in the developing world, the architectural reach of North America is cascading around the world. We also have strong distributor partnerships. Security Lock Distributors out of Boston is our number one in the nation. DH Pace out of Kansas City, a variety of capabilities and solutions. Anixter would take our products worldwide. We also have to have partnerships with The Big Box and Lowe's, where you see the richness of our residential offerings. The mega techs also play a bigger influence in this connected environment. Amazon Key, Siri Open the Lock, Google's influence. These are things, along with Alibaba. JustCo would be the WeWork of Southeast Asia. These are partnerships and channels that are important to Allegion's success. Our strategy. What is the strategy of Allegion? Allegion creates value for our employees, our customers, and shareholders by securing people and assets with seamless access wherever they reside, work, and thrive. That strategy is supported by six pillars, five pillars. Expanding core markets. Even in my number one market, North America, with an average of 35% market share, I have 60% of the base that I can still go out and serve. We have done an excellent job at segmenting our channels and going and driving growth. Seamless access, electronics, continued channel segmentation gives us great opportunities to expand where we're at today. We've made clear decisions on where we want to compete and where we don't want to. Look for us to continue to have that discipline. Be a partner of choice, whether it's on a wholesale distributor, an architect, a technology leader. If somebody walks in through Allegion Ventures, we have 10,000 channel partners that we can partner and help grow that business and maybe learn from that technology, partner with that technology, embed in that technology. At $3 billion in revenue and 11,000 employees, I've got to be a good partner. That partner is also based on open protocols, which we talked about early and I think is so important as we have to adapt into building control systems, as we have to adapt into security systems. Being a partner of choice on a variety of front, I think helps open us to opportunity. I'd contrast that there was a strong culture of it's got to be invented here, or that lock does not meet the standards of a BHMA level 1 standard. We can look at things through different lenses, be a good partner, and drive the business. Deliver new value and access. When I say we can influence human productivity, think about every time you go to the Goldman Sachs headquarters or the Bank of America headquarters, or you go down and visit Nelson Peltz, what you have to check in from a security standpoint. Those problems will be solved. We spent a lot of time in the last year going through a business sprint with outside teams, software developers, thinking about how we can provide access solutions in elderly home care. How do I know that the service provider at my mother's elderly care center went in and looked at her at 2:00 A.M.? Was the administrator able to justify to me that he was able to provide that service? Did they give her that pill? That's the opportunity with seamless access. That's where we can deliver new value in a variety of solutions. Another example, new value and access would be K-12 schools. We've got clear problems of security. Technology will help us solve them. If Dave Petratis walks through the door every day as a student and I weigh 180 pounds, why do I weigh 185 tomorrow? Artificial intelligence, sensing can determine and help predict problems. That's where new value and access creates opportunity for us to grow. Capital allocation will continue to be important to us, that we're good stewards of the capital, and continue to drive enterprise excellence would be the five things that guide us. Let's go deeper on the pillars. Expanding core markets, continue to optimize channel relationship, channel segmentation. Digitally enable demand creation through specification. Overtur, a good example of that. Continue to have outstanding back-office systems that help us seamlessly take and process orders and deliver. Our goal at Allegion for an architect and a general contractor is to get them off the job faster. I believe Allegion has a unique opportunity to raise our capability through smart tools, great specification, and understand the customer opportunities that we have to improvement and drive that value proposition. I think I'm part of an industry that's not very good. I think we can be a lot better, and it will help us grow organically. Provide leading products and solutions that solve problems. One of the learnings for Dave Petratis over the last three years as we've expanded our digital journey, as we deploy capital, what is the problem to be solved? Is the money there? Digital access and expansion of the core, if we think about those opportunities, help us grow. Deliver new value. It's amazing to me the opportunities that we have through technology and embedding in our products. Again, we'll accelerate new product development. I want it measured by vitality, I want it measured by electronics, and I measure it by organic. It's because the products have long lives for us. Our industry also has some resistance to be the first one out of the box. Our brands helped us to prove it, but in any industrial application, construction application, they don't always want to be the first to deploy. We tend to have long lives when we make upgrades to our products. The last is this, my comment in developing new access, there is a tremendous challenge to all manufacturers to develop this middleware that connects an intelligent lock to an app or a building system. Don't underestimate the amount of work that Allegion's putting into this in working with partners like Amazon, Apple, or Google. What we have to provide to successfully drive in that ecosystem, things in that middleware can allow access. It can hold intelligence. How many times did Dave Petratis go through the door today? It can make decision making. Our orchestration of that middleware and how it connects to our products and how it's plugged in in the broader world is an important opportunity on how we develop access. Think of it. I'll have to have, and we do have product roadmaps to think about how an exit device could go, how electronics communicate with the changing needs of electronics, and how we interface in this middleware, which also will have product roadmaps. I think we have displayed with our electronics growth that we've got a handle on all three of these. Our best days are ahead of us. Continue to be a partner of choice, drive enterprise excellence. We have signed up for a large margin expansion in 2019. We know how to do this. The six acquisitions that we made in 2018, we'll get in and industrialize and drive it. Enterprise excellence is the equation that we've used to drive industry-leading profitability. It will continue to be a large driver. Last, in terms of capital allocation, look for us to continue to make organic investments, opportunistic acquisitions of size and scale. It takes a tremendous amount of energy to go buy a $10 million thing. Look at us to be at a higher level, $50 million-$100 million, and focused on technology. Bernhard Sommer is here representing SimonsVoss. It's one of the best acquisitions that we've made. It's helped us to develop products, understand communications, and has been a good growth engine for us at Allegion. As we think about M&A, we like technology. ISONAS would be another example. Continue to not hoard cash. We are clear in terms of our ability to deploy our capital, organic growth, M&A, and shareholder distributions. I couldn't leave the stage without bragging on my team. Safest workforce in industry. Allegion industry rate is 85% below the 2017 U.S. industrial average. In January, we're getting ready for our monthly CANES. We do the revenues, the profitability, the things we do on a monthly basis. We also, at the top of the agenda, is safety and health. It's the first time in my leadership career I saw no injuries at Allegion in January. 11,000 employees, no injuries. We take this serious. It's important to us. I did not see that at Quanex. I did not see that at Schneider Electric. In my mind, safety and health, environmental stewardship is a true north metric, and we're living it. It drives bottom-line performance. I think it also says something about my leadership team, that we care about the people that are serving our customers. I also aggressively speak out on the health of our workforce, trying them to make better decisions on how they fuel their body, how they manage stress as part of the value proposition that we drive to try and leverage world-class performance and create a good experience. Allegion, outstanding demonstrated financial performance over the last five years. Excellent growth, industry-leading profitability, good EPS, and outstanding cash flow. We had to work over the last five years to earn your credibility. We know we earn it every day, and look for us to execute as a high level going forward in any economy. Our shareholder returns, you're well aware of. It benchmarks well. Last, I'll close by this. We've got strong industry characteristics and fundamentals. I feel extremely good about the economics that we face on a global basis and our opportunity to drive connected access. Seamless Access creates profitability and growth. Think about where we started 40 minutes ago when I started. How many doors are there in the world? How many doors right here in the U.S.? With a 5% penetration rate, I like our opportunities to be able to drive Seamless Access, new solutions, solve the problems of congested cities through package delivery or new ways to enter buildings. We enter the next five years from a position of strength. I'm clearly much more knowledgeable, as well as my management team. We've got a diverse customer base and set of business partners that have looked at us for the past to be successful and will continue to look for us for our expertise, not only in our historic mechanical knowledge, but in our Seamless Access. We've got an engaged and high-performing workforce, and I believe we put up five years with a great track record. With that, I believe that Allegion's best days are ahead of us. I'm going to bring up Vince Wenos, who's our Vice President of Engineering Technology, and Rob Martens, our futurist, to talk a little bit more about Seamless Access. Thanks for your attention. Guys? Vince? Thanks, Dave. My pleasure. Appreciate it. I'm armed. Good afternoon, everyone. Thanks for your time. Tough act to follow. I drew the short straw on that one. Dave could give this pitch as easily as I can, he's made that transition from barbed wire to fiber optics. Congratulations on that, Dave. My name is Vince Wenos. I have responsibility for engineering at Allegion, and I'm joined by my colleague, Rob Martens. Rob has one of the coolest titles in all of industry, that's futurist, and he's also the president of Allegion Ventures. We're going to tag team this topic a little bit. I'll start it out. Focus is going to be on technology and innovation. I think you could tell from Dave's pitch, we're going to focus a lot on electronics. You can probably tell that by looking at the product displays outside as well. Strong focus on that as we go forward through this deck. I'm going to hit on products, product innovation. Rob's going to come up and talk about a number of different trends that are impacting our business that we think we can ride and continue our success in the marketplace. He'll also talk to you a bit about Allegion Ventures then close this particular section. What do we mean by innovation? We're a product manufacturing company, so it'd be really easy for all of you to think about innovation around our products and solutions. I certainly do. It's what I do. It's what I love. It's what you see outside the doors when you leave here. It's the products you experience every day. Innovation is broader than that. I think Dave touched on that when he talked about our Trailblazer program. He said that we look at innovation around process, how we do our work. We look at innovation around our business models, how we go to the market, how we serve our customers. It's very broad, but at the center, no matter whether it's product process or go to market, it's a focus on the customer, right? If it doesn't bring value to the customer, then it isn't innovation. A lot of companies can talk about great ideas. A lot of people can have ideas. The challenge is translating those ideas from a piece of paper into a product that has success in the marketplace. I think you've seen by the products we demonstrated outside, and you'll see more in this deck as we go through it, that we feel we're extremely good at innovating and bringing value to our customers. Let's start a little bit on a history lesson, innovation relative to electronics at Allegion. You all know that 80% of our business is mechanical. You saw that with Dave's deck. In fact, our legacy goes back over a century to mechanical devices, the exit device, for example, that Dave talked about, or mechanical locks with Walter Schlage. In fact, one of his greatest innovations was the push button to lock a mechanical lock. We take it for granted now, but when Schlage invented that, it changed the game. It actually put Schlage on the map from a mechanical locking perspective. What you might not know about Walter Schlage is that he also invented the first connected lock. You're looking at me thinking, "There's no way that Walter Schlage invented a connected lock." He actually did. In 1909, you can see it up here on the far left-hand side of that timeline, he came up with a way to interface a mechanical lock to the lights in a room to turn them on or off. In effect, he came up with some initial home automation and the first connected lock. We can trace our legacy in electronics back over a century as well. As you go fast forward through this, you'll see this is not a linear timeline by any stretch of the imagination, right? It starts to get crunched as we get to the right. I think that's a natural outgrowth of the acceleration we see in electronics in our lives, right? A lot of our innovations have come very recently. In fact, I'll mention a few firsts for Allegion. We had the first Grade 1 high-security residential electronic lock in the Connect lock. We had the first lock, Dave mentioned it, to be HomeKit compatible. That was the Sense lock. Last year, we built on some of the firsts with Connect and added Zigbee and Z-Wave. Now you're thinking, "Well, those are certainly not new. How can you claim a first?" Well, let me tell you how we're claiming firsts on some of those. Zigbee came out with a new standard, Zigbee 3.0. It's intended to fix some of the security vulnerabilities that existed in the original Zigbee 1.0. We were the first company to field a lock, our Connect lock, with Zigbee 3.0 certification. That's really important. I talked about customers, putting customers at the center. When we look at the primary concern for customers, all of us when it comes to the connected home, is what? It's security. We're putting the customer first, coming out with solutions they need. Similarly, on Z-Wave, you say, "Well, Z-Wave is not new." That's true. Z-Wave Plus just came out last year. We were the first company to field a lock with Z-Wave Plus SmartStart. You say, "Well, what is SmartStart?" Again, focusing on the customer makes it easy to take that product out of the box and have it join your home network, easy to set up, easy to commission, easy to use. I said the top concern of people in connected home is security. Second is cost, and third, as you can probably guess, is ease of installation and ease of use. Again, continuing to put the customer first when it comes to our products, what we introduce, and how we introduce them. Those are some examples on the residential side of our business, but it carries over to non-res as well. If you look below the timeline on the right-hand side, you'll see that when we were last together about 24 months ago, our ENGAGE platform stopped with the NDE lock. I think you saw that out here. Since that time, we've added the LE, which is a mortise lock version of that connected to our ENGAGE platform, and we've also added what we call the RURM. Think of it as an electronically engaged, activated exit device, which fits on that platform as well. When we look at our innovation leadership, in the mechanical space it's strong, in the electronic space it's strong, and we believe we're well positioned to continue to be a leader into the future. I wanted to talk a bit about why the focus on electronics. I think Dave did a great job. He talked about our strategy, seamless access, and how we think that's important for us today and going into the future. Electronics growth is accelerating. Whether we call that a trend or just a fact of life, I call it just a fact of life. We live with it every day. In our lives, we see the impact it has. The connectivity we have is mind-blowing. I put a couple of stats on here. By the end of this year, it's estimated there will be over 10 billion Wi-Fi connected devices in residences around the world. That's a lot of devices. One for every man, woman, and child, plus some. Perhaps even more shocking, at least it was to me, was that in 2017, globally, 1.5 billion smartphones were sold. I had to go double and triple check that number because it seemed pretty astonishing that one in every five people on the planet bought a smartphone in 2017. Effectively, that's the case when you have industry leaders like Samsung selling close to 400 million just by themselves. Why am I pointing this out? It's an increasingly connected world. The transition to our homes and our offices is a natural one. Greater options, ease of use, better customer experience, are all driving adoption of these products in ways we couldn't have imagined before. You think that and you say, well, a lot of these statistics end with a B, billions. People are adopting them. The space must be crowded. It must be small. I think as Dave pointed out, what we see is just the opposite. For example, in the Americas, the penetration rate or the adoption rate of e-locks for front doors is only about 7%. Yet, when you talk to people who don't have them, when we did a survey of people who don't actually have one, 55% of them expressed an interest or a very strong interest in having one. The market is still very strong. When we flip over to non-residential and look at it's similar. That space has adopted electronics and connected locks much earlier than residential. There's no question about that. Yet the penetration rate only stands at about 14%. In fact, when we look at resi and non-resi, the entire market for e-locks for physical access control is predicted to be at least $2.5 billion by the year 2022. Just a tremendously large opportunity left for us to go get. I think that was Dave's point when he said, how many doors are out there? How many doors are out there that aren't connected? A huge number. Now that said, we can also look at some of the mega techs and the mega trends, Rob's going to talk a bit about those, and the influence they have and our ability to effectively partner with them and continue to drive this growth in ways we maybe never thought of, even five or six years ago with home delivery, for example, as Dave pointed out. Now, earlier I said that innovation only matters or ideas only matter if they're truly innovative and bring value to customers. I talked a lot about a lot of our innovation in electronic space, electronic locks, and otherwise. You might say, "Well, how do you know you're being successful?" If you look at this graphic, and again, it focuses on the Americas region for now. Left-hand side is residential, right-hand side non-resi. Blue bar is market growth over about five years. Orange bar is Allegion growth last year. You can see that our solutions are indeed winning. They're being adopted. They're bringing customers value in the marketplace because we're growing