Allegion Stock

Good day, everyone. My name is Shell and I will be your conference operator today. At this time, I would like to welcome you to the Allegion Third Quarter Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Joshua Pokrzywinski, Vice President, Investor Relations.

Thank you, Shell. Good morning, everyone. Thank you for joining us for Allegion's Third 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 2. 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 3, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone, and thanks for joining us. Third quarter results were driven by strong organic growth in the Americas, led by double-digit organic growth in our Non-Residential business. The team's performance reinforces what I hope you've come to believe about Allegion. We're a leader in security and access with premium brands and the highest margins in a great industry.

Our resilient business model has the proven ability to navigate inflation and withstand cyclical forces based on the value we provide to our customers and the large installed base we serve. This model continues to evolve with technology as security and access become electrified and digitized, a trend we expect to benefit market leaders like Allegion for many years to come. All of this allows us to deliver double-digit EPS growth through the cycle as we outlined at our Investor Day in May of last year.

Digging into the quarter, our Americas business is performing very well. With continued momentum in spec writing trends through our demand generation engine, we expect Non-Residential strength to continue into 2027, which we'll comment on later in the presentation. Residential has performed well in 2026 despite consumer headwinds from inflation and interest rates. However, these dynamics also make it difficult to forecast a strong recovery in the medium term. I'm also pleased with another quarter of margin expansion in the Americas. We have managed inflation well thus far in 2026, primarily through agile pricing actions that continued in the third quarter.

In International, we have resolved the ERP challenge we highlighted in Q1 and that business is back to normal operations and lead times. However, as discussed last quarter, macro conditions are difficult across Western Europe, particularly in our largest market, Germany, and we continue to be focused on execution and cost management in our International segment. With respect to our full year, we're raising our reported revenue outlook to 9.5% to 10.5%, and our outlook for organic revenue growth to 5% to 6% based on stronger demand and favorable price in the Americas. We are raising our adjusted earnings per share outlook to $9.05 to $9.10. I'll provide additional details on this later in the call.

Please go to Slide 4, and let's take a look at capital allocation, starting with our organic investments. In September, we launched the Allegion Optimize app in the Americas. Optimize gives installers, end users and our channel partners, one tool to commission, configure, manage and troubleshoot our connected products throughout their life cycle. We're rolling Optimize out initially across electronic door controls and locks, and we expect this app will ultimately manage our full nonresidential connected portfolio globally. Offering a single app to cover management of multiple product categories is a first in our industry. Customers will benefit from faster, easier experiences with our intuitive interface that eliminates the friction of switching between multiple stand-alone apps for connected devices.

Turning to M&A. We completed the acquisition of the Overly Door Company in early October for approximately $90 million. Overly manufactures specialty doors for acoustics, blast, bullet resistance and vault security. Overly's high security solutions serve commercial and institutional customers with strength across U.S. government, education and health care markets.

Similar to our 2024 acquisition of Krieger Specialty Products, this complements our hollow metal portfolio with additional specialty products and regional capability. We expect Overly to add approximately 1 point to Americas revenues on an annualized basis at margins consistent with the overall enterprise.

Recently, we also made a $40 million follow-on investment in Ambient.ai through Allegion Ventures. Ambient continues to prove the transformative potential of purpose-built AI and physical security, helping customers shift their security operations from reactive to proactive. This investment underscores our confidence in their technology, their leadership and our increased collaboration. Allegion paid $46 million in dividends and repurchased $120 million of shares in the quarter. We see attractive valuation in Allegion shares and expect to remain active in share repurchase. As we've said in the past, you can expect Allegion to be balanced, disciplined and consistent with capital deployment oriented to profitable growth and driving long-term returns for shareholders.

Mike will now walk you through the third quarter financial results.

Thanks, John, and good morning, everyone. Thanks for joining today's call.

Please go to Slide #5. Revenue for the third quarter was approximately $1.2 billion, an increase of 9.6% compared to last year. Organic revenue increased 7.2% in the quarter driven by strength in our Americas segment. The enterprise organic revenue increase was driven by both price realization and volume growth.

Q3 adjusted operating margin was 24.7%, up 60 basis points compared to last year. Price and productivity net of inflation and investment was favorable by $15.6 million and was a 50 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 20 basis point headwind to margins. I'll provide more details on revenue and margins within each of the regions.

Adjusted earnings per share of $2.60 increased $0.30 or 13% versus the prior year. Operating income, inclusive of acquisitions, drove the majority of the year-over-year EPS growth. Additionally, benefits from interest and other and share count were offset by a headwind from tax. Please note, third quarter 2026 adjusted operating income and adjusted earnings per share exclude the favorable impact from IEEPA tariff refunds. You can find additional information regarding this in our press release and 10-Q, which were filed this morning. Finally, year-to-date available cash flow was $539.4 million, up 11.2% from the prior year. I'll provide more details on cash flow and the balance sheet, a little later in the presentation.

