Allegion Public Limited Company Q2 2026 Earnings Call

Good day, everyone. My name is Stefan, and I'll be your conference operator today. At this time, I'd like to welcome you to the Allegion second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, and if you've joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I'd like to turn the call over to Josh Pokrzywinski, Vice President of Investor Relations.

Thank you, Stefan. Good morning, everyone. Thank you for joining us for Allegion's second quarter 2026 earnings call. With me today are John Stone, President and Chief Executive Officer, and Mike Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements.

Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to slide three, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone. Thanks for joining us. Second quarter results were driven by strong organic growth in the Americas, and we see continued momentum in non-residential indicators. Our specification activity has been robust for several quarters and includes the breadth of our core institutional markets, cyclical improvement in commercial verticals like office and multifamily, and strong growth in data center, which is still small compared to some of our legacy markets but will continue to gain relevance as that installed base grows and fuels aftermarket over time. I'm also pleased with the return to Americas margin expansion. In our International segment, we made progress on the ERP challenges experienced in the first quarter, consistent with our expectations. We saw strong sequential margin improvement and expect to build on that in the second half of the year.

However, demand is weaker in several of our European markets, including Germany, which is our largest market, and we have taken additional restructuring actions in response. With respect to our full year, we're raising our reported revenue outlook to 7.5%-8.5%, and our outlook for organic revenue growth to 3.5%-4.5% based on stronger expected demand in the Americas, partially offset by weaker international demand. We are raising our adjusted EPS outlook to $8.85-$9. I'll provide additional details on this later in the call. Please go to slide four. Let's take a look at capital allocation, starting with our organic investments and ongoing demand trend for electronics. Higher education offers a clear example of continued secular growth in electronics.

As demand for mobile technology increases on college campuses, these customers are moving from plastic cards and mechanical keys to contactless mobile credentials provided and managed by Allegion. This also drives large-scale hardware modernization. In a recent example from our team, two flagship university deployments turned into multimillion-dollar opportunities for our company, stemming from thousands of Allegion reader and lock upgrades paired with system-wide Allegion credential standardization. We also see off-campus housing and property managers adopting the same approach, extending secure, seamless access from the campuses where students learn into the communities where they live and connect. These upgrades deliver real benefits, simpler credential management and updates, lower installation costs, faster integration, and improved security and convenience for the end user.

As mobile credential adoption spreads across core institutional markets, our organic investments position Allegion to capture these hardware upgrade cycles, driving deeper customer loyalty and long-term electronics growth and shareholder value. Turning to M&A. We spent $70 million in acquisitions in the first quarter and did not complete any acquisitions in the second quarter. We continue to cultivate a pipeline of opportunities that complement our portfolio. Allegion paid $47 million in dividends, and we repurchased $120 million of Allegion shares in the second quarter. As we've said in the past, you can expect Allegion to be balanced, disciplined, and consistent with capital deployment oriented towards profitable growth and driving long-term returns for shareholders. At current share price levels, we do see attractive valuation in our shares and expect to remain active in the second half. However, consistent with past practice, our outlook does not include additional share repurchase.

Mike will now walk you through second quarter financial results.

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to slide number five. Revenue for the second quarter was approximately $1.2 billion, an increase of 12.7% compared to last year. Organic revenue increased 6.9% in the quarter, driven by strength in our Americas Segment. The enterprise organic revenue increase was driven by both price realization and volume. Q2 adjusted operating margin was 24.2%, up 50 basis points compared to last year. Price and productivity, net of inflation and investment, and inclusive of transactional FX, was favorable by $11.8 million and was a 30 basis point tailwind to margin rate. Volume leverage was also a tailwind to margin rate in the quarter. This favorability was partially offset by acquisitions, which were a 30 basis point headwind to margins.

I'll provide more details on revenue and margins within each of the regions. Adjusted earnings per share of $2.40 increased $0.36 or 17.6% versus the prior year. Operating income inclusive of acquisitions drove the majority of the year-over-year EPS growth, with a slight tailwind from tax and share count, partially offset by interest and other. Finally, year-to-date available cash flow was $260.8 million, down 5.3% from the prior year. I'll provide more details on cash flow in the balance sheet a little later in the presentation. Please go to slide number six. Our Americas Segment delivered revenue of $918.6 million, which was up 11.8% on a reported basis and up 8.9% on an organic basis. Our non-residential business increased high single digits organically, driven by price and volume growth. Demand for our non-res products remains healthy, and as John mentioned earlier, spec activity continues to be strong.

