Allegion Plc (ALLE) David D. Petratis on Q4 2015 Results - Earnings Call Transcript

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Allegion Plc (NYSE:ALLE)

Q4 2015 Earnings Call

February 11, 2016 8:30 am ET

Executives

Tom Martineau - Director-Investor Relations

David D. Petratis - Chairman, President & Chief Executive Officer

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Analysts

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Peter Richard Lennox-King - Sanford C. Bernstein & Co. LLC

Ronald Weiss - Creidt Suisse

Ron J. Jewsikow - Wells Fargo Securities LLC

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Conor Sweeney - Longbow Research LLC

Robert Barry - Susquehanna Financial Group LLLP

Operator

Good morning, and welcome to the Allegion Fourth Quarter and Full Year 2015 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Tom Martineau, Director of Investor Relations. Please go ahead.

Tom Martineau - Director-Investor Relations

Thank you, Emilie. Good morning, everyone. Welcome, and thank for joining us for the fourth quarter and full year 2015 Allegion earnings call. With me today is Dave Petratis, Chairman, President and Chief Executive Officer, and Patrick Shannon, Senior Vice President and Chief Financial Officer of Allegion.

Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at www.allegion.com. This call will be recorded and archived on our website.

Please go to slide number two.

Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities laws. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated results. The company assumes no obligation to update these forward-looking statements.

Our release and today's commentary includes non-GAAP financial measures, which exclude the impact of restructuring, acquisition and divestiture expenses and charges in current-year results and restructuring and spin expenses and charges related to the devaluation of our previously held Venezuela business from the prior-year results. We believe these adjustments reflect the underlying performance of the business when discussing operational results and comparing to the prior-year periods. Please refer to the reconciliation in the financial tables of our press release for further details.

Dave and Patrick will discuss our fourth quarter and full year 2015 results and provide 2016 guidance, which will be followed by a Q&A session. For the Q&A, we would like to ask each caller to limit themselves to one question and then re-enter the queue. We will do our best to get to everyone, given the time allotted.

Please go to slide three, and I'll turn the call over to Dave.

David D. Petratis - Chairman, President & Chief Executive Officer

Thanks, Tom. Good morning, and thank you for joining us today.

Allegion posted another strong quarter of operational results and closed out a very strong year. I'm proud of the company we have built over our first two years and believe we have one of the safest and most engaged work force in the industry that drive the high level of execution and performance.

Now onto the fourth quarter. Revenues of $545.4 million grew 4.8% on an organic basis led by strength in the Americas and European regions. Total revenue declined 4.9%, reflecting the impacts of divestitures and foreign currency.

Adjusted operating income of $103.5 million decreased 2.9% versus the prior year, which again reflects recent divestitures. We realized solid leverage on incremental volume which improved overall operating margin by 40 basis points. The ability to deliver improved margins while absorbing incremental investments continues to demonstrate the efficiency and effectiveness of our business.

Adjusted earnings per share of $0.89 increased 17% versus the prior year, driven primarily from improved operating performance, acquisitions and a lower effective tax rate, partially offset by divestitures, incremental investments and foreign exchange impact. This is our sixth straight quarter of double-digit earnings per share growth.

Please go to slide four.

As we did last year, I'd like to step back and review our performance scorecard.

We exceeded revenue expectations on a reported and organic basis. Markets performed as expected, and we achieved a high-level of contribution from our new product introductions and channel-led initiatives.

We delivered an effective tax rate below 22% and exceeded our adjusted EPS goals. Before taking into account the realization of lower effective tax rate, we exceeded the high end of our original guidance by $0.07. Our results demonstrate the benefit of a balanced investment in the business, which also fell within guidance range. And although available cash flow as a percentage of earnings exceeded original guidance, I would comment that cash flow is shown on a reported basis.

In 2015, this was somewhat distorted due to the one-time divestiture charges. As discussed last quarter, we expect to do a little better in absolute cash flow for the year, but we realized a reduction in collections associated with the Bocom Wincent business in Asia-Pacific, which has now been divesting.

Please go to slide five.

If we look beyond the financial scorecard, our 2015 accomplishments demonstrate our continued focus on our five growth pillars: core market expansion; innovation; opportunistic acquisitions; enterprise excellence; and growth in the emerging markets.

Allegion remains committed to health and safety as a company, which was evident by the improvement of our safety metrics that were already some of the best in the industry. We made the necessary decisions on divestitures and leveraged acquisitions to strengthen our portfolio. We've managed our debt structure efficiently and made incremental investments to drive performance.

Our growth in new products has been strong with a vitality index that has doubled from the prior year. The business is executing at an extremely high level. The decisions and performance in 2015 have positioned us well for 2016.