about twice market. When we feel really good about the products we fielded and what they're doing out for our customers. Whether that is the NDE lock, the LE, our Schlage Sense, our Schlage Encode, we'll talk a bit about those in a minute. We believe we're very well positioned to capture that growth as we go forward. I mentioned we were last in front of you about 24 months ago. I talked about some of the things that are new, but that's not all. We've had a significant number of new developments in the electronic space, not just in the Americas, but globally, that are driving our growth. I thought I would talk a little bit about some of those here. Up in the upper left-hand corner, you can see our residential Allstate portfolio of products. I talked a bit about those. The fact that we have all the major technology connectivity, Zigbee, Z-Wave, Wi-Fi, for example. We work with all the major voice assistants, whether that's Amazon, Google, Apple. We work with all the major home hub providers as well to give you solutions that are accessible, whether you're looking for home automation, whether you're looking for home security or just convenience. On the right-hand side, you see the ENGAGE platform. When we were here a couple of years ago, we had the NDE lock sitting on that platform. I talked about the fact that we've grown that platform significantly with adding mortise capability with the LE, as well as a door controller, which we call the CTE. That growth has been well-received by the market. It shows how you can create a platform and quickly put additional devices onto it to complement the portfolio and provide protection on all exterior and interior doors. Those are examples of resi and non-resi in the Americas region, but the growth and the innovation isn't confined just to that region. I thought I'd point out SimonsVoss. I think, hopefully, you got a chance to talk to Barnard and see the solutions that SimonsVoss brings to the marketplace. They invented the e-cylinder. You probably saw that on my timeline. They're experts in miniaturization, both mechanical and electronic, and they've leveraged that into a new product we call the SmartHandle AX. There's a great example of it out here. If you haven't had a chance to experience it, please do during the break. It's a tremendous product for EMEA, but beyond that, it's a global product that even has applicability in the APAC region. Great job by the team there, leveraging their strengths to bring new solutions to the market, and not just for EMEA, but for the world. Similarly, in Lucia's business, Interflex, our time and attendance business, has launched a significant portfolio of mobile credentialing, so getting away from physical credentials and being able to use your phone. Last, but certainly not least by any stretch of the imagination, is our Asia-Pacific portfolio of electronic locks. It has grown tremendously in the last 24 months. There's even some things you don't see here that I think we had out there for you to view in the SCL600. Bluetooth connectivity, both under our Schlage brand as well as our Milre brand, are really driving growth in the region for Jeff and for his team. All that stuff is really great, right? Cool technology, great products. I love them. Rob loves them. We think they're doing really well. You might say, "It takes investment to do that," and you'd be right. It does take investment to do that. You might ask, "Do you guys feel like you're getting a good return on that investment?" I'm just going to point out a few things that I think demonstrate our ability to have an engineering organization that is very effective, very efficient in bringing those solutions to the market. First and foremost, as with most parts of our business, we're always looking to digitally transform it. That is, bring latest tools and technologies to our teams to make them as productive and efficient as we possibly can. We're fortunate to be able to do that, to have common tools that we use globally so that we can share designs around the world. When I talk about sharing designs in the middle, in the upper hand part, you're not intended to have to read all this, so I apologize for the small font, but it's really focusing on platforming or what I like to call reuse, meaning can you develop core pieces of a design that can be shared, leveraged, so that we improve our time to market, reduce our risk, and maintain the highest levels of quality? We've done that around product platforms. I would argue Connect is one. We've done that around, I'll say, a software platform. ENGAGE is a great example. Even technology platforms over on the right-hand side there. The core of all Interflex readers is a common piece of electronics hardware and firmware that goes across the board. We do it once, we get it right, and we leverage it across all the products and all the controllers in that particular business. Dave talked earlier when he was talking about our global capability, and he talked a little bit about Bangalore. When we look at the needs of the business, we've had to grow headcount. Productivity is great. Platforming helps a lot too. As the business grows, we need to add people as well. We've been very successful in doing this since spin. Over 50% of our organic headcount, so set aside businesses we've acquired, 50% plus of our organic headcount has come in low-cost countries. The vast majority of that, as Dave mentioned, is in Bangalore, India, where we have virtually every engineering competency present. They started out maybe a decade ago, focused primarily on supporting product development for the Americas. I'm proud to say we now leverage that design center for the globe, supports the Americas, EMEA, and APAC as well, and about a quarter of our engineering headcount globally resides in that location. Gives us great capability, great access to talent. Huge numbers of engineers graduate in India every year, second only to China, I believe, and it's given us a great opportunity to leverage that. Dave talked about the complexity of our products, right? You've got a mechanical lock. By the time you look at the features, the trim, the colors, et cetera, you might have 1 million plus possible variants of our products. There's a lot of work to sustain that. Components, whether mechanical or electronic, go obsolete, we have to re-engineer the product so that it can continue on in the marketplace. We do value engineering to take cost out of our products, to keep them competitive in the marketplace. That is sustaining type work, meaning it's work we have to do to keep our current portfolio of products relevant. If you're not careful, that can consume everything you do, right? You need to have a good balance and make sure you're allocating a fair amount of your time to new product development innovation. What you see here in the lower left-hand corner is a stat that shows, and I didn't make this up. I know 50/50 are looking at it thinking, "He made it up." For 2018, that's how it broke down. We try and target that, right? 45/55/45, whatever, but try to make sure we've got the right folks maintaining our competitive products and their position in the marketplace, as well as a fair amount of our team focused on bringing that new innovation and those solutions to the market. As you go about thinking about the transition from a mechanical business to an electronics business, Dave mentioned we're at 20% now, but it's growing double digits. That's absolutely true. That brings a need for different types of people than maybe you had before. As we've grown post-spin, we've looked for people who are capable of doing systems engineering, software engineering, firmware engineering, electronics engineering. Some of those through acquisition, a lot of those organic growth in our company. I'm proud to say that as of last year, we passed a point where over 60% of our engineering headcount is now focused in those areas, which will fuel our future as we go forward. Last, and certainly not least, is are we doing a good job of protecting our ideas, our intellectual property? Lower right-hand side, you can see we've had a continuous stream of great ideas come out of our organization. Those resulted in submissions to the U.S. Patent Office. What's even more impressive is our conversion, the ability to get patents awarded is also very high. We have high-quality ideas, protecting our products, getting patents in those, and we've been very successful with, I think, over 200 granted since spin. As you can tell, I'm really proud of the products and solutions we have. Rob is. I know the entire leadership team is. We also feel good when others recognize the great work we're doing as well. I thought I'd point out just a few awards that we've won recently. On the left-hand side, you see the Engage Exit device, the RURM, won three major industry awards when it launched last year. I'd encourage you to take a look at it out here. Center on the top, we have what's called the TWICE Picks Awards. If you're not familiar with TWICE, it's a magazine, stands for This Week in Consumer Electronics. They provide awards during the Consumer Electronics Show. We won in 2018 for our Sense product, and we won award again this year in 2019 for the Encode product, the Wi-Fi enabled deadbolt that is compatible with Key by Amazon. Those two products, or those three products, came from our traditional teams. We're equally proud of the recognition that some of our newer entries have received as well. ISONAS, Dave mentioned, recent acquisition last year, brought us some tremendous intellectual property around IP connectivity for devices in and around the door, but also some pretty industry leading products as well. They won an award at ISC West last year for their access control as a service software platform. Last, but certainly not least, on the bottom there, you see our Pegasus Lock from Europe, which won a design award as well. Whether it's technology-based, design-based, or a combination of the two, a lot of great industry recognition for our teams. I hope you've enjoyed that so far. Talks a little bit about where we've been, where we are, and where we're headed. Where we're headed is heavily influenced a lot by what we see happening and by what's happening in the market, the influences, the trends that we see that are going to be important. When we think about that, we talk about megatrends. Here's the definition of a megatrend, the standard stuff, you can pull out of the dictionary if you want. We don't look at all the megatrends. We try to boil those down. We're pretty fortunate, actually, in Allegion to have an individual who's really good at that. Over the last three, four, five years, he's done a great job of predicting the trends that are going to be meaningful in the residential space, as well as the trends that are going to be meaningful in the non-res space. With that, I'd like to turn it over to Rob and let him take you through it. Okay, Dave. Thank you. All right. Like Vince said, one of my primary duties at Allegion is focusing on megatrends. What that's really about is, I think we're all generally familiar. We want to throw something up there just for context for you. In our world, there are plenty of them. The question is how are they relevant to us, either from a threat or an opportunity standpoint? I'd like to think we're doing a pretty good job of assessing those and kind of pulling those through. Today we're trying to figure out in the middle of the program, what would be something that's interesting for you, but it also be highly informative in terms of how we're leveraging those to our advantage. To start, I want to point out five. We just cherry picked five out of the plethora of megatrends that are out there that we think are especially relevant to our area of business. Hopefully somewhat familiar. I'm going to define these for you, and then I'll take some time to go through our unique opportunity and our unique advantage that we have based on a variety of factors. First, you heard Dave refer to edge computing, and I'm sure most of you have heard of edge computing, but you may be confused. It is a complex topic, depending on who's writing about it and which magazine at the time. Edge computing, what it really means is, more is happening at the point of interaction. More processing is taking place. It is focused on providing a better user experience in real time. It does not omit the cloud. When you talk about edge computing, we're not talking about everything happening on location. It's highly complementary. An area of focus for Allegion. The second one you heard Dave mention as well, conversational platforms. Alexa, Google Assistant, Siri, you name it. We participate in all of those platforms. We believe what is effectively becoming biometric authorized entry and things like that are highly relevant, highly intuitive, and work really well across various populations across the world. That's another one. Most importantly here, though, this is an effective bridge between physical and digital security. We're going to talk a little bit more about that with examples from Pindrop and some others as well I think you'll like. Want to focus a little bit more time here and pontificate, if you'll allow me, on secure and scalable IoT. If you've been at a conference where you've seen me talk before, I always say the big joke in the IoT is there is no S in the IoT. There is no security in the IoT. We've actually seen that transform a little bit more, and I would adapt what I said before is, not only has there been no security, but there's also been no scalability. The message that I want to give is, I can literally go out today and buy a product that will allow a kid that's 10 years old to connect something to the internet. Connecting products to the internet is not difficult. It's easier than it's ever been. The problem is what do you do once you get it there? Can it scale? Is it secure? You're seeing in the news, I won't give specific examples, but lots of places where this is hugely problematic. You can support 10,000 people. That's fantastic. What about when it hits a million? What about when it hits 10 million? What are you going to do then? We'll talk more about that. Specifications, core feature, core function, core capability of our business. The specification process in and of itself with Overtur is changing. We want to do things real-time. We want to collaborate. It's not about handing you a physical piece of paper. It's about a digital asset that is constantly learning. You see, machine learning, AI, all these things embedded and baked in now, into smarter specifications. Very dynamic space for us. Then interestingly enough, we're calling it a megatrend, emerging technology and venturing are going hand-in-hand. How does an established existing brand and company get access to the right technology at the right time and apply it responsibly? Venturing is a way to do it. We think about venturing differently than other people do. Dave came to me with a very specific challenge. I don't want to be like every other corporate venture group. We're going to talk a little bit about that and why we are so different. The bottom line here is we want to leverage these megatrends of today and tomorrow into profitable growth. Let's dive in. Edge computing, you've heard all of us talk about this before, but we're going to mention it again, is our unique geography around the door in and of itself is inherently valuable. You're processing more and more locally in order to give the enhanced customer experience that people expect, demand from their devices, from seamless access. You've got to have the geography. You've got to have it there. We have the ideal location for many things. As Vince Wenos's team improves things like battery life, various protocols, and other things that we're extremely familiar with, we do it better and better and better. Things that you think of today as being dumb devices, well, guess what? A lot of those are actually smart, and they're definitely getting smarter. Don't forget the trend. The trend is the cost of sensors continues to go down. The cost of transporting the information from all those sensors continues to go down. The cost of taking that dirty data and converting it to clean, usable data, that price is going down as well. All these trends pushing in our favor, and that geography has a lot to do with the benefit that we're going to recognize. We talked about conversational platforms. I won't belabor the point. When we see ones that we like, that we think have scale, and we think add value for the end user, we go for it. We're there, and we're there early. Talking about the IoT in particular and why we think secure and scalable is an advantage for us, I would say the proof is in the pudding. Look at the first investment that Allegion Ventures made. We made an investment in a company called Pindrop. Pindrop are experts in voice authentication. Instead of having to have a pin code when you go in to unlock your door, because that was our concern, unless we can validate that you are who you say you are, we do not want to open that door. We now can do that with Pindrop. You may be familiar with the Pindrop name because they've been heavily used in contact centers, large financial institutions, other places like this. We aggressively went after them to say, "Have you thought about propagating your technology in the IoT space more broadly?" Vijay and the team there said, "Absolutely." The benefit of that is exposure to an incredible array of entrepreneurs. If you look at Pindrop's board, if you look at their makeup of their company, I think you'll be fascinated. Check them out. Smarter specifications, a big advantage. If you're not familiar with Overtur, get familiar. It is the coolest technology that I think we have going. Heavy level of integration where we make a collaborative environment out of something that historically might have even been a little bit painful. It continues to double down and grow the moat that we've historically had, but do so in a way that adds inherent value with each step for everybody that's involved. We talked a little bit about Allegion Ventures, and I'm going to jump in more. You heard Dave mention we have a couple of examples there. Yonomi, for example, is the purveyor of a thin cloud technology. Many people think of Yonomi as actually a consumer app, and it is. They do seamless access for home automation and things like that. We leverage it to have a highly efficient infrastructure for our back end for cloud devices. Every cloud device that you have sends a message, lock, unlock, any status message or something like that. Those messages have an inherent cost to them. Those costs add up significantly over time with scale. If you're smart, you select platforms and companies to work with that understand where the technology's going. Not only do you get the best cost, but you maximize the capability and the number of messages that you can send, the speed, the quality. A great example there. One of the core pillars is around being the partner of choice, and one thing that I want to emphasize is no one can do this all by themselves. I think we've been consistent with that from the beginning. That's why we're focused on open standards, having innovative products that people want to partner with to get their hands on, to leverage within their ecosystems. Candidly, having the type of recognized experts out there that people trust. The bottom line with Allegion, even with the person with the futurist title, is we're not about technology for technology's sake. We're about the appropriate application of technology. How do we do it the right way the first time. Not to get the buzz, to get the funding. Let's make it so it works. We don't have the luxury of failing. Now, the bottom line here is we make products that play well with everyone. On the left-hand side, we've got kind of the usual suspects. We put them in a separate box because we think the mega techs have an unusual role to play. None of them are able to do it all, but they are able to do a certain level of aggregation, and they also do