Our residential business also grew high single digits, driven by both price and volume. Resi growth in Q2 was particularly strong in electronics, which can fluctuate quarter-to-quarter. Electronics revenue for the segment was up low teens for the quarter as both res and non-res were strong. On a year-to-date basis, electronics grew high single digits, consistent with our long-term expectations. In addition, acquisitions contributed 2.9 points of growth in the quarter. Americas Segment adjusted operating income of $276.4 million increased 12.5% versus the prior year. Adjusted operating margins were up 20 basis points in the quarter. Price and productivity, net of inflation and investment, and inclusive of transactional FX, was favorable by $10.8 million and was a 10 basis point tailwind to margins. The transactional foreign currency headwind of $2 million related to the prior year benefit that we disclosed in Q2 last year.

Volume leverage was a tailwind to margin rates, and acquisitions were a 40 basis point headwind as expected. Please go to slide number seven. Our International Segment delivered revenue of $232.9 million, which was up 16.2% on a reported basis, but down 1.2% organically. The organic revenue decline was the result of weaker demand in some of our markets, including Germany, as John discussed earlier. Net acquisitions contributed 14.3% to segment revenue. Currency was also a tailwind, positively impacting reported revenue by 3.1%. International Segment adjusted operating income of $28.8 million increased 9.9% versus the prior year. Adjusted operating margin for the quarter decreased 70 basis points. Price and productivity, net of inflation and investment, was 120 basis point headwind to margin rate in the quarter. Volume deleverage was also a headwind to margins. These declines were partially offset by an 80 basis point tailwind from acquisitions.

Margins did increase 440 basis points sequentially as the company worked to improve production rates following the ERP disruptions experienced in Q1. Please go to slide eight, it will provide an overview of our cash flow and balance sheet. Year-to-date available cash flow was $260.8 million, down 5.3% versus the prior year. The cash flow decrease was primarily driven by timing of sales, which were stronger later in the quarter, resulting in higher receivable balances at quarter end. For 2026, we still anticipate our ACF conversion will be approximately 85%-95% of adjusted net income. Next, working capital as a percent of revenue increased in the second quarter due in part to acquired working capital as well as higher receivables just mentioned. Finally, our balance sheet remains healthy with net debt to adjusted EBITDA at 1.6 times. I will now hand the call back over to John.

Thanks, Mike. Please go to slide nine. Midway through the year, we are raising our organic revenue growth outlook to 3.5%-4.5% and adjusted earnings per share outlook to $8.85-$9. We are raising our reported revenue outlook to 7.5%-8.5% based on changes to the organic growth range. You can find more details on our outlook in the appendix. In the Americas, we are raising our organic assumption to the higher end of mid-single digits, reflecting pricing associated with increased inflation as well as a healthier demand environment, primarily in non-res. We announced pricing actions in the quarter to cover the higher inflation we were experiencing and will continue to monitor the tariff and input cost environment to cover additional inflationary pressures if needed. As we said in the first quarter, we expect Americas margin expansion in the second half.

Our outlook does not include potential IEEPA refunds due to uncertainty on future refund timing, as we prioritize communicating with our customers first. We would not expect any potential IEEPA refund to have a material impact on EPS. For international, we expect to catch up on production impacts from the ERP implementation during the remainder of the year. While we expect better revenue and margin performance in the second half, weak market demand in Europe, particularly Germany, supports reducing our full-year outlook to a low single-digit organic decline. We are also truing up inorganic assumptions around FX and a modest reduction to M&A contribution as those businesses faced weaker markets this year as well. In total, for 2026, we expect to deliver high single digit to low double digit EPS growth in line with our long-term earnings framework.