Please go to slide six.

When reflecting on the opportunities for long-term revenue growth, it's important to acknowledge the role Allegion's well-rounded brand portfolio will play, especially in terms of electromechanical convergence. Our investments in new products will provide growth not just for 2016, but for sustained growth in the future.

In the residential market, those solutions include innovative products from our 2015 acquisitions in Schlage's leading and trusted home automation products. In the fourth quarter, Schlage launched the next generation of electronic access solutions, including the Schlage Sense for residential homes designed to work with Apple HomeKit as well as our Schlage Control Smart Locks for multifamily use that streamlines operations for building managers while giving residents convenient smart cards and phone credentials.

In the commercial market, our historic pioneer brands like Von Duprin, CISA and Interflex are raising the bar in terms of innovative solutions for Allegion customers, and our acquisitions are also contributing as reflected by the SimonsVoss SmartIntego system, which recently earned the well-renowned German Design Award. These products are just a sampling of our leading electro-mechanical solutions, which will continue to build out innovation in existing and new categories.

Patrick will now take you through the financial results, and I'll be back to update you on our 2016 guidance.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Thanks, Dave, and good morning, everyone. Thank you for joining the call this morning. Please go to slide number seven.

This slide depicts the components of our revenue growth for both fourth quarter and full year. I'll focus on the Allegion results and cover the regions in their respective slides.

As indicated, we delivered 4.8% and 5.4% organic growth in the fourth quarter and full year respectively. The strong organic growth reflects improved markets, the introduction of new products and the company's channel initiatives. Pricing was essentially flat in the quarter as favorable pricing in the EMEIA and Asia-Pacific regions were offset by slight decline in the Americas, driven by unfavorable residential pricing.

Specific to the quarter, the residential business absorbed higher returns versus the prior year within the retail segment as well as higher rebates reflecting increased annual volume thresholds achieved within the quarter. It is important to note that the residential volumes were up low double digits in the quarter. Pricing for the commercial segment continues to get good traction.

We continue to face foreign currency headwinds related to the strong U.S. dollar. However, the currency headwind is decelerating as noted by the negative 3.2% decline in the quarter as compared to the full year decline of 6.8%. And acquisitions contributed over $45 million in revenues in the quarter, which were more than offset by the divestitures of our Venezuela and Bocom businesses.

Please go to slide number eight.

Reported net revenues for the quarter were $545.4 million. This reflects a decrease of 4.9% versus the prior year, up 4.8% on an organic basis. The reported revenue reflects the currency and divestiture headwinds discussed previously, which drove a 17.6% year-over-year decline. This was partially offset by acquisitions and strong organic growth in Americas, EMEIA and the Asia-Pacific mechanical and electronic hardware business.

We continue to experience great progress in electronic product growth, up over 28% compared to the prior-year period. In addition, we continue to make significant progress with our new product introductions and channel initiatives as reflected in the vitality index improvement mentioned by Dave earlier.

Adjusted operating income of $103.5 million declined 2.9% compared to the prior year. Good incremental volume leverage and continued progress in our EMEIA margin transformation are reflected in the adjusted operating margin that improved 40 basis points. These benefits also covered incremental investment headwind of 20 basis points.

Excluding the divestiture of Venezuela and Bocom, year-over-year margins accelerated 120 basis points compared to the prior-year period. And the adjusted industry-leading EBITDA margin of 21.6% is a 110-basis-point improvement versus the prior year and 160 basis points excluding the divestitures. The business is executing at an extremely high level demonstrating both strong organic growth and margin improvement in all regions while continuing to make investments for future profitable growth.

Please go to slide number nine.

This slide reflects our EPS reconciliation for the fourth quarter. For the fourth quarter of 2014, reported EPS was $0.37. Adjusting $0.39 for the prior-year separation and restructuring expenses and other items as noted, the 2014 adjusted EPS was $0.76. Operational results increased EPS by $0.12 as favorable operating leverage and productivity more than offset inflationary impacts.

The decrease in adjusted effective tax rate drove $0.08 per share improvement versus the prior year. The improvement reflects favorable changes in the mix of income earned in lower rate jurisdictions, the continued execution of the company's tax strategies and the benefit of discrete tax items recorded in the quarter.

Acquisitions added $0.05 in the quarter while divestitures were a $0.09 reduction. As you may remember, our Q3 guidance already anticipated a $0.05 headwind for the slowdown of the Bocom business. The actual results reflect an additional headwind versus prior guidance of approximately $0.03 related to the divestiture occurring sooner than previously forecasted.

Next, interest, currency and other income were a net $0.02 reduction. The higher interest expenses related to the issuance of $300 million of senior notes completed in the third quarter. Other income primarily reflects the sale of non-strategic marketable securities, partially offset by net currency losses.