a good job in many cases of helping to own and deliver things like identity and other things like that and propagate it through. We play extremely well with them. We also play extremely well with some more traditional partners and some big ones too. You'll notice Alibaba up there, in Jeff Wood's area of the world. Lucia has Bosch. We have some incredible partnerships that we're very proud of, and we continue to maintain and grow and discover collaboratively with on a regular basis. This is just a short list. The long list, we just figured the logos would be too small. We didn't want to dump them all on one page. In that vein, I would say, what's a tangible example? We're trying to think of what's the best way to show you our ability to partner in some of these things. We thought, well, we've got a video that we did with one of our partners, and I would challenge you to tell me afterwards, is this a Schlage or Allegion video, or is this an Amazon video? Hit it. Ditch your keys and make life easier with the Amazon Key smart lock kit. Introducing its new compatible Schlage Encode Wi-Fi lock. Whether you have your hands full in the kitchen. Alexa, lock my side door. Locking. Hang on. Need to let someone in while you're out, or just want to make your morning run a little lighter, the Amazon Key smart lock kit with Schlage Encode Wi-Fi lock gives you the peace of mind to securely lock and unlock your door anytime, anywhere. No matter where life takes you. For me, my family saw that ad and said, "That's really cool that Amazon did that ad for you." Then we had a bunch of other people at work say, "Hey, that's really awesome that we did that ad for Amazon." The point is, we have these things at front of mind. We understand what the consumer is looking for is a seamless access, a seamless integration. They don't care about who owns what and which pieces belong to who. It's about having those open standards, and it's about living up to those open standards and those integrations the right way. When we have challenges, whatever it may be, we approach it in a holistic, strategic manner with people together. I would say that's a core differentiator and a core pillar for us that's an advantage. Kind of hopping back on the innovation piece itself. When you think about Allegion and innovation, we want you to think about the fact that we have three core engines for that. The robust core of this are our engineering, advanced development, and you heard also about Tracy's extended IT organization. Organic creation of solutions, strategic development, global platforming. Many people don't even understand the difference between advanced development and innovation. Advanced development is highly focused on identifying standards and propagating those standards quickly and efficiently. Whereas innovation has far more to do with identifying a theory and then proving that theory quickly. We understand those things, and we're organized in order to optimally push those things forward. You're also familiar, I know, with our acquisitions. We've had some nice ones. It's been wonderful. We expand that strategic footprint and capabilities every time we make a purchase. We're very diligent in our assessment when we look at folks, and we felt like there was one element that maybe was missing from these engines that we needed to tackle. That was on the ventures and partnership side. I want to tell you a little bit more about Allegion Ventures, which was officially launched in March of 2018. Okay? Allegion Ventures is all about discovery. It's about discovery of emerging technologies. It's about finding things before everyone else finds them. The thesis for the fund is very simple. People and asset flow. It's quite broad. We don't tend to invest in companies that are too literal to us, and when I say literal, I mean, we have people that come to us and say, "I have this smart lock, Rob. From a responsible venture capital standpoint, you look at them and say, "Hey, listen, we should probably have a different type of discussion with you. I don't know that you want us on your cap table, depending on what your exit strategy is." Things like that. What Ventures is focused on are things like Pindrop, things like Yonomi, things that can advantage us in ways that can accelerate the dynamic growth of this company. A couple of areas you see on the slide behind me, smarter, more secure buildings, easier, more secure access, a user-centric experience. How do we do this and differentiate ourselves from all the other corporate VCs? Because having been a startup person before and an entrepreneur myself, I look at those things and give the Heisman. Right? I don't have a desire to interact with people that are heavily bureaucratic or somehow may waste my time and I might not get what I need anyway. We actually have a Venture as a Service program within Allegion Ventures, which allows people like me to focus on what we're really good at. We can do our financial analysis, and we can do our assessment of companies in days or weeks, not months. It's not burdening our traditional finance or other groups to do those assessments through the partnership that we have with Touchdown Ventures. When we have a conversation with an entrepreneur, it is about their technology and how we believe that we can help make it grow for them. It's also about returns. We want to have a successful return, what it's really about is taking that person that happens to be an expert in working with big box retailers and exposing them. Taking that person that has the supply chain expertise or a particular power management expertise or something, and exposing them, so it's beneficial both ways, and the feedback thus far has been fantastic, and the pipeline for Ventures is incredibly robust. I would just say great things to come. Kind of want to end it up here for Vince and I around how do we define success in this incredibly dynamic, cool space. At the end of the day, we really want to be the smartest, most convenient security devices to install, integrate, manage or own for your home, property, or business ecosystem. At the end of the day, you should be able to buy it, have it delivered, what have you, have the person show up, and it should just work. The way we're going to do that is through seamless access. Thanks. Ladies and gentlemen, we will now have a 10-minute break. During that time, we encourage you to visit our product display area and to talk to our experts on innovation and technology. It's my pleasure to introduce to the stage our Senior Vice President of Allegion and President of Allegion Americas, Tim Eckersley. Good afternoon, everybody. Is my mic on? Sounds like it from here. Probably don't need it. It's exciting. I'll spend the next few minutes talking to you a little bit about the Americas business. I'll try to do that with the energy, excitement, and enthusiasm I have for this business that is such a core part of what Allegion does. In the last two years since I was with you last, we've been working hard in the Americas. We have accomplished a lot. We've expanded our position in the electronics business. We've created a successful penetration into underserved markets in the marketplace. We've created a foundation in our business for digital capabilities as a business as well. We've strengthened our market-leading positions from a brand perspective. We've led this industry in organic growth. We've grown our business leverage year-over-year. We lead the industry in customer satisfaction. It is my pleasure and privilege to be able to represent the great work of the employees of the Allegion Americas team. It's my pleasure to be here with you this afternoon. If we just take a quick snapshot of where we are as a business here in March of 2019, you find a $2 billion enterprise that has market-leading operating performance and margins. As I said, we've expanded our market strength in both the residential and the non-residential markets. We've got a more balanced end market cyclical exposure business now that has the ability to withstand downturns in particular market segments in a more effective way. Electronics in this market is accelerating at an incredible pace. We are right smack in the crosshairs of that acceleration. We strengthened our leadership position in both the mechanical and the electronic portfolio space. The foundations of this business remain solid and strong. Yet we've also made significant investments in building on those strengths through acquisitions and organic investments. We have over 5,000 industry professionals as part of the Allegion Americas team. We have in-market manufacturing capabilities, we have significantly broad channel exposure and channel strength. Let's talk a little bit about brands. We are blessed to be a house of brands here at Allegion. In the Americas, certainly brands play a big major role in our success as a business. Von Duprin, LCN, and Schlage represent the best of the best in our industry for quality, innovation, install base, customer access, you name it. We lead the marketplace, and we are blessed with the strength of those brands. Over the last two years, we've also made some investments in some brands that are actually focused more on the repair, replace, or aftermarket business. We've launched Dexter Commercial and Locknetics, specifically targeted at taking a bigger share of the aftermarket business through our channel initiatives. Those brands represent a growing opportunity for our business on a going-forward basis. We've also been successful at acquiring a number of really fantastic brands as well. AD Systems, that you heard Dave mention, is this phenomenal sliding door company for glass and wood. Perhaps the most significant thing that's not often talked about is their intellectual property position that creates a specifiable advantage for us in the healthcare space by providing that sliding door capability, using or managing both noise and infections in a healthcare environment, and doing so with ADA compliance on the bottom rails of those doors. Exactly specifiable intellectual property that makes up the strength of our business. Similarly, in the case of Technical Glass Products, or TGP, a high-end, premium-based, fire-rated glass wall partition capability that brings new design elements to places like schools, auditoriums, and other things, while maintaining the fire rating that is so critical to the specifications that we write as a business. Again, we've advanced ourselves there in a specifiable advantage in TGP. ISONAS, that we acquired in the middle of last year, also significant in their intellectual property that we acquired for edge computing technology, particularly PoE-based edge computing, Power over Ethernet, edge computing technology, and cloud-based architecture for access control. All three of these companies represent innovation and leadership in their market segments, and they also represent opportunities for us to take the strengths of Allegion and leverage those on a going-forward basis to the advantage of both these acquired companies and Allegion in the Americas business. Let's spend a few minutes talking about the markets. You heard Dave talk about positive, favorable trends in the markets. We expect our markets in the Americas to support our growth through the years 2021. Our institutional market segments, which are generally late cycle, are actually sustaining and still building on momentum that came in 2018. We see positive trends there, and we're also seeing, now in the institutional space, electronics becoming a bigger and bigger part of the solutions that are being adopted in both K through 12 and higher education. We'll talk more about that in a minute. The commercial market, I would characterize as slowing a bit, particularly in the multifamily side, where we see a little bit slower market growth. Even here, there's market dynamics that are driving above market expectations for growth, including delivery and mobility in the multifamily space that is driving both a renovation and a new construction market segment where people are vying to bring new connected experiences to people who rent apartments around the country. On the residential new construction side, we do see some softening there early this year. We'll see how the rest of the year plays out, and I would say the retail environment is somewhat mixed and a bit moderating. Here, we see the electronics portfolio and the activities we have in electronics driving this, and we're even starting to see the effects of the builder market on electronics as well, driving a higher than expected growth rate in the market. The combination of our channel activities and our investments in the channel development area, electronics, and I would say the continued capability to drive specifiable differentiation for Allegion's products, we believe that we are poised to grow at a pace that is slightly faster than the overall market growth over the next three years. What are the strengths that we talk about all the time in the non-residential side? First and foremost, we've got to talk about product strength and supply chain skills. The concept and the capability to provide over 100 million different variations of our core product offerings and do so in five days or less anywhere in the country with local manufacturing and deliver those on time, every time, is a significant competitive advantage to Allegion. Now, if you bundle that up with the code expertise and the skills that we have to write specifications that are uniquely qualified for Allegion products in the marketplace, and our capability of orchestrating the channel to the benefit of Allegion's products on top of the specifications, you've got the three-legged stool. Products that are differentiated relative to our competition, specifications that are driven differentiating our product, and access to and management of the channel structure enabling our success. This position in the marketplace also affords us incredible strength to drive investments in organic activities. We have continued to drive innovation in the non-residential space that you can see outside these doors, and we'll talk a little bit more about it as we get into this presentation. This innovation is driving a distance between us and our competition in a significant way. We're also beginning the process of building value propositions that are beyond the core products that are hanging on the door, and these connected solutions are bringing new value propositions in the area of data. Last but not least, we are investing heavily in digital capabilities that is driving efficiency and effectiveness in distribution or disruption into the distribution channels. We're not sitting still at all on these strengths. As I mentioned, we have been investing in market-leading innovation, and here we believe electronics, mobility, and mobile access, as well as investments in mechanical innovations, will continue to drive a higher than normal or higher than expected vitality rate on our new products in the marketplace. We're also doing a lot of work to disrupt the institutional and commercial markets through the development of IP-based or IP-centric solutions. We'll talk about this in a minute, but at the heart of this, we're talking about delivering solutions that are easier to install and are more cost-effective, allowing for a deeper penetration into commercial facilities with electronic access control to enable this seamless access concept. We're also investing in tools that are driving efficiency, effectiveness, and broadening and strengthening our relationship with the architecture community. Overtur is a perfect example of a digitally collaborative environment that allows us to collaborate with architects in a seamless way, produce a single source of truth of the hardware and capabilities that are intended to be constructed in that project, and driving that single source of truth all the way through the implementation and the activities in the business. We're also starting to build value in these discretionary channels, as we mentioned before. Here, this discretionary approach is not just a matter of packaging up our products and trying to sell them to new channels. No. Here we are, in fact, trying to build really intentional relationships with the best partners in the industry that are aligned with the products and the capabilities of what Allegion believes in in the marketplace. Here we're talking about open systems, edge intelligence, seamless access, and the balance between security and convenience in this seamlessly connected access world. What is our competitive advantage in the residential space? An equal opportunity for Allegion. You heard Vince talk about our E-Lock evolution and, in fact, our legacy. We're not new at this. Our first electronic lock innovations in the modern age started in 2006. That's a pretty significant long time ago. 12 years ago, that was something called the KPL/KPD that we launched in the marketplace. Now today, fast-forward 12 years later, with the brand-new launch of the Encode product in the marketplace. Just started shipping yesterday. Last week, sorry. If you haven't gotten your Encode lock, get onto Amazon, get onto homedepot.com, buy your Encode lock. I'm telling you will be blown away by the simplicity, the ease of installation, the connectivity capability, and the breadth of skills and strengths that we are bringing in what is the first Wi-Fi enabled connected lock. What else matters in this residential world? Brands matter. Brand strengths matter. We are not talking about gadgets, and we're not talking about light bulbs. We are talking about home security. When we say the door is locked, the door has to be locked. Plus or minus five degrees on the thermostat, the light bulb doesn't turn on, it's okay. The lock is supposed to be locked. If it's not locked, it's a problem, and this is a big deal. Big brands are important to deliver these kinds of value propositions. Our installed base and broad market exposure, we are in the big box markets, we're on e-commerce, we're in all the builder channels, and we have a substantial distribution marketplace to support all of those install capabilities. We have scale and legacy. I can't tell you the number of times that myself and my partners in the Americas are sitting in room with big companies trying to make a difference in the connected world, and we are the adult experts on security sitting in the room. We are absolutely driving a value proposition that is different than anybody else in those conversations because of our 100-year legacy, and the trust and respect that is built around our brands that we've built over the years. Here's the key point. We know where value is added in access, and we fight like hell in those places where value is created. We also know that lots of other people can add value in this connected home space. There we focus on partnering, we focus on nurturing relationships. We focus on being with the best and the best in the industry. Where are we spending our time right now? Three big areas. The first one is doubling down on our channel development work. Here we will continue the work in understanding and developing capabilities to serve underserved markets from our perspective. We're also doing a lot of work to modernize and grow and add value to our existing distribution. Think about digital tools, new business models, new routes to market. We're also focusing on always maintaining a creation of value perspective and making sure that we maintain or advance our competitive differentiation or competitive advantage in the marketplace. We're also going to continue to focus and accelerate our focus on investments in electronics. Here, we're predominantly talking about connected experiences. IP plus mobility, plus edge computing equals seamless access in the marketplace, and we're driving aggressively in that space in both the residential and the commercial side. We're embracing data as a company as an opportunity. Data, these connected devices are collecting information and data all the time. We're using that data to embrace as an opportunity for our