Please go to Slide #6. Our Americas segment delivered revenue of $942.4 million, which was up 11.7% on a reported basis and up 9.1% on an organic basis. Our Non-Residential business increased low double 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 grew mid-single digits in the quarter, driven by price, consistent with year-to-date trends. Electronics revenue for the segment was up low double digits for the quarter and continues to be a long-term growth driver for the business. In addition, acquisitions contributed 2.6% of growth in the quarter.

Americas adjusted operating income of $283.8 million increased 12.6% versus the prior year. Adjusted operating margins were up 20 basis points in the quarter. Price and productivity, net of inflation and investment, was favorable by $13.5 million and was a 20 basis point tailwind to margins. Volume leverage was also a tailwind to margin rates. However, acquisitions were a 40 basis point headwind as we expected.

Please go to Slide #7. Our International segment delivered revenue of $230.2 million, which was up 1.8% on a reported basis and down slightly organically as favorable pricing was offset by lower volumes. The volume decline was the result of continued weakness in Western Europe, as John discussed earlier. Acquisitions contributed 2.5% to segment revenue and currency was a headwind in the quarter.

International adjusted operating income of $31.9 million decreased 1.2% versus the prior year. Adjusted operating margin for the quarter decreased 40 basis points. Price and productivity, net of inflation and investment, was a 30 basis point tailwind to margin rate in the quarter. Net acquisitions drove a benefit to margin rates of 20 basis points. These benefits were more than offset by headwinds related to lower volume and unfavorable mix.

Please go to Slide 8, and I'll provide an overview of our cash flow and balance sheet. Year-to-date available cash flow was $539.4 million, an increase of 11.2% versus the prior year. The cash flow increase was primarily driven by higher earnings. For 2026, we still anticipate our ACF conversion will be in the range of 85% to 95% of adjusted net income.

Next, working capital as a percent of revenue was 7.9%, consistent with the prior year. Finally, our balance sheet remains healthy with a net debt to adjusted EBITDA at 1.5x.

I will now hand the call back over to John.

Thanks, Mike. Please go to Slide 9. With one quarter remaining in the year, we're raising our organic revenue growth outlook to 5% to 6% and adjusted EPS outlook to $9.05 to $9.10. We are raising our reported revenue outlook to 9.5% to 10.5% based on changes to the organic growth range and acquisitions. You can find more details on our outlook in the appendix.

In the Americas, we're raising our organic growth assumption to 7% to 8%, consistent with year-to-date organic growth in the segment. This is a result of a healthier non-res demand environment and higher price realization. For International, our organic growth outlook remains unchanged at down low single digits as market demand in Europe, particularly Germany, remains weak. For full year 2026, we expect to deliver low double-digit EPS growth, consistent with our long-term earnings framework. As in prior periods, this outlook excludes the benefit of future capital deployment and therefore, assumes a share count of 85.6 million.

Please go to Slide 10. We'll provide our full 2027 outlook in February. But in the meantime, consistent with our usual practice, we'll share some high-level perspectives on the year ahead. We expect demand in our major end markets to be similar to current year with growth led by strength in the Americas. Spec writing trends support optimism on nonresidential markets over the next several years, particularly in the context of our late cycle business model.

Residential markets continue to face headwinds from inflation and high interest rates but multiple years of low activity supports a stable demand outlook in 2027 with growth driven primarily by price. International markets are expected to remain soft, driven by weak economic activity and persistent inflation. We expect to remain in an inflationary environment and will continue to drive pricing to protect operating profit dollars.

Operating leverage in the Americas segment should be consistent with our long-term framework for incremental margins. Internationally, we remain focused on self-help and have some benefit of carryover cost savings from 2026 actions. We plan to stay active in deploying capital pairing bolt-on acquisitions with share repurchase.

Please go to Slide 11. In summary, Allegion delivered high single-digit organic revenue growth this quarter, fueled by the strength of our Americas Non-Residential business. For the full year 2026, we're raising our reported revenue outlook and our adjusted EPS outlook. We remain agile and focused on strong execution. The Allegion team expects to continue delivering on our commitments and driving value for shareholders.

With that, we'll take your questions.

[Operator Instructions]

Our first question comes from Joseph O'Dea from Vertical Research.

John, can you just talk a little bit more and unpack some of the strength that you're seeing in Americas Non-Res, the organic this quarter kind of equal parts volume, enterprise and so in particular, volume that's in that mid-single-digit type of territory. If you could talk a little bit about the end market strength there, where the spec writing activity is seeing signs of strength? And any degree to which you think you're winning in the market and some of this is share related?

Yes, Joe, I appreciate the question. And certainly, as you know, Americas Non-Res is the largest business segment of the company and really our most important and up high single digits this year, a combination of volume and price. Our spec activity continues to be strong, as we've said the past few quarters, and that strength continues to be broad-based. Certainly, growth in data center forms a good base for 2027 volume growth as we look forward, but we do expect other verticals to contribute there as well.