And lastly, incremental investments related to ongoing growth opportunities for new product development and channel management as well as corporate initiatives tied to our strategy specific to taxes and IT investments were a $0.01 reduction. This results in adjusted fourth quarter 2015 EPS of $0.89 per share.

Continuing on, we have a negative $0.15 per share reduction from acquisition and restructuring charges, partially offset by a favorable divestiture charge. After a giving effect to these one-time items, you arrive at the fourth quarter 2015 reported EPS of $0.74.

Please go to slide number 10.

Fourth quarter revenues for the Americas region were $383.1 million, down 2% or an increase of 6.6% on an organic basis. Reported revenue year-over-year comparisons were unfavorably impacted by currency movements in Canada and Colombia and the divestiture of the Venezuelan business.

Strong organic growth reflects strong market performance driven by our new product and channel initiatives. As noted on the chart, we experienced very strong residential performance, mid-single-digit growth in non-residential products and strength in electronics across the portfolio.

Americas' adjusted operating income of $100.2 million was up slightly versus the prior-year period. Incremental volume leverage and productivity more than covered the Venezuelan divestiture, higher inflation, foreign currency and investments.

Adjusted operating margin for the quarter increased 60 basis points while absorbing incremental investment spending that created a 50-basis-point headwind in the quarter. Excluding the Venezuelan business from prior-year results, operating margins improved 140 basis points. The ability to drive growth, improve our market-leading margins and drive investments demonstrates excellent performance by the entire Americas team.

Please go to slide number 11.

Fourth quarter for the EMEIA region were $129.2 million, up 24.8% or up 3.1% on an organic basis. The reported revenue growth was driven by acquisitions and the organic growth partially offset by currency headwinds. Acquisitions accounted for $35 million of the revenue increase in the quarter. Both SimonsVoss and AXA performed well in the quarter and are delivering on the expected results. The organic growth reflects price and strength and hospitality, Interflex and general market improvements.

EMEIA adjusted operating income of $17.6 million increased 51.7% versus the prior-year period. Adjusted operating margin for the quarter increased 240 basis points, reflecting continued improvements in the ongoing business transformation as well as contributions from the recent acquisitions, which were accretive to Allegion's margins.

And although it isn't reflected on the slide, the full year adjusted operating margin for EMEIA was 7.9%. If you remember, the 2013 adjusted operating margin for this business was approximately 1%. This is a significant accomplishment, and we feel we are well-positioned for continued margin improvement in 2016.

Please go to slide number 12.

Fourth quarter revenues for the Asia-Pacific region were $33.1 million, down 58% versus the prior year. As noted on the slide, the decrease was specific to the system integration business, which drove a $55 million reduction in revenues year-over-year. Excluding the system integration business, revenues grew approximately 43%. This reflects the contributions of acquisitions in the region as well as organic growth exceeding 12%. Organic growth was strong in Australia, New Zealand and Southeast Asia. Asia-Pacific adjusted operating income of $2.2 million was down $7.5 million, reflecting the divestiture.

Operating margin excluding the integration business reflects a positive story with an increase of 400 basis points versus the prior year. The operating margin improvement reflects volume leverage, productivity and accretive acquisitions that more than offset inflation and currency headwinds.

Please go to slide number 13.

Available cash flow for 2015 was $222.2 million, an increase of $14.7 million compared to the prior year period. The increase in the year-over-year cash flow was primarily due to reduced capital expenditures. Specific to capital expenditures, we anticipate investing approximately $10 million more in 2016 than 2015 for new product development, operations and IT projects.

As noted on the slide, we now reflect the impact of recent acquisitions and divestitures in the current numbers. Although this recalibrates the baseline somewhat, it doesn't change our commitment to an effective and efficient working capital structure to maintain minimum levels of investment.

Please go to slide number 14.

You'll remember our capital allocation strategy for our Investor Day that defined a balanced and flexible approach. This reflected our strategy on day one remains our focus and commitment for 2016. We ended the year with a gross debt to adjusted EBITDA of 3.5x, which reflects the impact of the recent debt offering and facilitated our acquisitions in 2015. Given EBITDA growth and debt amortization, we will be able to quickly delever to be within our targeted range of 2.75x to 3.25x.

As Dave will mention later in the guidance, we continue to see opportunity to fund incremental investments in organic growth for new product development, channel strategies and enterprise excellence to accelerate core market expansion. Supported by our 2015 performance, we believe these investments will enable the company to grow at an accelerated pace and faster than the broader market with higher returns on invested capital.