business. Last but certainly not least, software as a product, not just simply software to enable a product. If you think about that, there are opportunities across the landscape in our market segment where we can gain additional value and leverage on our investments by simply acknowledging that the software that comes with our products is also creating value beyond just the products themselves. I want to go back. Lastly on this slide, I wanted to talk about enterprise excellence for a few minutes. The first point here is we understand, respect, and focus on this price, productivity being greater than inflation equation in our business. It's a core part of what's made us successful, and we continue to drive there. Our strength is in gaining leverage on the volume of products that we produce for the marketplace. We're also focusing on platforming, providing a lowest cost platform opportunity that allow us to differentiate our products in a whole host of market segments out there. We're also investing in digital tools that are reducing our internal complexity and bringing a better customer experience to the people that interact with our business on a going-forward basis. A quick update on our channel work that I talked about two years ago with a lot of excitement and enthusiasm. I'll try to do the same thing again today. You remember, if you were with us two years ago, we talked about a $2 billion market opportunity for Allegion. These are markets that existed out there. They were operating in their own pace, yet what we found when we did our work is that Allegion was underrepresented in these market segments. So we set about doing something different about that. Inside this $2 billion market opportunity, there's somewhere between six and eight meaningfully differentiated segments of the marketplace. We are currently operating in earnest on three of those six to eight. We got plenty of room for continued growth. Here we are focusing on building long-term sustainable value that is the product plus other value components like lead generation, marketing support, training and development. All these things that actually these channel partners create value in what they're trying to do and grow their business. It's also important here is that we are curating a select set of partners in the marketplace. This is not an opportunity for 100% of the locksmith and integrator customers in the marketplace. That is not what we're doing. We are looking for places where strategy, investment, and strategic business alignment are all playing together that allows us to create an entrenched, differentiated position with a specified focus set of customers in the marketplace that are driving value in the aftermarket. Let me just give you a quick example of what this looks like. You'll see in a minute over 700 locksmith partners. We're also now very actively engaged with many large and small customers around the advent of delivery in the home. In order for delivery to the home value proposition to be enabled, you must have some means of access into the home. That means that you must have some kind of an electronic lock in the home. What these big and small players are struggling with is how do we get those locks on those doors? How do they get installed? Well, lo and behold, Allegion happens to have a curated, aligned, and focused relationship with over 700 locksmiths across the country that now represent an enormously valuable opportunity for a seamless and simple install of electronic locks in the homes. It's not just product. It's also the relationship that you build and the ability to build value with that relationship early on. This is still very much in the early phases, even though we've been talking about it for two years. The opportunities for Allegion in these discretionary market spaces are big, they continue to grow as time goes on. Let's take a little look at what this looks like. What we're looking at is winning value partnerships and relationships with locksmiths and integrators. I mentioned a minute ago, if you look at the integrator and locksmith space in the country, there are some 30,000 plus of these providers across the country. Some big, mostly most small. These companies are grinding it out every day, churning through $100 jobs, $1,000 jobs, now a lot of these customers, the ones that we've decided to make purposeful relationships, are grinding it out through those jobs with a bunch of Allegion gear on their trucks. In addition to that, down below, you can see that we've been focused on national account development. This national account development is actually more about the new construction, establishing a standard for Allegion products in the new construction phase as these companies begin to expand their brick-and-mortar presence. With that new construction also comes the service network that is created by our integrator and locksmith partners that we've curated as part of this business. You can imagine, over the life cycle of that building, the ability for us to service and maintain the Allegion position in an effective way inside those retail environments is enabled by this full life cycle approach in the aftermarket space. Let's talk a little bit more about the residential electronics and what's driving the growth there. First of all, I mentioned a minute ago that the market for residential electronics is accelerating at a fast pace right now, and yet we still find that 10% of the market penetration is the maximum. It's less than 10%, actually, in penetration. If I were here two years ago, when I was here two years ago, we were talking about penetrations of 4%. We still have not yet eclipsed the 10% level of penetration. What's driving this? Four simple things. First of all, security is driving it. Voice, and the use of voice in the home is another driver of growth in the e-lock business. Delivery is another one that's gotten a lot of press recently. In-home delivery, driving the growth of our residential electronic business. I would say the fourth thing is just a host of variety of new ecosystems that are emerging, whether it's dog walking services, market or cleaning, house cleaning services, a whole variety of different point-based services that are all adding to the narrative in the marketplace of access to the home. The other really interesting thing that has accelerated over the last 12 months is actually the new construction marketplace, the builders jumping into this in a big, big way. I'm really proud of the relationship that we've just recently established with Lennar. Lennar, as you know, is one or two, depending on how you're counting, largest builder in the marketplace. The key here is, from this point forward, every single home that Lennar builds for the next five years will have at least one Schlage electronic lock on that home, regardless of price point. Think about the significance, A, of the volume, but B, of the behavior that's starting to get entrenched now in the new home construction, and think about the pressure that that's going to push on the aftermarket business and electronics. We believe the actual engagement of the new construction market in this phenomena of e-locks and access is a big, big deal for our business on a going-forward basis. It's important to note here, because you see it occasionally in our numbers, this advent and growth in electronics is putting pressure or cannibalization on the mechanical front door hardware that we have traditionally sold. These are not one for one, but there is pressure. The key point for me is that the average unit price for these e-locks is significantly higher than the mechanical product we would have sold in those instances in the first place. Secondly, they are being sold at the same or perhaps slightly better gross margin rate, which produces significantly more gross margin dollars for the business. While cannibalization is a reality in this e-lock growing world, we believe that also favors the long-term viability of our business here in the Americas. As I mentioned on this residential thing, we've been doing this for a while. We've been at this since 2006. We are a trusted and desired partner with almost anybody who wants to talk about the connected home space. We are invited to all the discussions and all the meetings for anybody who's trying to create new value in the connected home space. Our brand is second to none in the industry. It represents quality, innovation, and security, which is a key and important part. We have broad and significant channel exposure, and I would add the word loyalty. Channel exposure and loyalty in our market. We are the market leader in the building marketplace, and that gives us not only opportunity to sell innovative electronic locks, but it also gives us the opportunity to begin to disrupt and innovate around the supply chain around new construction. If you know anything about the new construction of a home, you know those processes in all phases, let alone door hardware, are broken and they are inefficient. We believe there are opportunities for us to extract significant value from both us and our builder partners by changing the game, so to speak, in the distribution environment. Lastly, we have a broad product offering in the marketplace. We are supporting industry-leading ecosystems that you can see down on the bottom. More importantly, we're beginning the process of expanding price points. We believe that as this market continues to accelerate its growth, it's going to be required for us to bring price points sub-$100 to bring connected locks to the masses. We believe that an Allegion company with the scale and the brand strength, we have that capability to drive those kinds of economics and do so in a way that's as profitable as the position we're currently in. What about the non-res and how is that going in the electronic space? Well, here the situation's a little bit better. You can see penetration rates just below 15%. But I would say that is predominantly perimeter security, and I said that two years ago, and it's still the case. One of the unique things about the commercial and institutional space around electronics is the fact that this industry is still dominated by what I would call old legacy business models that are built around proprietary technology, panel sitting on the wall. Every product has to be connected back through a wire to a panel, RS485 architecture, which you probably don't even know what it is, and I could go on and on and on. Where the opportunity exists is for us to drive IP connectivity, this edge computing technology, and mobility into the marketplace in a new and unique way that'll drive efficiency, effectiveness, cost-effective solutions. As an example, campus security. We've been involved in university campuses now for five-plus years with our ADCO platform out here. We are now starting to see exactly what we would have predicted five years ago. Customers are going back to those AD locks. They're taking off the modular component of that AD lock that represents the opportunity to change the air interface, and they're adding to that new modules that allow them to have Bluetooth connectivity and enable mobility on those platforms. Five years ago, we didn't have the technology to enable mobility. Now we do, and we have the ability to go back to every one of that installed base of AD locks and upgrade and enhance those with simple modules that provide electronics necessary for mobility. Our newest electronic products inside this commercial category are growing out over 100% right now. One of the best and most shining examples of innovation and creativity outside is the Von Duprin RU/RM. You got to go look at this product on the next break. It's on the left-hand side. You will be blown away by the technology. What have we done? All we've taken is our market-leading install base in panic bars or exit devices. We've created a retrofit product capability, a simple in-field install by either an integrator or the campus locksmith. You put in this module. It enables wireless electronic connectivity from that device to any OEM access control panel, probably one that's sitting and managing the front of the school district. Immediately now, you have the ability in a cost-effective way to enable access control and perimeter security for the three or four other doors around an elementary school where only the front door was previously access control. Now you know if the door has been propped open. You know if it's being locked when it's supposed to be locked. You're no longer relying on the janitor to make their rounds to make sure that door is locked. We've done all that at a price point that will allow us to deepen the penetration in this space. Pretty exciting stuff. The focus here is on simplification, innovation, and cost efficiency. We believe that the number one thing to drive deeper penetration in these markets is actually driving down the cost of the solutions, which are predominantly driven by an archaic architecture. You'll see all the work that we're doing is in driving edge computing, IP architecture, and mobile credentials and mobility in this space. Our strategy refresh that Dave took you through at the beginning speaks a lot about partnering, and this is a really important element of the strategy that we're executing in the Americas as well. First of all, I would say that partnering builds on what has been our innovative legacy as a business of open architecture platforms. We are not in the business of creating closed systems and trying to manage or control systems by technology. We believe open technology enables the best to thrive, and we believe we're one of the best. Also, I would say that while security, we know security is our core, there are many other things happening in the marketplace that are actually driving the purchase intent for security devices. Think about the homeowner who never thought about whether or not they needed to use their mobile to get in and out of their front door. All of a sudden is attracted by a delivery experience that, oh, by the way, just happens to bring an electronic lock to the door. In those cases, regardless of how hard we try, the value proposition purely provided by Allegion is not nearly enough to make that happen. We have to figure out a way to partner. We own significant geography in this equation, though. That's an important element that you heard Rob talk about. This door that you go through every day, it's ours, and the way you get through it is with our products. That significant geography and the critical importance of almost all of these value propositions that are being proposed in either connected home or connected campuses or connected office buildings all start from the position when you walk in the door and grab the Allegion product going through the door. It's a critical point in that point of access. That's why we say your point of moment of access is our moment of value creation. Our ability to partner in all these phases will enhance our opportunity to grow our business across the board. We can't and we won't do everything by ourselves. Let me give you a couple of examples. Apple Pay platform plus a one-card provider like CBORD or Blackboard plus an Allegion offering equals campus seamless security. In the market today, Amazon Key plus Ring plus Allegion represents a delivery and security platform in the consumer space. Kastle and Allegion represents a significant seamless access solution for the multifamily environment. STRATIS plus Allegion creates a smart home experience in the multifamily apartment buildings that we're serving today. All of these examples, they're not just about our products. They're about our APIs. They're about our SDKs. They're about our market presence. They're about our brand value. They're about our install base. They're about our distribution. They're about a lot of things beyond just the technology and the products that we offer that all bring value in an integrated way to a host of ecosystems that are starting to evolve aggressively in the marketplace. This is why we believe partnering is such a core part of what we will do going forward. Let me give you an example in the non-resi world. Here's a typical cloud chart on the right-hand side. Don't expect you to understand it all, but on the right-hand side, you've got a set of products, we'll call those edge computing devices. They happen to be in the form of a lock or a reader or an exit device, but they are in fact edge computing devices. In the middle, we have identity and credentials that are created by Allegion. We also have a cloud infrastructure that enables this seamless access experience to occur when you're in this environment. All these things together create an Allegion seamless access experience. Take that forward and talk about how you would work with a provider. Here we also have infrastructure capable of bringing a partner's own mobile or electronic credential to the table, their own mobile application, their own IP infrastructure, all on the exact same infrastructure to deliver this seamless access and perhaps provide even broader value proposition beyond just access. A significant move forward in this partnering and understanding, not just our products, but how do our products work with everybody else in the ecosystem. I want to spend a few minutes talking about enterprise excellence. It is the core of what makes Allegion successful. I mentioned as we started that we have industry-leading margins. It's something we're enormously proud of. I will tell you that those industry-leading margins today are delivered in a siloed way with siloed processes inside our organization. A lot of manual tools, a lot of manual capabilities delivering that industry-leading margin. As I mentioned at the start of this, we have been working hard to digitally enable our business for the future and drive efficiencies and effectiveness. We believe that digital optimization represents an enormous opportunity for our business. It creates an opportunity for us to deliver a better end-user customer experience. It enables us to deliver better competitive differentiation, the likes of Overtur that I talked about a minute ago. It allows us to reduce waste in almost everything that we do. It allows us to remove labor inefficiencies in our business. It allows us to more effectively link our strong new construction legacy to the aftermarket business in serving these buildings over many, many years to come. It also provides a connected data experience that provides us, Allegion, with a competitive advantage over all the other players who want to continue to sell just purely mechanical or non-connected devices. Our enterprise excellence work is focused on delivering platforms that will allow us to leverage that growth over time. Here I'm not just talking about product platforms. I'm also talking about technology platforms, connectivity, cloud-based infrastructure, software and firmware. All of these represent enormous opportunities for a company with the scale and the reach of Allegion to gain leverage on our investments as we go forward. Clearly, these things will take time. We've got a big, complicated, difficult business, and we are in the process of modernizing our infrastructure, but we are well down the path. I think the key for me is that for you to know that we know that margin expansion, particularly in the Americas business, represents our biggest competitive advantage, and we are focused on driving continued margin expansion in our business on a going-forward basis. Wrapping things up, Americas key takeaways, healthy end markets. I would say in addition to that, we have the opportunity for above-market growth with the acceleration of electronics, our work that we're doing to develop and expand our channel presence in underserved channels. None of these things are actually tied to the new construction market that is constantly referenced in the media. We're driving key partnerships, and we believe these partnerships will accelerate the growth of our business even beyond what we could do by ourselves by creating new value propositions where security may not be the reason for the purchase, but security is required for the value to be delivered. Digital convergence is trending in our industry, which creates opportunities for our products, the things we do for our customers, and our internal organization in becoming more efficient from a digital perspective. As I mentioned a minute ago, we believe that we have continued opportunity in our business to expand our margin and our channel opportunities in the marketplace going forward. I appreciate your attention this afternoon. It is my pleasure and my privilege now to turn the stage over to my friend and my partner, Lucia Moretti, who heads our European business. Lucia. A round of applause, huh? Thank you. Thank you. Thank you, John. Good afternoon. It's a pleasure to be here with all of you again. I think we were here two years ago, and even before. I would like to talk a little bit about Europe and how we are doing after five years of Allegion. $590 million of revenue in 2018, 14.6% adjusted EBITDA. As you heard before, in all of the Allegion's presentations, we are a house of brands. No different in Europe. We are the number one brand in Italy, which is called CISA. In Germany, we have great brand assets like SimonsVoss and Interflex. In Netherlands, we have AXA, an acquisition that is a very well brand recognized by the bike business, but as well in the residential business. It's really brands that have a portfolio that meets a lot of the market needs that we have in Europe. One of the strengths that we have in Europe is the leading portfolio that we have over there with a large install base. When we connect this large install base with a strong channel presence, becomes an asset that can be leveraged when we combine the traditional mechanical technologies that we have with the connected solutions that we are going to talk about it. Through a very disciplined M&A, we brought technologies to Europe, we expand our business geographically, and we started to transform this business. Today, we have 40% of the European business is already electronics, primarily driven by the commercial applications. 