Consistent with prior practice, the outlook does not include the benefit of future capital deployment, as a result, the outlook assumes a share count of 85.9 million shares. Please go to slide 10. In summary, Allegion delivered double-digit revenue growth, high teens adjusted earnings per share growth, returned capitals to shareholders. We see momentum building in our largest market, which gives us confidence in our organic growth potential over the next several years. The Allegion team expects to continue delivering on our commitments and driving value for shareholders. With that, we will take your questions.

We will now begin the Q&A session. For today's session, we'll be utilizing the raise hand feature. If you would like to ask a question, simply click on the raise hand button at the bottom of your screen. Once you've been called upon, please unmute yourself and begin to ask your question. You'll be able to ask one question and one follow-up question. Thank you. We'll pause for a moment to allow the queue to form. Our first question will come from Tim Weiss from Robert W. Baird & Co.. Please unmute your line and go ahead.

Hey, guys. Hey, Tim. Good morning.

Nice chat. Can you hear me?

Yep. We can. Just want to make sure I figure this whole tech thing out.

Okay, great. Yeah, thanks. I guess maybe just first question, I guess, particularly on the volumes in North America, it seems like the quarter itself was better from a volume perspective for you guys. I'm just kind of curious, what was better relative to your expectations, and what is your expectation for Americas volume in the second half of the year?

Yeah, Tim. Certainly, we had a real strong second quarter from a volume and total revenue. The quarter itself was as strong as I can remember in some time. There was strength across both res and non-res. Res demand has been really solid, and we feel we'll continue to have strong demand patterns moving forward when you think of 2026 and 2027. Residential, certainly stronger than we expected. High single digit at the higher end of that, obviously, with the close to 9% organic. That was a little stronger. That was driven by electronics. The one item I would note for Allegion here in the second quarter in the Americas, we did put a price increase out in the market at the end of May. That does result in customers ordering a little in advance of that, so that led to the stronger June.

You could've seen a little pull forward as you think of Q3 into Q2, but not much. Underlying demand is in the high singles when you think about the second quarter, maybe just not as high as 9 for the segment. Overall, really good demand, and as you think moving forward, non-res feel real good. In the case of residential, encouraged by the quarter we just had. I would say the outlook doesn't assume that level of performance moving forward. I think we're a little prudent to not take one quarter and then extrapolate that as a trend moving forward. I think there's more modest assumptions in residential in the outlook, although feel good that great to see our residential business growing as strongly as it did in the second quarter.

Okay. That's helpful. I guess maybe just stepping back, is there any way to put numbers or any sort of color or trend around what you're seeing from a spec quoting activity and how that's kind of tracked the past three to four quarters? I'm just trying to get a better kind of visual or understanding of how that, specifically that non-res spec activity has changed over the last three to four quarters, and what that might mean for volumes as we think about 2027 here. Thanks. Yeah. Tim, this is John.

It's a good question. I think certainly you picked up on the commentary from Q1 where we said spec activity was strong to even very strong. That strength, that momentum has continued through second quarter. It's as strong as I've seen since I joined the company. We're very encouraged by it. Certainly we feel it supports our outlook for the current year. With specs generally indicating or being a good indication of project work and revenue in the next 12 to 18 months, as we said, we feel that this lays a good foundation for organic growth in non-res for the next couple of years. We don't release specific numbers around spec. It's not prudent to do that because the line of sight to revenue is always a little lumpy.

Better just to let you know, like we said in the prepared remarks, we see broad-based strength across the core institutional verticals. We do see cyclical recovery in commercial verticals. AIA consensus came out this week that indicates some acceleration in the commercial space into 2027. There's more signal than noise at this point for what feels like improving non-res demand.

Appreciate the color. Thanks, guys. Good luck. Thanks, Tim. Thank you.

Our next question will come from Alexander Virgo with Evercore ISI. Please unmute your line and go ahead.

Yeah, thanks very much. Good morning. Hopefully you can hear me.

Yeah, morning. Morning. Thank you.

I wondered if you could talk a little bit about Europe and the evolution of demand there. I think one of your main competitors last week actually reported accelerating growth in Europe, albeit low, slow. I just wondered if you could give us a little bit of comment there around some of the drivers of the difference in performance and perhaps a bit of color around that deceleration or deterioration that you called out, especially in Germany. Thank you. Very fair question, and something we've been watching pretty closely.