We remain focused on growing our portfolio through acquisitions. We have gained considerable experience, successfully integrating a number of acquisitions over the past year that have been accretive to our results and the M&A pipeline continues to remain active. And lastly, we have the opportunity to provide shareholder distributions through increased dividends that reflect strength and confidence in cash flow.

And we will continue to repurchase shares offset dilution and to be opportunistic when appropriate. In summary, due to the consistent high cash flow generation, we have many options to deploy capital to yield higher returns for our shareholders.

I'll now hand it back over to Dave for an update on our full year 2016 guidance.

David D. Petratis - Chairman, President & Chief Executive Officer

Thank you, Patrick.

Please go to slide 15.

We expect continued growth in our primary markets in 2016 but recognize that we are in a period of macroeconomic uncertainty and currency volatility. Our expectation is that the organic investments combined with our ability to execute will deliver better than market growth.

In the Americas, our exposure to non-residential construction markets remain a positive. However, U.S. GDP levels are forecasted to remain below 3%, which I believe is a point that defines sustained growth. And if you were to review industry assessments for commercial markets today, you would find a wide variance in expectations. We remain positive yet cautious in this area.

On the institutional markets, we continue to expect slow improvement, characterized by more balanced educational demand between K through 12 and higher education since Safe Schools Initiatives and the need for school security upgrade is evident when you review state legislative priorities. The outlook for healthcare remains more subdued in 2016 with flat to moderate increases.

Overall, we anticipate low-to-mid-single-digit growth for the non-residential segment. The U.S. residential market will continue to increase mid single digits driven by both builder and big box segments. Single family home construction will continue its recovery, although we continue to expect variance in the segment driven by labor and land availability. The multifamily segment will continue to grow, but we expect a deceleration in the rate of growth as compared to the last two years.

Consolidating the market outlooks, we project organic revenue growth in the Americas of 5% to 6% and reported revenue growth of 4% to 5% reflecting some currency pressure. For the European region, we anticipate low single-digit market growth overall. We expect continued growth in the German and UK markets and modest growth in Italy.

We believe that recovery in France will continue to lag, and we expect further contraction in Eastern Europe. For the region, we project organic growth of 1% to 3%. When we combine the impact of acquisitions partially offset by currency, we project reported revenue growth of 25% to 27% for the year.

The Asia-Pacific markets continue to show low-to-mid single digit growth in residential and non-residential segments. Our current portfolio reduces our risk to the slowing China economy and positions us well in Australia, New Zealand, and Korea.

Organic growth in the region is estimated to be 5% to 7%, and total revenue is estimated to decline 16% to 18%, which reflects the system integration divestiture. All-in, we are projecting organic growth of 4% to 5%. Incorporating the net benefit of acquisitions that offset divestitures and currency headwinds, we expect total revenue to grow up to 7% to 8%.

Please go to slide 16.

Our 2016 adjusted earnings per share range is $3.25 to $3.40, an increase of 7% to 12%. The earnings increase is primarily driven by operational improvements and the net benefit of acquisitions and divestitures, partially offset by investments in the business, currency headwinds, interest and a higher effective tax rate assumed to be between 18% and 19% for the year. We are forecasting strong organic growth and margin expansion in all of our reporting regions.

Incremental investments, which are forecasted to be lower in 2015, will be focused on new products and channel development to meet demands of the electro-mechanical conversion as well as driving solutions for the underserved repair and replacement markets.

Our guidance assumes outstanding diluted shares of approximately 97 million, which reflects the company's goal to at least offset share dilution with buybacks. Restructuring and acquisition expenses are expected to be in the range of negative $0.05 to $0.10, resulting in a reported EPS range of $3.15 to $3.35.

Please go to slide 17.

We are very pleased with our 2015 results that delivered organic revenue growth over 5% and increased our operating margin by 50 basis points. The growth of both revenue margin while making investments in our business demonstrates the disciplined approach we set out two years ago.

We've made tremendous progress improving our European profitability from slightly positive two years ago to an 8% rate today. It's truly a great accomplishment by the entire team to achieve these results so quickly. And we delivered on our effective tax rate commitments, sustaining below 20%. We continue to generate strong cash flow and are recognizing growth from our organic investments.

We look forward to 2016 as an opportunity to build on our prior results. Although we expect continued market volatility and currency headwinds, we remain focused on our growth strategies to guide us through the challenging markets. We have a safe and strong team in place, committed to our vision to make the world safer and secure the places where people thrive.

Now Patrick and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We'll now begin the question-and-answer session. . Our first question is from Tim Wojs of Baird. Please go ahead.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Hey. Good morning, guys. Nice job.