60% of the European business is non-residential. All the rest you can see is split between residential and portable. From a new construction perspective, five years ago, this business was almost insignificant regarding the new construction. Well, we all know for us to start or to continue to enjoy the annuity of the repair and the replacement aftermarket, we have got to invest in the new construction. I am very happy to have 35% of our business in the new construction. All of that significantly changed the geographic mix that we have in our business. Five years ago, with Allegion, we had a business that was extremely dependent on the southern European part of Europe, in a region which is poorer in terms of growth expectations. Now, five years after, we have 35% of our business in the DACH region. That means a premium region with some expectations in terms of growth. Since spin, we have been able to focus Europe in the core, we have been able to bring innovation, and we have been able to change the geographic mix. All of that made us able to expand progressively our revenue, but more importantly, to expand the margin business that we have in this business, the EBITDA margin. We have today a much better business than we used to have at Allegion in Europe. With that, let me talk a little bit about the portfolio. We think we have a unique portfolio of products and solutions to deliver in the different market ends. Let me start with the mechanical security. Mechanical security is the mechanical hardware. I am talking about mechanical cylinders, mechanical locks, panic devices, door closers. This is the legacy of Allegion. This is what is the core. This is the install base that I mentioned before. Great opportunity with electronic access control. This is the SimonsVoss that you saw outside. This is also Interflex access control, and when you bring to the Interflex access control, the workforce management, which is the time and attendance and the personal scheduling, you are taking access control to the next level, which is seamless access. It is more than through the door. Portable security, a very distinctive portfolio for Allegion. We like this business. It is about bike locks and bike lights, more and more connected. It is something that is interesting over there. Product categories that are delivering the vision that we have in Allegion, seamless access in a safer world. All of that represented with all of these brands, House of brands that really means innovation and quality. Let me just go and talk a little bit about the overview here. One of the things that is important here is that when you look at this outlook here, you really see how we are positioned in terms of market segments in Europe. One of the things that I have to say is that I like the fact that we were able to reduce the exposure of Allegion in the mechanical, traditional, in poorer regions. I love the fact that we are participating in this digital access control revolution, all of the electronics connectivity stuff, in a good region. That really gives me the opportunity to maintain my growth expectations for the region. Let us talk about market. Mechanical security, huge market, $4 billion, flat. Up in some regions, down in other regions, but essentially flat when we consider the whole Europe. Electronic access control, significant large business as well, growing very fast. We are talking about that because of the enhanced or the demand for security and connectivity, bringing convenience and efficiency. We see here a demand for access control using cloud solutions. This is primarily being driven by small, medium type size of companies that look for access control with cloud just because it's very expensive to have big wired type of access control. They would prefer to expand the money operationally instead of being a capital intensive, big mainframes. From a supplier perspective, this is pretty good because it gives you a recurring revenue. We like that. We are participating great opportunity. Portable security, distinctive sector here, $400 million. A small market size but still growing. Opportunities, the e-bikes market. E-bikes, higher cost, higher locks that we have an opportunity here. A segment that we enjoy and that we think we still have an opportunity here. Overall, Europe, $7.6 billion, and we are participating with around 8% market share. A lot of opportunity to grow. The three priorities of Europe, let me tell you. Demand creation, electronics growth, and enterprise excellence, just like we had in Americas. Demand creation, and I'm going to go in a little bit more detail in each one of them, but I just want to give you the perspective here of demand creation. All of the key elements that you see over there are essential to deliver the Allegion's promise. Electronics growth, I'm going to explain to you how we are doing, why we are growing. Enterprise excellence is the backbone. That's the reason why we have been able to expand our margins in Europe. Let me just start with demand creation through the lens of Middle East. Middle East is an area that is growing in the region, and one that we have some significant opportunities over there. Middle East, as you probably know, is a diverse, dynamic, managed through imports. At a time, is a very challenging market, but one that we are investing for the long-term growth. It is a specification-driven region. Clients are requiring or requested to have knowledge of ANSI portfolio and the EN portfolio, which is the European. If you wanted to succeed in Middle East, you've got to understand building codes and standards for the American products as well as the European. There is also an expectation or a desire from customers to have doorset solutions. Customers expect or give a preference to suppliers that have doors, European hardware, American hardware, and access control. That's the reason why we invested in QMI, which by the way, we have had some challenges we are working on short-term. There are some work to be done over there. The intent and the strategic rationale that we have by investing in QMI is absolutely there. I have a pipeline that I see doors and hardware. I am absolutely convinced that this is the right way to win in this region. How does Allegion win? You heard about that. No different in this region, is specification. This is what is driving over there. Allegion in this region has developed a reputation with many key stakeholders over there. End users, architects, general contractors. Just to give you a reference on what does that mean, we have double our specification capabilities in Middle East in the last 12 months. We brought spec writers to the United States. They spent here 7, 8 months writing specs and/or learning how to write specs. Today, just in 2018, just to give you a reference, we wrote around 100 specs for 100 projects, and that means around 75,000 openings that we have done only in 2018. We work with companies that you probably know very well, architects firms like Gensler, with Icon, with HOK, many companies like that. We also use the latest and greatest tool called Overtur that you heard in many of the presentations today. We think we are very well-positioned in to win in markets like that in Middle East. Here's an example of when this strategy turns into money and that creates value. This is heart of Doha. All that you see, all of these buildings are a project, which is probably the biggest city regeneration that there is in the entire world. I'm talking about Doha, capital of Qatar. All of these buildings is 100 new buildings being constructed in Doha. This is hospitals, this is schools, this is commercial buildings, this is residential buildings. All of the cost of this project is $5 billion. Just the circle over there, it's the last phase of this construction, which is $1 billion. Tim Eckersley and Dave Petratis, they were with me visiting this site. Only that phase, you saw 7,000 people working in that site. Guess what? This project started in 2010. Allegion has been specifying hardware since then in all of the phases. We bought QMI the day after. We knock at the door, not quite intended. We offer a door set solution certified with the American hardware. We are talking about Schlage, LCN, Von Duprin, and Ives, and we propose a total door set solution. Guess what? Customer accepted. Happy customer, happier Allegion. Very good opportunity to deliver the total access solution, a complete door set for the market over there. Let's talk about electronics. Acts exciting. All of us talk about electronics because we are really taking as the advantage of that. First of all, I have to say that, the growth rate that we have over here is. You can see that there is some movement over there, but the penetration is still very low. From the commercial side, we think that we are talking about 5%, if so. Very much behind what Americas is. I have to say something. We like what we have in the DACH region with electronics. We love it. We think that there is something over there that we can export and expand to other geographies in Europe, and we are already doing this. The foundation of our success, the reason why we are growing, is because we have a user, and the end user engagement is extremely important. We understand and we have to understand specific user cases so that we provide the solution, which is either more security or connectivity or what the result of both. One of examples that we have here is the SimonsVoss mobile digital key. It's outside. You can see over there. Simple. You just change and replace a mechanical cylinder for a digital cylinder. No wires, no drills. Very easy to install. You get an app. You just put over there, configure 20 doors, 100 users. You can do this at a distance. Very simple. User case, typical of a lawyer's office, typical of a dentist office. Very important to understand what is the need in providing the solution for this need. Let me talk about Interflex. Interflex is not only about the perimeter access control, we are talking here about workforce management. When you talk about workforce management, it is data, exchange of data, and then you're talking about efficiency and productivity. A lot of great opportunities here with electronics, and I think we have a great platform with SimonsVoss in Interflex. Beautiful European design. Isn't it beautiful? Huh, Bernhard? Right. I just want to make a statement here. SimonsVoss is indisputable, the digital locking technology leader in the DACH region. Absolutely. In 2018, we sold 200,000 digital cylinders. We have 1.75 million users of our devices. Sorry. We have 1.75 devices, and we have more than 4 million active credentials being used in the market. A phenomenon. We go to Interflex. Interflex offers here a fully integrated access control solutions with all of these features that you see in the picture over there. We have several thousand system installations, and Interflex manages more than 4.5 million users every day around the world. Our customers, example, automotive manufacturers. We are talking about BMW. We are talking about Audi. We are talking about Continental. These companies have their headquarters in Germany, and they open sites all over the world. Interflex manages entries in all of these sites. It's not only that, right? Interflex, we have a lot of big hospitals where personal scheduling is extremely important. Interflex is there from a time and attendance and personal scheduling. Let's talk about a different vertical. Airports. The Dubai Airport, the busiest airport that there is in the world as we speak. The crew maintenance, where the maintenance guy should be at the right time, it's a software that is developed by us, Interflex. Think about the ability to have the right people at the right place at the right time. We are talking about seamless access. Let's talk about residential electronics. Residential electronics, when we talk about the commercial electronics and we say that the penetration rate is small, here is really, but really, really small. Okay? It's still it's moving, and it's moving in some geographies. Reason why we invested in Nuki. Nuki is a startup created four or five years ago. They are out of Austria, and they are in the market, became almost like a leader in the DACH region and also in France. They are obviously expanded their business now in other geographies in Europe with the support of Allegion. After four or five years, they are already certified as electronics residential with Alexa, with Google Assistant, with Apple HomeKit, with Airbnb, and also with Ring. They have already 50,000 installation devices in EMEA. We are very happy with this partnership of Nuki. Very interesting. It is over there outside. Have a look, please. Enterprise access, no different than Americas. Has been the backbone, has been one of the pillars why in the opportunities that we had in Europe to expand our margins. Will continue to be. Through the lens of the customers, we are going to understand how we can serve our customer in a more holistic way. How we can drive value to our customer, and doing that, we think that we have an opportunity to create value, and in consequence, increase our prices and then have better margins. This is an area that we are going to continue to work. Obviously, there is opportunities for a footprint optimization. That is something that we always consider in Europe. None of that would be possible without having an engaged workforce that we do, living the Allegion values as we all do. A lot of opportunity here is still to drive margin expansion, bring in productivity, and get the results there. Finally, the messages to take home. First of all, we have in Allegion, in Europe, a much better business than we had five years ago. We have a much better balanced business. We are much closer to the end users. We are creating demand through specification, which is the thing that Allegion knows how to do best. We are participating in the biggest growth market. We are very well positioned with the electronics business, and we are taking this business to the next level, different geographies and seamless access. We will continue to drive productivity across the region. I will say it again, Allegion in Europe is much better than five years ago. I will finish with Dave's favorite sentence to all of us in Allegion, "The best years are still ahead of us." Thank you. I have to call now Jeff Wood, President of Asia Pacific. All right. Yeah. Thank you, Lucia. Thank you. Good afternoon. Five years ago, Asia-Pacific was primarily a low margin, a poor cash flow system integration business. Today, we are a product-based business with much better profitability, with significantly better cash flow, and one with scale, one with capabilities that allows for strong organic growth and margin expansion. If you look across our region, Asia-Pacific is much more fragmented when compared to Americas or EMEA. Global companies as well as local companies are playing a role in growing the safety and security market across the region. Our presence is primarily in Australia and New Zealand, followed by China and South Korea. We have positioned ourselves in alignment with areas of the market that are growing. Mechanical represents 70% of our business, but our electronic portion of that is growing rapidly. From a residential, 60%, which is unique across the three regions, versus 40% in commercial institutional. Both electronics and mechanical are the fastest-growing markets and segments within the region, and positioning and transforming ourselves have been critical to supporting organic growth and profitability. If you look at our product categories, we have folding and sliding door systems, which is led by Brio. It's very rare to walk into a hotel room or a recently decorated apartment without seeing a folding and sliding system. We made this acquisition and is a key area of our Australia and New Zealand business, and really it supports both OEM and retail channels. In the electromechanical space, acquisition of FSH, making door strikes, magnetic locks, and most recently, magnetic high security sensors going into military and government applications. Our mechanical portfolio, led by Briton, Gainsborough, and the Schlage brands, this is traditional door hardware serving both new construction as well as retrofit markets. Lastly, electronic access control management with electronic locks and access control systems bringing value and solutions under the Milre and Schlage brands. I want to go back to 2013 and kind of walk through the transformation that has occurred within the Asia-Pacific region. At the point of Allegion's spin-off in 2013, we closed a manufacturing joint venture and relocated the manufacturing to our sites in Mexico. In 2014 was the first acquisition of FSH, which added electromechanical products in a key market, Australia, to start moving the transformation forward with a product-based business. In 2015, the acquisition of Brio brought in the folding and sliding product categories also in Australia. Expanding not only product-wise into electronic locks, but into South Korea market with the acquisition of Milre, a top three electronic lock manufacturer in a key South Korea market that's having influence across the region in electronic locking. 