I think when you look at our exposure in Europe, primarily Southern Europe, and overweighted in Germany. If you look at Germany GDP growth forecasts, sequentially been taking that down with every update in the last six or nine months, and we're feeling that. I think confident in the businesses there. They're good businesses. Our electronics businesses in Europe are very strong, great margins, been good growth. The macro backdrop in Germany has just been worsening, so that does have an outsized impact on us. In our mechanical businesses, largely exposed to Southern Europe, countries like Italy and Spain have been hanging in there, consistent with our expectations. It's not great, like you say. It's not huge, but hanging in with expectations.

It's just been the sequential decline in demand in Germany that's had a bit of an outsized impact on us.

That's really helpful. Thank you. Just as a kind of extension of that, I guess, the pricing side of things and the pricing that you've obviously been able to push through in the Americas is encouraging to see. I'm guessing that the weakness in the broader market in international makes pricing a little bit more difficult. I just wondered if you could just maybe talk a little bit about the second half and how we might think about that. Thank you. Certainly. If you think about our business, our pricing ability in North America, particularly non-residential, is our strongest across the company.

I would expect, though, to see positive pricing. As we talked about in the prepared remarks, we're also really focused on driving cost actions. As you think about the margin performance for the international business, you should see expansion in the second half of margins, and that would be a combination of pricing, as well as restructuring and cost activity to drive better margin performance.

Brilliant. Thank you very much.

Thank you. Our next question will come from Rafe Jadrosich with Bank of America. Please unmute your line and ask your question.

Hi. Good morning. Thanks for taking my questions.

Good morning. Morning. Just to start, can you just talk a little bit about obviously the acceleration on Americas residential?

How do you think about kind of quantifying the pre-buy relative to the sell-through rate there? How do we think about potentially the cadence as we go through the back half of the year?

Yeah, if you look at our performance in the second quarter for res, really strong electronics, that's driven by consumers in retail channel, point of sale was good. Inventory levels at retailers are at normal levels, right? This is not a big stocking order. Underlying demand was strong in the quarter. In the first question, I try to address this. This is the one quarter where we saw this super pleased. I think the activity was stronger in the quarter, but the outlook doesn't assume that just yet, right? We want to see a few more quarters of positivity. Just be cognizant, as you think about the prior year comp, Q3 last year was particularly strong. As you think about resi as we progress, Q3 last year was strong. That's a tougher comp. Okay.

That's very helpful. Then, in terms of the input cost environment, can you just talk about how that's evolved maybe over the last three months or so? Obviously, there's a lot of puts and takes with 2-3-2 and steel prices. I think last time you were talking about maybe a 30-basis point margin rate headwind, but dollar neutral, 1% of revenue in terms of the input cost pressure. Is that still the case or has that shifted at all?

I would say as we think about our business, tariff and inflation, right? Tariff is a form of inflation. What we're going to do is we're going to manage those inputs. We're going to drive pricing and productivity such that we're going to cover the inflation in the investments. What you saw in the second quarter is we're back to expanding margins and covering, obviously, the cost basis. Q1, a little pressure in the Americas. Q2, back to expansionary margins from PPI. I do expect for the full year we will be neutral to slightly positive on PPI in the Americas. That would be obviously expansionary in the back half. Finally, as you think about the quarters, just take a look at the prior year comps as well.

I mentioned earlier about Q3. In general, think of it as all the costs that we know about are in the outlook as inflation. We've taken the necessary pricing actions to ensure that we can cover it.

Great. Thank you. Thank you.

Our next question will come from Jeffrey Sprague with VRP. Please unmute your line and ask your question.

Hey, good morning, everyone. Jeff.

Hey, John. I just wondered if you could shed a little more light on sort of the nature and scope of the restructuring that you're doing in Europe, and is everything you plan to do in flight there, and maybe some color on the savings or expected savings on the other side of the actions?