David D. Petratis - Chairman, President & Chief Executive Officer

Good morning.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Hey, Tim.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

I guess just on Americas. Two questions. If you look at the growth, end market growth. I think I get to about 3% to 4% from a volume perspective, and you're guiding to 5% to 6%. So could you just give us a little bit of color of what you're expecting? I think new products and probably price is what the bridge is there, but just some confirmation on that. And then just could you talk about the puts and takes to just EBIT margins in Americas in 2016?

David D. Petratis - Chairman, President & Chief Executive Officer

So I'll take the top line and pass it over to Patrick on some of the numbers.

Our growth in Americas in 2016, we'll continue to leverage our electronic growth, which has been yielding nice returns. Second is we're moving into our second full year of channel development, and this is really going after the repair, replacement retrofit markets on the commercial side. And we presented that as really a five-year initiative, and we're gaining share with those initiatives and I think it should be reflected in the numbers.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah, so, Tim, just to add from a revenue perspective in Americas, if you kind of look at the components in organic growth, we ended 2015 full year pricing of about 50-basis-points improvement; a little pressure from the residential segment, but getting pretty good traction on the commercial segment. I would expect this to show a little improvement there in 2016.

From a volume perspective, again, really strong organic growth in 2015. There's a couple of quarters early in the year, easier comparisons, but volume is still anticipated to be fairly strong but down a little bit year-over-year.

If you look at the margins for the full year, we showed a slight improvement, and I just remind you that was kind of weighted down a little bit because of the Venezuela divestiture. Extracting that, we had pretty good margin growth. We're on a path now; we've got pretty good visibility to productivity. We'll participate in a deflationary economy that we're seeing in commodities, and we'll continue to get good leverage on the incremental volumes. So I would anticipate the margin improvement to accelerate a little bit in 2016 basis of the incremental volume forecasted.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay. And just on Venezuela, could you just remind us for the full year, what the impact to the margin was from both the FX and the divestiture?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yes. I want to say in Americas specifically, for the full year, it was close to, let's see here, about 50 basis points impact.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay. Okay.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Americas specifically.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

All right. I'll hop back.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

And just kind of thinking forward on that, because of the devaluation in 2015, that's going to have a minimal impact on the margin comparisons going forward for 2016 when you compare to 2015.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay. Okay. Thanks. Well, good luck on 2016 guys.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Thanks. Appreciate it.

Operator

Our next question is from Steven Winoker of Bernstein. Please go ahead.

David D. Petratis - Chairman, President & Chief Executive Officer

Good morning, Steve.

Peter Richard Lennox-King - Sanford C. Bernstein & Co. LLC

Good morning guys. This is Peter Lennox-King on for Steve. Just – if we can talk about the EMEIA margins for a moment. Now that you've clearly breached to the 10% rate, at least for the quarter, and with the acquisitions and restructuring that you've been undergoing, what's the new run rate target that you've got there all-in? And then related to that, could you layout for us what the underlying or organic margin within EMEIA was, so leaving out there the recent acquisitions?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. So a couple things, just as a reminder. Q4 historically from a seasonal perspective always operates at a much higher margin than the first three quarters of the year. So you're seeing a much higher than the 10% target that we had targeted in Q4.

Having said that, if you kind of break out the components and you look at the base business, continued really excellent execution relative to our March toward the 10% target. I'd say we ended the year pretty much in line with our expectations. Moving some of the production out of our CISA facility this year will continue get us productivity benefits in 2016 and some carry forward in 2017 after that's completed. So we feel really good about the progress there.

The acquisitions completed last year are accretive to the margins in the region. And so what you saw collectively, we ended pretty much for full year basis close to 8%, which is about 400 basis points improvement compared to full year 2014. You're looking at 2016 at a low kind of double-digit margin range. And I just remind you also that there is a big delta between EBIT and EBITDA margins in that region because of the acquisitions. EBITDA margins would be in the neighborhood of mid to high teens, which is a fairly significant and kind of in line with our peer group in the region.

Peter Richard Lennox-King - Sanford C. Bernstein & Co. LLC

Okay. Thanks very much.

Operator

Our next question is from Julian Mitchell, Credit Suisse. Please go ahead.

Ronald Weiss - Creidt Suisse

Hey, guys, Ron Weiss in for Julian. I just...

David D. Petratis - Chairman, President & Chief Executive Officer

Hey, Ron.

Ronald Weiss - Creidt Suisse

How you are doing? I just want to touch on the Asian-Pacific market. Now that the Bocom divestiture is complete, can we expect the margins there to kind of accelerate as we saw them accelerate in Q4 for all of 2016 or how should we think about the margin progression there for the year?