2015 was also a milestone in refocusing the business with the divesture of the Bocom system integration business. At that point, we made the transition to primarily be a product-focused business in the region. In 2016, we integrated the SimonsVoss Asia business with our Southeast Asia team, this enabled us to reposition ourselves from really being a trading company to a business capable of doing products and services and going direct-to-market with projects working with our partners. In 2017, we started our transformation in China. Prior to that, China was really a spec-led projects business utilizing imported products coming from Europe and from the U.S. By localizing our products, by expanding our business models, we transformed into a much better balanced commercial, residential business, focusing on a variety of different channels to improve both growth opportunities and significantly improving profitability. In 2018, we acquired the Gainsborough and API locksmithing business in Australia, increasing significantly our scale in that key market as well as for the entire region. So over these five years, not only have we divested and refocused to a product-based business, but that product-based business has increased its scale three times over the last five years. If you look at our markets, Asia-Pacific continues to grow and expand in safety and security. If you look at the different geographical areas, Australia, New Zealand, a key market from a mature perspective, has been softening, led by a softening in the residential construction market. That softening has really been driven by slowing the foreign investment going into the major metro areas, and we see that both in multifamily and in single-family construction. The commercial market in Australia and New Zealand continues to do very well, especially in the health and aged care, and we're seeing increased penetration and acceleration now starting with electronic locks in those markets. China continues to be a key market for the region. Slowing growth, or more moderating growth, but really a market that's transforming to be more urbanization focused and really changing buying habits and consumption with a growing middle class. That urbanization continues to drive large projects with subways, metro, and commercial applications, their progress in e-commerce and the digital economy is really starting to accelerate the deployment of electronic locks and electronic solutions. South Korea continues to be a slow growth market. Electronic penetration there is already 70%-80%, and the e-lock is really transforming to what used to be a keypad-oriented electronic locks now into more connected smart home applications. The other factor that's driving the South Korea market is the increase in minimum wages, and we're starting to see the market, both in terms of companies as well as the supply base, starting to transform their supply chains, exploring offshoring to reduce their labor costs. In Southeast Asia, this continues to be another high growth area for the region. Continued investments in infrastructure driven by urbanization, both in commercial and residential. Here we're also seeing significant growth in digital solutions and electronic locks as their digital economy is starting to accelerate. Overall, a significant market where today Allegion's still a niche, and we are positioning both in residential and electronics well to support and take advantage of this market growth. When you look at our priorities in Asia Pacific, three priorities. Leverage the Gainsborough acquisition in Australia. This acquisition not only increased our presence in a key market, but increased significantly the scale of Allegion in Asia Pacific. Electronics, growing and taking advantage of this trend and leveraging the assets that we have across the region to support not only product sales, but expand into solutions as well. Enterprise excellence, recognizing that today Asia Pacific is the lowest in terms of margin performance inside of the three regions, and how can we leverage enterprise excellence to expand our margins on a year-over-year basis? Let's go into a little bit more detail. Australia, New Zealand. You may be familiar with some of the landmarks, both of which are Allegion customers. If you look at where we were prior to the acquisition of Gainsborough, in New Zealand, we were number 1 or number 2 in both commercial and residential, and a leader in that market. In Australia, we had a very strong commercial business. We had a strong OEM and security integrator business, but we didn't have the brand, we didn't have the scale that was needed for the residential. Gainsborough brought us a strong history, a strong brand, the number 1 position in residential construction, and really complemented the two businesses coming together as one. Not only did they have a strong brand and a strong presence in the construction, but they also had various channels to market. Retail, the trades, the hardware and distribution, as well as complementing from an OEM relationships as well, especially with the Austral brand, which is a line of sliding door locks and accessories that were complementary to Brio. They also brought in additional manufacturing and assembly capabilities with a plant in Melbourne, assembly capabilities outside of Melbourne in Blackburn as well. Another piece of this puzzle, which is unique inside Allegion, is API. API is the only national locksmith company in Australia. We can be into homes of 90% of the population in Australia in less than an hour. When you think about the role of and the capabilities of that, not only in traditional mechanical cylinders and locks and key systems, but also access control. They play a key role in partnering with education systems, with several of the city governments, and working with commercial applications to recommend, to specify, and install access control systems, and really is a basis of installation for electronics for the future. It's a really a great opportunity for Allegion to move beyond the product sale to include overall lifecycle management. With the acquisition of Gainsborough and API, we moved from a number 4 or 5 position in Australia to now number 2. As we were going through the due diligence with Gainsborough, it was very clear and very quickly understood that there was significant synergies and value of bringing Allegion and Gainsborough together. As we started to focus on that, we wanted to come out very quickly with day one integration and moving quickly into a one Australia, not only bringing Allegion and Gainsborough together, but really how do we leverage all of the assets that we had acquired in Australia, including Brio and FSH. We have built and now have deployed a channel structure which includes commercial, leveraging the spec writers from both Gainsborough and Allegion as one team, and expanding our capacity, expanding our presence across the country. Leveraging the residential, bringing our Schlage and the Gainsborough teams together to leverage our partners both with new construction and retail and trades. Leveraging security integration with the access control and the FSH platforms. Bringing the OEM, bringing Austral and Brio together to better serve door and window manufacturing and architectural partners there. API as well. Really bringing solutions to each one of those markets, leveraging the assets and capabilities of the two businesses together. In addition to that, identifying significant margin expansion opportunities that will more than compensate for the slowdown in the residential construction market. Back office consolidation, bringing sales offices and locations together in key cities like Adelaide and Sydney. Consolidating our residential warehousing operations from Brisbane down to Melbourne, achieving significant scale from a supply chain perspective, not only leveraging Australia businesses, but that of Asia Pacific as well as U.S., because the door prep in Australia and New Zealand is the same as the North America markets as well. As we bring these companies together, I don't want to lose sight of the opportunity that drives our priorities, and that is the customer. How do we ensure that we're not adding more complexity to customers through this integration, but actually identifying a way to do easier to do business with? Bringing the two companies, they both have best practices. How do we leverage those best practices to bring a competitive advantage to our customers and bringing that solution partner? A great example is with JAB. JAB is an interior office and commercial company. Inside JAB, we have Brio products. We have other Allegion products, we're bringing solutions to them utilizing our hardware that is an application that brings value to them because those openings aren't just the entry, just isn't the front door. There's a large number of openings that are managed inside of an office or a commercial environment. We're bringing those solutions as one company and building a stronger partnership with JAB. want to now transition and talk a little bit about electronics. Electronics is a area that is accelerating across the region. At the same time, we do have diversity. In the South Korea market, 70%-80% of homes already have electronic locks. They've been deploying and working their way up that curve for several years. You also have markets that have very low penetration rates in the low to mid-single digits, China, Southeast Asia, Australia, and New Zealand. We're seeing this start to accelerate with new construction. Similar to what Tim had highlighted earlier with Lennar, many of the developers now are deploying electronic locks across their residential towers. We're also seeing retrofit expand, both on a do-it-yourself and an install base. I want to highlight China also playing a key role. Not only is it a very large market with a large number of consumers, but its penetration is accelerating, driven by its digital economy and the role of e-commerce. If you think about the number of households that was mentioned earlier, China has an estimated number of households of 440 million. If you look at by 2022, 35% of those homes will have digital locks. That's 140 million. In China, we have this tendency and perception that China is just low cost, low price. The SCL 600 lock that's sitting outside retails between $400 and $500. Most of the locks that are going on urban high-rises, Shanghai, Guangzhou, and there's a tremendous large number of cities in China that have greater than 1 million. Those urban environments, most of those households are putting locks on their front doors between $300 and $500. This is a tremendous market. There will be a variety of this, and it's not just the front door where we're seeing electronics being deployed. We also see channels are expanding as electronics become the norm, as users are using their mobile devices to order taxi cabs, to order food. They're also wanting to replace their key. Real estate developers are looking for smart home applications beyond just in electronic locks. E-commerce is playing a key role with many of the websites selling e-locks growing 100% on a year-over-year basis on that category. Non-hardware retailers are coming into the market. Electronic stores, department stores, other retailers now looking to get into the electronic lock business. Home systems or ecosystems, whether it's home automation, telecom, are utilizing their presence and their retail outlets to sell smart home components, including locks. As you can see, a tremendous opportunity here where we are focused on positioning. How are we built? How are we prepared to take advantage of this growth? I want to focus on what are our capabilities that we have in place already today that is supporting our growth. In South Korea, we have Milre. This was an acquisition that was made in 2015. Their portfolio already includes today rim, mortise, push-pull, locker locks, and glass door locks. We do design and manufacturing in Korea. We also manufacture their products in our plant in China. Today, they export under the Schlage brand to Australia, to New Zealand, to China, to Southeast Asia, to Mexico, and other countries. It is a supply chain platform that we're capable of leveraging across the region. In China, we have a mortise platform, both for European and local China standards, for both residential development and retail. Today, we have partnerships with 30+ of the top 100 developers in China, where our locks are going into new construction. We also design and we manufacture locks there as well as the Milre SKUs that I mentioned earlier. In Australia and New Zealand, this is a market that has locks coming from Asia, also has locks coming from the U.S. market, given the similar door prep. We also have local products that are being designed and developed leveraging our supply chain capabilities in China and in South Korea. We're also working to develop relationships with the ecosystem and technology partners within the region, Alibaba, Huawei, Telstra. Working with asset management companies in workspace, shared assets like apartments, then bringing solutions to market in commercial customers like PwC in Singapore. Having a product portfolio and having a competitive supply chain isn't enough to win in this market in Asia. It takes more than just having a product and a supply chain. It starts off with a differentiator for us around quality. I want to highlight an example. We were in Vietnam two weeks ago, signing a partnership to develop codes and standards for the people of Vietnam. Their codes and standards there are not near as mature as Australia and the U.S. We're leveraging our expertise. One of the ministers of the agencies got up and talked about the lack of quality, the lack of standards in Vietnam. He was telling this story that in his apartment building, multiple customers or residents started to install electronic locks. For about the first week and a half, everybody's excited and everybody wanted one, until one of the young teenagers figured out he could open them all. Just because you have a lock and just because it has a fingerprint biometric reader, doesn't mean it's good quality. Good quality doesn't mean just getting in, but good quality means determining if you're the right person to get in. That's the type of standards, that's the type of focus that we're reinforcing across our products being part of Allegion. It's also about agile R&D. Being able to bring our products to market faster than our competition. The new SCL600 that's outside the China residential, from industrial concept to production in less than eight months. A brand-new platform. Doing that, leveraging our capabilities in Bangalore for firmware, for software, and leveraging our supply chain partners in China to bring things to market faster, and leveraging subsystems and platforms that are already in existence to reduce the risk around quality and reliability. It's also about productivity. China, Asia is a very competitive marketplace. Technology like phones and TVs, the price curves as technology comes down quickly. What are we doing to value engineer as soon as we go into production to bring our cost structures down 15%-20%, to ensure that we have the ability to remain price competitive, as well as ensuring that we can maintain profitable margins over the life cycle of those products? New channels and solutions. Being able to sell online, leveraging the digital, but leveraging opportunities to bring these products to market in non-traditional hardware. Here you see in the photo one of our Schlage boutiques in a decoration mall. We have kiosks going into electronic stores. One of our large customers in Singapore is an electronic home automation store who leverages and installs electronic locks. Some of our fastest-growing customers are actually non-hardware distributors and retailers. Connecting to create value beyond the lock itself. Dave mentioned JustCo. JustCo is a competitor we work. It's a Singapore-based company in shared meeting space. Our SimonsVoss product line is integrated in there, where you can go on your mobile device, pick an office location, whether across the region, could be Bangkok, it could be Singapore, it could be Sydney, it could be Jakarta. You can go in and reserve a space, download the credentials, and go into that space. Getting access to the building, getting access to the office, getting access to your specific conference room or meeting space all through integrated solutions. Bringing value beyond. The other area that we're focusing on with electronics is there's more applications than just the front door. How do we ensure that we're leveraging all the access points and outside you see a glass application? I also want to focus on enterprise excellence. This is really key to leveraging and growing our margin on a year-over-year basis. One of the challenges we have is we don't have the scale. We have a diversity of products being utilized in Asia, which include European products, U.S. products, and local products, because the codes and standards don't drive a certain consistency. To meet the cost pressures, to meet the budgetary pressures in building, what we typically find from our customers is they want U.S. standards for the front doors. They want European standards for the bedroom. For the closets, for the fire doors that may only get used a couple times a month, they're okay with local. You have to have a product portfolio of each of those standards to hold the spec, to hold that job as it goes through the architectural design to the general contractor to the actual build. We've been developing local products to fit each of those applications so we can deliver and don't give an opportunity for a competitor to come in and break that solution. Having a full solution of the right product in the right place at good margins for that customer. We've also been focusing on localization. I mentioned two years ago in China, we started the localization. We continue to focus on building localized products because with the trade agreements that are developed across the region, it's very difficult to import from the U.S. or to import from Europe and be competitive. Having local capabilities has improved our cost structure, but more importantly, our customer service and responsiveness to the market. Acquisition integration, continuing to leverage the economy of scale in Australia, but also leveraging that additional scale to benefit the entire region. Vitality, value engineering. By being an electronics-focused, residential-focused business, the expectations are much more consumer-oriented. Life cycles are shorter. It's critical to maintain vitality. It's critical to drive value engineering in a much more agile and competitive environment that's moving much faster than traditional commercial products. We also want to leverage our global capabilities. I mentioned leveraging Bangalore in terms of firmware, leveraging other technology so that we're not reinventing the wheel. It's about leading and it's about leveraging ourselves as one region to unlock the potential which is unique against local competitors, and our agility and size can also be a competitive advantage against the other global competitors. As we wrap up, I want to stress that we are a very different business today. We are a product-focused business aligned with the key markets for significant growth in electronics and residential. We have built capabilities through acquisition. We've built capabilities through our product portfolio to take advantage of the electronics penetration and growth rates. We're unlocking the synergies through the recent acquisition, not only in Australia but across the region. We're leveraging capabilities required as a residential electronic focus, agility, speed, customer focus to differentiate ourselves and differentiate our region to support 50 to 100 basis points improvement in margin on a year-over-year basis. I encourage you to take a look at our new products from Asia, the architectural style of Gainsborough, the glass door lock from South Korea, as well as our latest designed innovative product that was developed in less than eight months for China. Thank you. Ladies and gentlemen, we will now have a 10-minute break. This is your last opportunity to visit the product display area. Ladies and gentlemen, please take your seats. The program will begin. Let me go ahead and get started. First of all, thank you all for attending, your participation and interest in our company. I'm Patrick Shannon, Chief Financial Officer, and I hope throughout the course of the day, you guys have gotten a sense of the enthusiasm and passion and excitement about the future prospects of our company. I'm the last act before Q&A. Let me first start with how we think about and how we drive shareholder value and returns every day that we work at Allegion. It's really four areas. The