Yeah, Jeff, I'll start and ask Mike to chime in a little bit, too. With regards to the restructurings and the cost actions we took, a couple of different flavors there. Some of it was capturing acquisition cost synergies from acquisitions we made a year ago. Some of it, though, admittedly, was just in response to softer demand in environments that have persisted for a little bit, and just reducing the overall cost structure in a couple of those segments. In terms of how to think about it from a more quantified perspective, let me ask Mike just to add in a couple of comments.

Yeah. Jeff, if you think about the benefit, think of it as $10 million annually of cost benefit. We'll get the full run rate in Q4. The actions, though, have been addressed. They're already completed, and you're going to have a partial quarter in Q3. Q4 is the full quarter, and then as you think of the first half of next year, you're going to get the tailwind from the carryover. Just from a full year amount, think of it as $10 million annually of benefit.

Great. Thanks for that. Just back to resi one more time, or at least only one more time from me. Was there anything going on with, I don't know, new product launches or anything that caused the stimulation of demand? You said there was no unusual inventory build, and point of sales seem good. Just again, curious, it seems like a surprisingly strong number.

Yeah, Jeff, I think consistent with the prepared remarks and Mike's answer earlier, it was stronger than we expected in the quarter. I do think it was driven by electronics. The new product launch was a year ago. That was Q3 2025, Mike mentioned that's what's going to be a strong or a tough comp as you look into 2nd half of this year. I think we're running our playbook, we're running our strategy, and it's working. We got great electronic products out there. Our resi business is 70% weighted to aftermarket and about 30% on new build. New build is still weak, there's no denying that. You can see what the home builders are reporting and their commentary out there. The point of sale and retail, like Mike said, has been pretty strong, and strong because of electronics.

Okay, got it. Thank you very much.

Thank you. Our next question will come from Joe Ritchie with Goldman Sachs. Please unmute yourself and ask your question. Joe, your line is unmuted. Please go ahead and ask your question. Okay, in the meantime, we'll move on to Tomo Sano from J.P. Morgan. Please unmute your line and go ahead.

Hi. Good morning, everyone. Hi, Tomo.

Thank you for taking my questions. I would like to double-click on America's non-residential highest single-digit growth in second quarters. Could you give us more color on the by verticals, let's say universities, office, multi-family? John, you talk a little bit about the data centers. How should we look at the second half outlook for those drivers as well? Thank you. Yeah. Tomo, really good question, and non-res certainly largest part of Allegion's business, and demand has been improving.

The momentum is good. The forward-looking signals around spec activity and the AIA consensus is favorable, so we feel good about that. In the slides, in the prepared remarks, you saw a bit of the breakdown between pricing and volume growth. I would say consistent with what we said on the spec activity, the project work, our customers' backlogs are very much broad based, and you do see some cyclical recovery in commercial verticals like multi-family and office that have been depressed for the last few years. They're improving. Our institutional verticals, healthcare has been strong, education hanging in there. We highlighted some of the work going on within higher ed, just as a few pinpoint examples for you.

Broad-based is the way we would talk about the acceleration in non-res demand. Data centers, obviously a very rapid growing space. It's small. It's probably approaching 5% of our non-res business at this point, and still growing very rapidly. That's future installed base that will generate aftermarket sales in the coming years. Very excited about that, too.

Thank you, John. If I may follow up on data centers. As these clients emerge as new areas of technology-driven demand, how does Allegion differentiate yourself for the customers and versus competitors, please?

Yeah. That's a great question, and I'd say really, really proud of our America's field sales and marketing team, our spec writers. Our end user demand generation playbook is exactly what we're doing here, and I do feel we're the best at it. Getting in early in the design phase, creating end user standards that meet code, meet specification, have all the SKUs available that meet the specifics around data centers. A really important acquisition we made two years ago now, Krieger Specialty Products, is bringing very high technology doors, in fact, that are a new space for us, but are really helping in the data center vertical. Create the specification, create the end user standard, meet the delivery expectations with all of these SKUs in very short lead times as the projects go.

Now, as these hyperscalers build new campuses, we expect to be there.

Thank you. Appreciate it. Thank you.

Thank you. At this time, I see no callers in the queue, so I'll hand back to John Stone for closing remarks.

Well, thank you all for the engagement and the great Q&A, and we look forward to connecting with you on our Q3 earnings call in October.