David D. Petratis - Chairman, President & Chief Executive Officer

Yeah. I would look at that business going forward. You saw in the full year negative margins. A lot of that or all of that is due to the Bocom business. That of course is going to be peeled away going forward, and the acquisitions we've done in the region in the Pacific Rim have been very accretive to the regional results. And so you're looking at a business there, call it a little over $100 million mid single-digit. (35:12) margins is kind of the expectation going forward. And we'll continue to chip away in the margins through productivity and those type of things. But anticipate to see good progress, particularly year-over-year, in that region of the world for 2016.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

I would add that Bocom was a distraction for us in the region. A focused Asia-Pacific team, building on the acquisitions that we've made there, has got a bright future and look for us to continue to drive improvement with that portfolio.

Ronald Weiss - Creidt Suisse

Got it. And then just on the balance sheet, the goal is to bring the net debt-to-EBITDA down for the year. But if the right deal came along, where would you guys feel comfortable pushing that kind of leverage ratio up to for the year?

David D. Petratis - Chairman, President & Chief Executive Officer

Yeah. So we highlighted the expectation without any large acquisitions because of the strong cash flow generation EBITDA growth and the mandatory principal reductions. We're going to delever fairly quickly.

But we've always commented for the right transactions, again given the strong cash flow generation, wouldn't have a problem of going up to four times, maybe a little bit higher for the right transaction. And so I think we've got a lot of flexibility there, not only basis of the free cash flow generation, but the ability to add some incremental debt if we needed to.

Ronald Weiss - Creidt Suisse

Great. Thanks, guys.

Operator

Our next question is from the Rich M. Kwas of Wells Fargo. Please go ahead.

David D. Petratis - Chairman, President & Chief Executive Officer

Hi, Rich.

Ron J. Jewsikow - Wells Fargo Securities LLC

Hey, this is Ron Jewsikow on for Rich Kwas. I was just wondering if you could provide a little more detail on the Safe Schools. You mentioned state priorities are reflecting the need for this. But are you seeing anything in budgeting specifically, or is it still kind of just more commentary?

David D. Petratis - Chairman, President & Chief Executive Officer

No. I commented on this last quarter. I spent some time in Southern California and there's specific investments going in for schools. In particular, in rooms that have over five inhabitants, they've got to have visual locking capabilities, which is our CO-220, so that from across the room, you can determine whether it's secure or not. And I think the overall momentum in the market of state budgets, local budgets improve, their investments are going in. So we see activity, and I think it will continue to improve over the next 36 months.

Ron J. Jewsikow - Wells Fargo Securities LLC

Thanks for that. And then just a quick kind of modeling question on the incremental investment headwinds. There was only $0.01 in the fourth quarter. How should we think about the cadence of that in 2016?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah, I would look at it fairly evenly ratably throughout the course of the year. There is some flexibility, variability there. But specific to new products, which is more kind of engineering-related that kind of is people related cost and that would kind of be steady state. And then on the channel initiative, again as Dave indicated, getting really good traction on the repair of retrofit markets here in North America, and we're going to continue to ratchet that up to take advantage of that opportunity. So that might be a little bit more kind of backend loaded, but for modeling purposes, steady state.

Ron J. Jewsikow - Wells Fargo Securities LLC

Okay. That's very helpful, and thanks for taking my questions, guys.

David D. Petratis - Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question is from Josh Pokrzywinski of Buckingham Research. Please go ahead.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Hi, good morning, guys.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Hi, Josh.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Just a follow-up on the earlier question, and maybe I missed it. Did you guys point out what you think EMEIA margins should be running at for the entirety of 2016? Obviously there is seasonality there. But did you explicitly say that?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. We've commented that we anticipated around low double digits.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Okay. I guess...

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

With the EBITDA margins in the mid-teens to high teens.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

I guess the way that shakes out then, looking at your guidance is even with all this extra investment, you guys are still delivering incremental margins well above 40%, probably closer to 50% in the Americas. Is that a fair to way think about it? And I guess, some of these investments seem like they were going to start tapering off into this year, maybe not flat, but certainly much lower year-over-year numbers. Is it that you guys are finding more opportunity? Is it that maybe markets aren't recovering as quickly, slower rollout of new products? Just help us to mention maybe when these investments start to plateau.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

So you've got two questions there. On the investments, as we highlighted in the Investor Day last year in March, we did highlight we'd expect it to start tapering down a little bit. You're correct in that.

We continue to analyze that through our annual operating plans, and we believe that from a capital allocation perspective, to the extent we can drive good organic growth that have really strong returns on invested capital, we're going to make those bets. And because of the traction we've seen relative to electronic products growth and the channel initiative here in North America, we're accelerating some of those things and that's why it's down year-over-year, but maybe not as down as what you'd anticipated. But I still think it's good return on capital.