first of all is to drive accelerated organic revenue growth, faster than the broader market. You've heard today a lot of things that we're working on to accelerate growth, whether it be through new product development, electronics adoption, accelerating that part of our business, as well as channel segmentation. Improving operating margins is critical so we can get a compounding effect on our earnings growth, and we do that by ensuring we get really good leverage on incremental volume, as well as managing this price inflation dynamic extremely well, ensuring we get a high cash flow convergence in terms of our earnings, and we're getting that, and you'll see that in a little bit. Then balanced, flexible, disciplined capital allocation, how we take the excess cash flow that we generate in our business, reinvest for organic growth and/or inorganically to drive shareholder returns. Our financial performance first five years has been outstanding. Dave touched on this briefly. Just to hit on a couple highlights here. Revenue growth, total revenue growth, a little over 6%. That would include acquisitions as well as offsetting divestitures and foreign exchange. Probably more importantly, organic growth, a CAGR of 5.6%, better than the broader market. Our adjusted EBITDA margin continues to expand, growing faster than revenue. Margins have expanded 190 basis points. We finished 2018 at roughly 23% adjusted EBITDA margins. EPS has more than doubled, a CAGR of 15.6%. We're getting that through the acceleration of revenue growth, margin expansion, as well as we did benefit a little bit on a lower effective tax rate to help in that area. Cash flow has continued to expand nicely, pretty much in lockstep with earnings growth, a compounded growth rate of 14.3%, now over $400 million of available cash flow per year. If we think about capital deployment, Dave touched on this briefly. This is one of our critical strategic pillars for the company and how we manage this effectively. We first start and look at how we're managing the balance sheet from a leverage perspective. As you guys know, in 2017, we're upgraded to investment-grade credit rating that's lowered our overall cost of borrowings. Our philosophy is to maintain investment-grade rating going forward. The three areas or pillars that we look at investing in our business, and this would be in the order of priority, and I'll touch on these individually going forward, but organic growth investments, so making investments again to expand our core portfolio and channel capability, accelerating new product development, as well as enterprise excellence, adding to our core business through acquisitions, either through expansion of our product portfolio or geographically. If those aren't available or actionable, providing capital back to our shareholders in terms of increased dividends and/or share repurchases. The key message here is to ensure that we maintain a balanced, disciplined, and flexible capital deployment strategy in our business. One of the great things about our business, as you guys know, is we generate a lot of cash flow. It's a CFO's dream. Cash flow has been accelerating here over the past couple of years, now over $400 million. When we look at the next three years, 2019 through 2021, and this is after capital expenditures, we would expect available cash flow to be $1.4 billion-$1.5 billion over the next three years. The sources or uses of that capital, three areas, we have mandatory debt repayments on our Term Loan A facility, about $140 million. Dividends, as you guys know, we've been expanding the dividends faster than earnings. We expect that will continue on a going-forward basis. The $390 million here does assume that the dividends will increase faster than earnings in the next three years. Share repurchases. At a minimum, we're going to buy back stock to offset the creep on management comp plans. This leaves us with over $800 million of excess cash flow to invest back in the business, either through M&A and/or shareholder distribution. Again, the idea here is that we're not going to hoard cash, we're going to put it to use for our shareholders to drive incremental value for our holders. If you look at our leverage, we're in really good shape relative to our balance sheet. Our leverage ratio, if you look to the right here, our total debt to adjusted EBITDA, we peaked in 2015, after we completed the SimonsVoss and AXA transactions. We funded part of those acquisition prices with some incremental debt. We ended 2015 at 3.4 times debt to EBITDA. We've delevered very nicely over the past couple of years with the growth in EBITDA. We finished 2018 at 2.3 times, and the forecast for this year is to end up around two times debt to adjusted EBITDA. You can see what that looks like on a net debt basis, so approximately 1.2 turns at the end of this year with cash building on the balance sheet. The point here is that we have plenty of firepower availability for additional borrowings that we could go out and complete a significant acquisition. A lot of optionality and flexibility in capital deployment to continuously grow our business. If you look at specifically our organic growth investments, again, you guys are familiar with these, we look at three primary areas to grow our business, again, faster than the broader market. New product development. Hopefully, you guys had an opportunity to see some of the product displays and all of the new electronics and platforms and those type of things, making a lot of good progress there. There's a lot of incremental capital being invested in engineering and R&D efforts. You heard Vince talk about that earlier. That's to accelerate electronics and to integrate those products with some of the mega techs to ensure they're part of the ecosystems and connectivities, a very important part of our strategy. Channel development continues to be a priority as well. There's a lot of opportunities across the globe to do a little bit deeper dive in some of the channels to get a bigger share of the wallet to expand our market presence in certain areas. Tim talked about this, specifically in Allegion Americas and some of the discretionary opportunity we have there. Demand creation is really trying to accelerate the resi electronics growth and create activity in the marketplace associated with that. Enterprise excellence, it's not just about driving productivity in the four manufacturing walls, also developing lean process automation and back office. Digital tools is an important part of our strategy as well. You heard us talk about Overtur as an example, having better collaboration between our specifiers, our architects, general contractors, distributors, et cetera. All of these collectively drive, we believe, above-market growth and improve productivity. They provide a good return on invested capital, good quick cash return on these incremental investments. If you look at where we've invested the dollars, kind of like the last three years, normally incremental investments between $0.10 to $0.15 of earnings drag on the business. We believe it has proven that it will accelerate growth in the future. 2019, around $0.15 expected for this year. The expectation going forward, we kind of look at the opportunities relative to market demand, there will continue to be incremental investments in these primary categories, again, to accelerate growth faster than the broader market. If we look at M&A, again, one of our primary growth strategies, we've been fairly active in the M&A arena over the past five years. The industry is consolidating. We want to continue to be a part of the consolidation there. The types of platforms or areas of investments that we look at would be expanding our product portfolio, expanding our geographic presence, looking at emerging technologies. Technology is changing rapidly. Rob talked earlier about Allegion Ventures. This supplements the strategy, and it's a low-cost option to look at emerging technologies to integrate it as part of our products on a going-forward basis. That's going to be key for us as well. Some of the acquisition criteria that we look at in terms of candidates for acquisition. One, look at good valuations for the business tied to our strategy, core to our business. We're not going to drift far away from what we do very well and have strong capabilities in ensuring strong market fundamentals, ability to scale the business either within their specific region or globally, and then clear synergy opportunities. Financial hurdles that we look at, providing a return on invested capital within a three-year projection, again, inclusive of synergies and market growth, and then ensuring its EPS accretive going into year two so that the total year would be additive to earnings per share. If we look at our track record in M&A over the past five years, and you may recall, coming out of the chute, we had to build a lot of capabilities around the globe, both in terms of sourcing transactions as well as the integration approach. We've been fairly active. We deployed over $1 billion in M&A, 14 transactions closed. 2018 was a busy year. Completed five acquisitions, TGP, QMI, AD Systems, Gainsborough, and ISONAS. All of these, I think, are tied extremely nicely to our core business and provide good synergy opportunities going forward. Three examples that I just wanted to highlight quickly of the types of businesses we look to acquire that are good characteristics of things we would like to buy. AD Systems, a specialized acoustic sliding door system. This was acquired in early 2018, and it's sold predominantly through the institutional market segment. You think about incorporating that product set and solution through our specification capability to our national sales force, we can accelerate that business going forward. It's got some international opportunities, particularly in the Middle East. That's a good potential growth opportunity for us. SimonsVoss, you heard Lucia talk about this specifically, a great business leader in electronic cylinders, predominantly in Germany. It's expanding throughout Europe and provides a lot of technology capability that we can leverage in terms of miniaturization, extended battery life, and those type of things. A really good business and acquisition there completed in 2015. You heard Jeff talk about Gainsborough. This expanding our presence in the Australian market. Really good business, gave us access to new channels, different product segments in terms of residential, and we can leverage some of our capabilities relative to electronics, incorporate it in those products to accelerate growth in that market going forward. If we look at dividends, it's been a nice progression of dividend increases here over the past five years. Every year, 20-plus % increase in dividends. You can see that the payout ratio has increased since when we spun from 12%-22%. The key here is that we're going to continue to increase the dividends faster than earnings. We've got plenty of room to grow here, that's going to be a key part of our shareholder distributions going forward. In terms of our adjusted EBITDA margins, you guys have seen this chart before. You have both the dollars in EBITDA as well as the margin performance. A couple of key points here. It's been really good CAGR growth, a little bit north of 8%. If you look specifically on the last two years, 2017 was the peak EBITDA margin performance, close to 24%. Margins were down in 2018. You guys know that. Inflation was a headwind. The margin profile on some of the businesses we acquired lower than our overall margins put a drag on that. Nonetheless, it's still the second highest in the past two decades, even though it was down. We expect the margin percent to increase in 2019 across the globe in each of the regions. Even though the margins were down, 2018 still represented, in terms of dollars, our peak EBITDA dollar performance. A couple other quick points. Look at the consistency of the EBITDA margin performance here over the past 20 years. Tight bandwidth, 400 to 500 basis points from peak to trough. Resiliency relative to economic cycles, I would say that's really characteristic of the fundamentals of the nature of our industry to some extent. It's a long-cycle business, you have visibility to when markets start to deteriorate. You can adjust your cost structure accordingly. We've done extremely well, really pushing this price dynamic to exceed inflation. I think we're extremely well-positioned on a go-forward basis. You've heard a lot of the portfolio transformations made specific to Europe and Asia. We've got a better, stronger core business that we can manage this in softer economies going forward. Really good story relative to our margin performance. One of the questions I get periodically is, "Can you guys continue to expand your margins? You've got margin profiles that are close to 400 to 500 basis points higher than your nearest peer. Can you continue to expand your margins?" The shorter answer is yes, absolutely, let me explain why. When you look at our business, the contribution margin for every incremental dollar of revenue is $0.40 or north of that. That's what we've experienced historically over the past five years. We would expect every dollar of incremental revenue, we can get $0.40-plus in additional operating income. The key to get incremental margins is how we manage the inputs to the business and how effective we are in doing that. If you look at the net price productivity inflation dynamic, prior to this year, we were net positive, I believe we can be net positive 2019 going forward. We've got pricing power in the marketplace. We have good initiatives relative to productivity. Inflation was a big headwind last year. Shouldn't be that way this year, I think we've got the makeup where this can be positive, the key point here is normally when that's positive, it helps fund all of the incremental investment dollars, okay? That's kind of how the financial model works. If those two are net zero or a little bit north of zero, you're going to get incremental margins just because of the 40% contribution margins, both on margin percent and dollars. This is a simple example. Our business plan going forward, 50 to 100 basis points is certainly within the realm of possibility going forward. Our 2019 outlook, this isn't a change from what we presented several weeks ago when we released Q4 results, but just to touch on a couple of highlights here. Revenue growth on the left, total revenue and organic revenue, 5%-6% increase year-over-year. Still strong growth, and we're getting really good traction relative to the things I talked about previously. Seeing pretty good organic growth across all the regions of our business. If you look on the right side, you have the earnings per share reconciliation. We ended 2018 at $4.50 adjusted earnings per share. The expectation or the guidance or forecast for 2019 is between $4.75 and $4.90 per share. That's only 6%-9% of earnings growth. If you look at some of the components and you look at operationally what are we driving in terms of earnings growth, net of investments, 10%-14% increase. We're getting accelerated revenue growth with margin expansion is what's going to drive that. Managing this price inflation dynamic extremely well will help us get that. We have below-the-line pressure. Pension expense, because of the increase in the discount rate, the lower return on assets, the actuarial valuation is a $0.07 drag on earnings expectation for 2019. I don't expect that to continue going forward. It depends, obviously, on the actuarial assumptions. That is a one-time item in 2019 non-cash. The tax rate, in 2018, we experienced a lot of one-time benefits that are non-repetitive in 2019 going forward. The tax rate's migrating from 13.5%-16%, and that's having a drag on our 2019 earnings per share performance. Nonetheless, still up nicely, $4.75-$4.90 is the expectation. Our cash flow generation, maintaining that to be close to earnings, close to this 100% conversion ratio, $430 million-$450 million is our estimate for 2019. As we look forward to our three-year financial targets, I've got a comparison here to our first five years and how we've done, let's focus on the next three years, 2019 through 2021. What are the expectations for Allegion to deliver going forward? I'll just walk through these. Organic revenue growth 4%-6%. Believe we have a good line of sight to do that. Markets still remain healthy. Dave talked about that earlier, driving the electronics penetration, new product development, channel initiatives, those type of things should allow us to deliver top quartile performance in organic revenue growth of 4%-6%. Margin expansion, briefly touched on that, 50 to 100 basis points per annum would be the average of what we expect. Again, seeing margin expansion in all of the regions around the globe. Adjusted EPS growth 8%-10%. I should've said at the beginning, this is an organic view, does not include any of the capital deployment I talked about previously, the $800 million. Earnings per share, 8%-10% growth there. That does assume a higher tax rate migrating to the high teens from 16% in 2019, available cash flow managing our business to be between 95% and 100% conversion going forward. Not too dissimilar to the last five years that we've delivered. I believe we're well-positioned to continue to deliver solid financial performance in the next three years. Last slide here. I started with shareholder returns and value creation, and I'll end there. This walks through the components of how to think about TSR for Allegion. This would be on a per annum CAGR basis. It starts with revenue, again, 4%-6%. The focus here is that we believe, basis of our initiatives, electronics, investments in R&D, new product development, et cetera, that we can grow faster than the broader market, 100-200 basis points faster than the broader market. On average, we have 4%-6% there. We should get margin accretion, this will give us adjusted earnings per share growth of 8%-10%. I talked about that. The capital deployment, what we talked about previously, having an incremental $800 million the next three years that we can deploy into the business, assuming we do that effectively through both either M&A and/or shareholder distributions of buyback of stock, should allow us to generate another 2%-3% of earnings power per annum. That gives us an adjusted earnings per share of 10%-13%. Our dividend yield today is a little north of 1%. Hopefully, that will accelerate dependent upon the share price, obviously. Again, the expectation is that dividends are growing faster than earnings. You get a total shareholder return on an annual basis somewhere in the 11%-14% on a CAGR basis going forward. That's what we expect to do on total shareholder returns on the next three years. Those are my comments relative to the finances. I'm going to turn it back over to Dave to end up with his closing comments. We'll go into Q&A. Patrick, good job. Let's give it up for Patrick. At Allegion, Patrick was employee number one. I had to interview with him before I got the job. He's been a great financial partner. One of the great things that Patrick does is to help our entire leadership team and the business understand the importance of delivering shareholder value and our commitments to you. A housekeeping item before I get to my final comments. One of the big challenges of a management team is to be able to shut up a guy like me. When I left the stage, I thought my mic was off. It wasn't. I apologize for that. I met a member of the audience out here. We had a conversation. What you may have heard is congratulate Nelson Peltz for the breakup of Allegion from Ingersoll Rand. If I went down to 280 Park Avenue, where Nelson Peltz lives today, I would salute him again. The creation of Allegion from Ingersoll Rand five years ago was an outstanding event, and it's unleashed great shareholder power. That's what I think you heard over the microphone. We went on in my drive for continuous improvement. How could I sharpen my message? We talked about my son-in-law's trade to the