Relative to your incremental margin question, I think it's a pretty good way that you're looking at it; 50% is high. We've always kind of stated this 40% type of target, and we really delivered on that in 2015. The extra benefit we're getting in this deflationary economy specific to commodities is we'll start seeing that come into our numbers a little bit more than what we saw in 2015, just given the spot rate trades relative to the average rates in 2015.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Got you. That's helpful. And then I guess a follow-up on the electronic comments, you guys were finding more areas of opportunity. It seems like some of the feedback from the channel is that the NDE with ENGAGE rollout has been perhaps a little slow or not really showing up yet. Are you guys still piloting some of that in the market? Is that maybe some lessons learned early on? Just with that product specifically, how would you gauge the rollout and the cadence from here?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

When I think about the NDE, it's not met our expectations in term of the rollout, and I would argue that we underinvested. I think the lessons learned here is we should have had a full complement of Mortise communication gateways ready to go with that product, and we're going to continue. But that's the lesson learned. That was rolling when we created the company, and I wish we would have invested more because the product has clearly got its capabilities. It will step up in growth in 2016. But that frontier of electronic locks in the commercial arena is really the mother lode of opportunity for the company.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

Would you say you have what you need today, or at what point do you reach that just based on the development pipeline?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

We'll make more expansion to that portfolio in 2016 and into 2017. Key is the Mortise offering. And the other thing is our channel, the locksmiths, the installers, not as fast to adopt as you see in the residential. So those are things that we're working on. We've got specific resources, focused resource after it and it's going to bear fruit.

Joshua Pokrzywinski - The Buckingham Research Group, Inc.

All right. Thanks a lot guys. I'll turn it over.

Operator

Our next question is from David MacGregor of Longbow Research. Please go ahead.

Conor Sweeney - Longbow Research LLC

Hey, good morning, guys. This is Conor Sweeney on for David this morning. Congrats on another great quarter. I just want to go back to the Americas, and in particular, 4Q organic growth of 6.6% and the full year growth of 7.1%. Could you talk about how that compares to the industry growth for the periods? And then also can you maintain this level of growth going forward in the Americas, or do you think you'll need to maybe lean more on Europe for growth going forward?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

So I would observe if you line up some competitive landscape, we were certainly head to head with them, the world leader Assa, and outperformed the rest of the pack. Our growth initiatives, new products, channel development, we believe will continue to bear fruit and are going to continue to look to the Americas to lead that growth.

As I reflect over to Europe, we see recovery in Europe, but the Northern European markets continue to perform better and we improved our position in 2015 with the acquisitions AXA, SimonsVoss. So more work to be done there.

Some pretty fundamental things going on in Europe that'll help us in the future. Number one, we're profitable. Number two, developing better capabilities around specific segments of the business matched with specification capabilities. It'll help us, but it's all not going to come in a year. It's continuing on the plan that we have with investments and people and products and acquisitions that will get us where we want to be long term in Europe.

Conor Sweeney - Longbow Research LLC

Okay. And then also as an add-on, can you talk about maybe in the residential space, the competitive conditions you're seeing in the big box aisle and to the extent that's impacting your residential margins here?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

It's no surprise among all the big box, they see the deflation of commodities and they're going after it, so the competitive's there. There's still a lot of opening price point on the new construction side. Again, we have pushed style and design and electronics, and that's helping us to expand margins. We tend to perform stronger on the replacement side of the house in residential construction, and we think that will continue to be good for us, especially with Schlage's sense like touch. Those would be my thoughts.

Conor Sweeney - Longbow Research LLC

Thanks, guys.

Operator

Our next question is from Robert Barry of Susquehanna. Please go ahead.

Robert Barry - Susquehanna Financial Group LLLP

Hey, guys. Good morning.

David D. Petratis - Chairman, President & Chief Executive Officer

Good morning.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Hey, Robert.

Robert Barry - Susquehanna Financial Group LLLP

So just a bucket in the guide for operational improvements is pretty big bucket. I was wondering if you could maybe parse out a little more of what's happening in there in particular around the assumptions for price and price cost.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. So what I mentioned earlier, pretty good leverage on the incremental volume would be reflected there. Pricing, call it, and it varies by region, but in aggregate, 50 basis points to 75 basis points improvement and that would be reflective in our organic growth assumptions. We've got some improvement baked in relative to the deflationary situation on commodities. I mean, those would be the three primary drivers of why you're seeing high leverage on the incremental volume. And then of course, the continuous improvement in the European margins is also helping that as well.

Robert Barry - Susquehanna Financial Group LLLP

I mean, is that deflationary piece relative to price kind of a significant component? Because I think just looking at the headlines on the commodities, there's been pretty substantial declines.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. So I don't know how you define significant. It's certainly much higher than what we realized in 2015. Keep in mind, we talked about this I think on the last call. But our commodity spend relative to our total purchases, call it around 10%. So it's not a big portion for us.

And secondly, we kind of have a supplier lock agreements that are kind of hedged over a period of 12 months. So we don't see the immediate benefit. When spot rates go down significantly, we don't see that effect immediately into our result. It kind of bleeds in over a period of 12 months, and so we've got a program there and we stick to the program. So we don't bet on the markets.

David D. Petratis - Chairman, President & Chief Executive Officer

I would also say with 10% pure commodity, steel breadth that type have been, we've got to go and work with suppliers to wring out that value. Again, if something that we have maybe didn't stress, but when we spun out two years ago, we didn't spin out with a rich procurement capability. We've built it, and it's going to give us some opportunities in this deflationary environment.

Robert Barry - Susquehanna Financial Group LLLP

Got you. Maybe just shifting to Asia for a second. Could you just kind of level set us what the core growth was for the year on the businesses that are remaining in the portfolio?

David D. Petratis - Chairman, President & Chief Executive Officer

Probably, let's see here, I think it's around 10%.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

I would say 12%. I think our core hardware business grew 12%.

Robert Barry - Susquehanna Financial Group LLLP

So kind of similar to what you saw in the fourth quarter?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah.

Robert Barry - Susquehanna Financial Group LLLP

And that you see...

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

I will check it and get back with you, but I believe that's correct.

Robert Barry - Susquehanna Financial Group LLLP

Got you. And so the slowdown, the five-year to seven-year forecasting, is that something mostly China?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

China clearly is slowing but it's a $100 million business, especially in China, our opportunities are really to get our products out there and focus. We like the acquisitions, Brio, Milre. These are new offerings that help us to grow in these regions.

David D. Petratis - Chairman, President & Chief Executive Officer

Yeah. China, keep in mind, small business, niche market that we compete in. There's plenty of opportunity, I think, to take share from other folks.

Robert Barry - Susquehanna Financial Group LLLP

Got you. And maybe just finally on the cash flow, it looks like you're looking for a $60 million to $80 million increase in the available cash flow. What are the big components there? I assume some is tax. What's happening with working capital?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. Big components would be, we talked about CapEx being up roughly $10 million year-over-year. D&A (51:54) would be higher than that. Working capital would be up just given the growth in the business. We still expect to kind of maintain this 5% of revenue metric within that range, but working capital being a use of cash.

The other thing to keep in mind, we've historically targeted 100% of earnings. If you run the math, you wouldn't be seeing that for 2016. The primary purpose or reason for that is because in 2015, we recorded some restructuring costs associated with the CISA manufacturing relocation, and those cash expenditures haven't yet happened. That will occur in 2016, and so that's putting a drag on that ratio. But even with that, it's still pretty good cash flow conversion and we'll put it to use in the best way possible.

Robert Barry - Susquehanna Financial Group LLLP

Got you. So those are all drags. I mean, the working capital going up, the CapEx going up. So the increase is really just kind of the core of the EBITDA.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah. Earnings.

Robert Barry - Susquehanna Financial Group LLLP

Yeah.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah.

Robert Barry - Susquehanna Financial Group LLLP

Okay. Great. Thanks, guys.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Yeah.

David D. Petratis - Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question is a follow-up from Tim Wojs of Baird. Please go ahead.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Hey guys, just following up on the last point on cash flow. There is no change to the historical 100% conversion, right?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

No. No. Again, a little pressure on 2016, but we believe it's sustainable to maintain 100% for a lot of the factors we've talked about: CapEx being lower than DNA; cash tax being equal to or lower than the book provision; and offsetting kind of the working capital increase basis on the growth of the business. So I think we can kind of maintain that going forward. That's the target.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay. And then just two housekeeping. What's the FX headwind that's embedded in just total revenue this year, and then what's corporate expense look like?

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

So FX headwind to the basis of current rates today could be as high as 1% would kind of be the high point of that.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay.

Patrick S. Shannon - Chief Financial Officer & Senior Vice President

Our exposures are predominantly related to euro and Canadian dollar to U.S. dollar. And corporate expenditures, we ended the year in line kind of with our original guidance, and you would expect that because of some investments in the IT infrastructure, ERP programs, that's going to be up. We'll call it $60 million for the year, in that type of neighborhood.

Tim R. Wojs - Robert W. Baird & Co., Inc. (Broker)

Okay. Great. Thanks.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Tom Martineau for any closing remarks.

Tom Martineau - Director-Investor Relations

Yeah, we like to thank everybody for participating in today's call. Have a safe day, and please call or contact me for any further questions.

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