Arizona Cardinals, in which he should be the starting outside linebacker next year, and my youngest daughter's boyfriend, who's the starting pitcher for the Pittsburgh Pirates today, gave up four hits. Again, I've walked off a stage like this more than 200 times, and I ought to be able to know how to pull the plug. Apologize for that. Let me amplify a couple things in my closing message here. Allegion has an outstanding opportunity to take advantage of the trend of seamless access. I challenge each of you, how many doors are out there in the world? There's clearly 30 to 40 billion. Let's think a little bit about the automobile industry. At the beginning of the millennium, about 1999, 2000, keyless cars were introduced. By 2008, 11% of the U.S. fleet was keyless. By 2018, 62% of the fleet is keyless. I am not suggesting that in the next 20 years, 62% of the 40 billion doors in the world will be keyless. I am strongly suggesting that we're in a transformation of this industry, and Allegion is in an outstanding position to take advantage of technology to drive our business. It's a transformation that reminds me of what went on in the electrical industry. When I joined Square D Company in 1980, we were just unleashing ground fault interrupters. Today, they're in every wet location and have penetrated the market at probably a 90% base driven by code. As you think about the complexity as we embrace, we will not go at the pace, but the work that we do to keep people secure where they thrive is a compelling opportunity for the company, and I believe Allegion is in an outstanding position with our strength in early electronics, SimonsVoss. The adaptation that we're taking toward digitization, I hope you can see that we have a great opportunity. I hope you also learned a little bit today about the important role that we drive in the specification in access and security in complex building. That complexity is not going away. It's a process that we own. The ability to work with an architect, a mechanical installer, a contractor to make their designs meet the codes and standards that are required for modern buildings. It's an important aspect, and it drives our business. Last, I hope we have earned your confidence over the last five years. We have an operating system that delivers and a dedicated team that I think have put up some respectable results, and I firmly believe that our best days are ahead of us. Thanks for your attendance today. We're going to bring up the team for questions. Come on up. Should I unplug the mic? No. You're good? Yeah. I'm going the other side. Great. As we start Q&A, we ask everyone that they just ask one question, and then get back in the queue. We want to make sure we can address everyone's questions as best that we can. With that said. Welcome Why don't we start in the front, Julian? A lot of questions. Thanks. Maybe, a first question for Dave around the low-end residential market, in the Americas region. Maybe talk a little bit about how large you see that market as being. What's Allegion's strategy in that market, and have you seen any changes around competitive dynamics or ability to push through price increases, particularly in the context of commodity inflation and so forth? Help me, residential Americas in total? About $1.7 billion. Put opening price point at about 20% of that. That'd be fair. It's under attack. It's a position of where we choose not to play. It's not a sense of capability. If we put our design resources, I believe that we could produce the lowest price point in the world. Can we get better returns somewhere else? There's a line that you go over where standards pick up, where style and design, and then the integration of electronics and brands make a difference. That's how we'd see the market. Any other observations, too? Well, I guess the two things I'd add to that is, first of all, we're not seeing the floor go anywhere but migrate upwards. The bottom end of the marketplace is not going lower. The second thing is that we're not seeing the acceleration in the mechanical side slow down a bit in terms of the OPP space. We're not seeing further pressure on driving that overall market. I think the retailers believe are starting to reinvent or reinvest in brands and the capabilities there. The gap between the OPP and where we sit in the marketplace has sort of shrunk quite a little bit. Two positions. Number one, we make a conscious choice not to go opening price point. It puts Schlage and the Schlage brand in a great position. An American builder on the low end, home guarantee is good for one year. When the lock or the latch or the interior hardware blows off the door, we are in a great position to replace it. It's not a bad value proposition. Will a consumer go like for like when something didn't last two years? It puts the Schlage brand in a great position. I believe if we had the intent, we could go after the opening price point market. I just think there's better opportunities. Why don't we go to Rich here in the front? Yeah, thanks. No worry. Just a question for Dave and as well as Lucia and Jeff. If you look at the business, Europe margin has stagnated. Asia's really not big enough to move the needle much. It comes down to Americas margin, as Patrick talked about. What are the scenarios over the next three to five years where you could see EMEA and Asia being a meaningful contributor to margin expansion? It seems like you need more scale in both those markets. It seems like there's more M&A required. Dave, I guess start out with your thoughts there. From the beginning, we've not been shy. We lack scale in Europe. We lack scale in Asia Pacific. Our ability to be able to transform and drive margin expansion is really in electronics, access control, our software interface, SimonsVoss growing nicely. Interflex, which was a question mark historically, we did a deep dive on the strategy there. It's growing at double digits. It's our ability to outperform in that converging space. Also like the opportunity with Nuki. Some interesting challenges in connected residential in Europe, in that you've got the form, fit, function along the variety of styles as you go out through the European geography. We think Nuki's a nice piece. That partnership will help us. As we go to Asia Pacific, a large transformation over the five years, but really in the last 36 months, when we cut Bocom and walked away from that. Jeff has put in a strategy that's positioned more on the strengths of Milre and our electronics, gaining share. We're now a number one, number two in Australia, New Zealand, but again, driving that on electronics and the opportunity we think smart access brings. Is that good for you? Okay, other questions. Go. Josh. Thanks. I'll cheat a little bit, it's one question with maybe a couple parts for Patrick. In the whole capital allocation framework and kind of the three buckets that you categorize there, investments being the first one, the incremental margin that you talk about over the planning horizon is better than what you've done in the past couple of years. Is that a function of investment stabilizing, a better view on gross productivity that's kind of the offset? If investments are stabilizing, doesn't that mean external capital deployment needs to go up? In the absence of M&A, just a lot more share buyback. I know there's a lot there, you made me do it. I'm going to try to answer your question, okay? Your question, in my mind, is more specific around the ability to expand margins. Yes. Right. If you go back and you look at 2017, it did increase it close to 100%. We've done it before. The guidance, 50 to 100 basis points. That is net of investments. The investment profile going forward, think about it to maintain a similar type of level of incremental investments. What we have is a better view on productivity of these digital tools that we talked about, driving enterprise excellence, driving price better to have less leakage. It's not just raising the top-line price. Managing discounts, rebates, promotions, those type of things better all kind of fit into that equation. That's our target. Prior to 2018, our margins did expand 50 to 100 basis points per annum. That's kind of our objective. Inflation got out in front of us a little bit too fast in 2018. We adjusted price. We'll continue to drive that in 2019. Jeff in the front. Thank you. I was wondering if we could get to this adoption question, maybe through the lens of Korea. Now, maybe Korea is just so idiosyncratic it's not a great parallel, but it's at 70%-80% penetration. When was it close to zero? How quickly did it get there? Was there some kind of S-curve that was evident as this happened, and what light does it shed on where we stand today in these other regions? I am not steeped in history with Korea. The adoption rates of electronic locks are about the 70% level. I think you can look at Korea as a fast adopter. I would look to parallels. I think China's going to move extremely quickly. That's why Jeff has positioned our products on electronic growth, relationship with the developers of electronics. Can you back in? Are we too conservative in terms of the electronic growth? Maybe. It's clearly in its inflection point here in North America. I look at it as upside. I think there are centers of the world where there'll be faster adaptation. We're clearly in the middle of it with our Milre franchise that we acquired in 2016. We like it very much with fast adaptation. We think complexity helps us. We think brands help us. Jeff, anything to add there? I would say one thing to add would be, look at the scale of South Korea compared to some of the other markets. I think it's fair to say some of the countries in Southeast Asia would have a similar curve and time frame. When you look at a U.S., a China market, much larger geographic and a much larger population. I think that will play a role in terms of a slower curve. John. Thank you. Question around specification and, across construction markets, you have to defend your spec, right, from competitors, particularly as you move away from the architect and get more down into the contract and the project manager. Wanted to hear you kind of talk about your experience and how you've been able to successfully defend your spec, and maybe talk specifically about the Americas or any other geographic region where you think it's really pertinent. John, I'll start the process and others can add. If you think about the model that we've established, the first thing we have is deep long-term relationships with architectural partners. We have close working relationships with the vast majority of architects around the country, where they have deep personal relationships with the 120-plus spec writers that we've deployed across the country. That process gives us the upfront opportunity to be in advance of all the other competition in the case of specification. We then spend an enormous amount of time on the end user side, not selling products, but actually creating differentiation for our product portfolio. Selling the value proposition, total cost of ownership, those kinds of things. Establishing a brand preference for our products across school districts, university campuses, those things. Get spec, what we would call a spec guide, which tells anybody who's putting hardware on this facility, it needs to meet these standards for us. If we do those two jobs really effectively, we've got a spec that on a small number of occasions is a no-sub spec, meaning you can't replace it with anything, or you have a spec that includes our products as in a preferred position along with competition. We've also established this end user preference, which is also driving the GC to not only build the project, but build the project the way the end user wants it built. That's really the secret to the activity. One of the most exciting things with Overtur is that we've created now this digital collaboration world between us and the architects that allows a common one set of data available for that. That allows us to push that data into a place with either the GCs or the distribution channel, and then it becomes a much more difficult task to manually change that data because it is automatically fed into those systems and drives the construction process. There's the concept of digging the moat around our business deeper and broader. I would also The depth of our spec writers, the maturity of our spec writers. In some cases, the partnerships with our wholesalers, architects, and mechanical contractors can be decades. They grew up together. When there's tough code compliance issues and a fire inspector say, "I'm not giving you a sign-off," our people are there to defend the spec. In many cases, are more intimate with the code and standard than the architect or the inspector. In the life of the building, they'd be getting called into that. Another example that I would help strengthen our spec relationship is when we won that on the first round, when you go to renovate, it's not only an Allegion product with Von Duprin, Schlage, and LCN. If I have an install base of Square D, the electrical player, I'm not going to go duplicate that. A maintenance guy with his salt wants to have a common set of mechanical and electrical capabilities. If we do our job up front, the spec works, and our product lasts the test of time, we'll win it again. One other add that I meant to mention. Overtur being a digital tool, it is globally deployable, and now Lucia and Jeff's teams in the rest of the world are adopting these tools and beginning the same process and strengths that we have here in this marketplace. Next question. Josh, I guess you have a follow-up? One thing I found pretty interesting in Jeff's presentation is this notion that the price points in China for electromech are actually much higher than in the U.S. Maybe curious to add some more color to that on, one, why that gives you confidence that, to Tim's point, that elmech in the U.S. is not actually like lighting at all, in that no one's selling $500 product in the U.S. That doesn't make sense. Is there a big spread in China underneath that, or is that just one case study and there's plenty of low-end stuff below that that may leak over here eventually? Go. Yeah. It is very clear. We're playing in the medium price point to high price point markets, and if you look at the urban environments inside China, the cost of real estate's pretty high. If you, for example, in Shanghai, which I understand is on the higher end of the curve, 900 square foot apartment in a building that's 20 or 30 years old will cost $1.1 million. That's 20 or 30 years old. If you want a newer construction, it's about $2 million. The locks that are going in those types of applications and in those types of developments will retail in that $300-$500 time frame. You go to the countryside, it's more of a rim lock, probably $35-$80 for a lock, it's a much simpler lock, and those are readily available in Milre, and we have those in our product lines as well. Really where we're aimed and focusing on in China is to not play in a cost competitive, it's that medium to high price point market. I was surprised as I've traveled China, the door industry. Number one, the Chinese want to give a picture of grandeur, and it begins at the front door. Oftentimes heavier materials, more detail as you enter a home, and this is part of what pulls through an expensive lock. The second is within China and other parts of the world, there's a lot of cheap stuff out there. When you enter your home, again, we put ourselves in a good position. If I made a wrong choice when I build out, I can upgrade. We try and perform on reliability, quality of the product, and we think it's a place that'll justify that type of price point. Tim, in the back. Hey, good afternoon. Maybe just looking at the $2 billion that you guys have talked about in terms of the channel opportunity. Tim, you said you're kind of in three of the kind of 6-8 sub-segments of that market. Are those other three to five attractive parts of the market? Maybe if you could give us an example of what that might be outside of what you're doing right now. Answer A, yes, they are attractive. They all represent opportunities where there's growth. We're under-penetrated and under-represented in those market segments, and there's value to be created with the right value proposition, the right product, the right product price positioning, and the value created for the channel. I'd rather not say what those other five are because other people will go after them as well. We'll start the process. You'll see it. One of the early things we've been doing is we've been interjecting ourselves into this builder space, and we're in the very early days of that. That whole builder channel that is somewhere between two and four steps between us and the actual construction of the house or the single-family home has ripe opportunities for us to create a completely differentiated approach to that, and we're just sort of getting started on that. I'd offer that as another example of a place where you'd see us kind of pretty aggressive over the next year or two. Maybe one more question. Are there more questions from the audience? Thank you. I'd just like to talk about doors for a second. In 2013 or 2014, you divested the U.K. doors business. You've had Steelcraft in the States and recently made three different deals across your geographies. Can you talk about the importance of building up this portfolio regardless of geography and kind of the importance of it going into speccing for a certain project? Our position in hollow metal, $200 million. We acquired QMI, we've got Steelcraft, we've got Republic. When we get into package bids, especially against the market leaders, we feel it's important that we have the ability to offer hollow metal frames in a building like this in our hardware packages. The market sometimes demands a complete solution, and we've tried to position ourselves to do it, and would say our challenge is to continue to build that model out. The hollow metal business and the door business in general is a tough space. The market dynamics, I actually believe our competitors got into the hollow metal and door businesses because of Steelcraft's presence in Ingersoll Rand in the early 1970s. As they came in, they have doors, we have to have doors. The market dynamics are there, it's really to complete and have a package offering where we need it. You still have the opportunity to partner in some geographical areas. That's a better way to go. For the last question, John, I saw your hand up. Do you have another question? I guess just a question around M&A and what kind of pace we should be expecting. I mean, obviously, you were very active and maybe just some comments around the bandwidth internally and maybe by geography where we should kind of be expecting to see the capital deployed. You saw in 2018, we acquired businesses around the globe. Each region was represented by a transaction. Most of the integration efforts are done within the region and owned by the business for the financial results and business case. We've got some continued work to do to ensure we maximize those opportunities and integrate those effectively, which we're working on now. It's really contingent, dependent upon actionability of transactions. Valuations continue to be a little bit on the more side, now high. Hey, we've got a robust pipeline. We'll continue to action opportunities to extend their core to our business, fit with our strategy, provide good synergies, opportunities, some of the examples I mentioned earlier. This could be a key part of our capital deployment. It's too difficult, I'd say, to give you a number and say, "Hey, we can complete X number of deals, $X in revenue per annum." It's just going to be dependent upon what's available, what we can action at good, reasonable prices that we can leverage going forward. With that concludes the Q&A. We want to thank all of you for joining us today and look forward to meeting with you all throughout the year. Thank you.

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