And as we mentioned in the prepared remarks, we see an inflationary environment continuing, and you should expect price to remain elevated as a result. We do feel that I think trade labor -- skilled trade labor can be a bit of a governor on year-on-year market growth. But again, as we said in kind of looking forward into 2027, that kind of high single-digit environment with a combination of price and volume, what we feel is quite well supported by our spec activity.

With respect to where are we winning, I think our team wins every time we step on the field. We've got great brands. We've got a great field marketing and sales force. We've got great distribution partners. And I think, tough to say with share, as we've answered many times in the past, we sell through distribution. So pinning down market share numbers in this space is kind of hard.

I appreciate that color. And then just given some of the headlines earlier this month, I wanted to ask about your technology integration with smart home providers. If you could give a little bit of color on developments around the technology integration, how broadly penetrated you are with that across different providers. And your perception of any risks attached to new entrants into the hardware space?

It's a timely question. And yes, we saw the news media headlines as well as you did. So I would say, first off, Allegion through our Schlage brand has been an innovation leader there and electronic and connected locking in the residential space. For the past 7 years, Schlage is America's most trusted lock brand. We've got a great brand reputation, great product portfolio. We're integrated with all the major smart home devices and providers. We're integrated with Airbnb as we've talked about on previous calls as well.

But if you wind the clock back, it'd be, maybe 8 or 9 years ago, we were the first WiFi connected deadbolt that integrated with Apple HomeKit. That innovation has not slowed down. And I'd say with regards to new entrants into the space, that happens from time to time. I would say the product category that these companies have indicated, they might be introducing a lock into, represents a low single-digit percentage of Americas revenue and an even smaller portion of Americas operating profit just to size it for you. But we feel confident in the Schlage brand and Schlage portfolio. And I think our performance this year and a rather soft demand environment speaks for itself.

Our next question comes from Rafe Jadrosich from Bank of America.

Just starting on the pricing in Americas, on a year-over-year basis, it did not sort of maintain a similar level in 3Q versus 2Q, but you are lapping a lot tougher of a comp. Was there incremental pricing that was announced in 3Q? And then how do we think about that going forward?

Yes. Thanks for the question. If you remember, last year, our pricing started to step up in the back half of 2025 as we dealt with the new tariff impacts that were implemented by the administration. So the comp got tougher starting really in Q3. So you saw that this year, we have a tougher comp. The thing to remember about our business is we've been facing consistent inflationary pressure. So the days of just setting pricing once across the portfolio in early February, has kind of changed over the last couple of years. So we take pricing as needed to combat inflationary pressures. So we put in multiple price increases across select parts of our business.

I think the key thing to think about our business is we're always going to drive that pricing and productivity to try to cover that inflation and investment. And we -- as you've seen over the last couple of years, we've been able to do that driving positive dollars. And then as you think of the current year, think of it as that PPII neutral on a margin rate for the full year and some positive dollars. So there's going to be pricing actions, but it's not going to be the one time in the beginning of the year that you might have known Allegion to do in, let's say, 2014 through 2019. It's been a more consistent adaptable environment to the changing inflationary pressures we face.

Okay. That's helpful. So it does sound like there's been some incremental pricing which is why you're not slowing kind of on the 2-year. Can you just talk about your visibility on the level of inflation you're expecting into next year, maybe compared to this year? What are you expecting in terms of input costs? And then like how much price you would need to offset that?

I would say, honestly, the details of the magnitude of exact pricing and inflation, we'll give that when we give the outlook in February when we announce earnings. In general, though, think of it as we're planning for a high inflationary environment. And so we're going to make sure that we take the necessary actions to price our products to combat that environment that we're in today and we expect to continue into next year.

The magnitude of it, we'll come back to you in Feb. But just remember, we're focused on driving that pricing and productivity to offset that inflation and investments and expect us to do that into next year as well. But the details of the actual percentages, let us finish out the year and get back to you in February.

Our next question comes from Alexander Virgo from Evercore ISI.

I wondered if you could just talk a little bit to the sort of implied slowdown in the guide in Q4. Just sort of thinking about, is that something that's just a reflection of prudence given the comps get easier? And then just to clarify on the pricing and the carryover into the first half, I suppose, of next year. Any chance you can give us a sense of how much that might end up being?

Alex, this is John. I would say a couple of things. Largest business segment being our Americas Non-Residential business, and that's a construction-facing business. Project size has been growing, and that's going to put a little lumpiness when you look quarter-to-quarter. And what we think is the better thing to look at is just the year-to-date or the full year high single-digit organic growth that, that business is driving.

Taking one quarter and extrapolating that forward is not the best idea. There's going to be some lumpiness because of project size. There's going to be some lumpiness because we're construction facing. And in the Americas, the middle 2 quarters are always going to have a little bit more construction activity than the 2 tails.

I'm going to ask Mike to step in and speak to the pricing part of the question.

Yes, there will be carryover pricing into next year. I think it's more important for you as you think about next year, carryover wouldn't be sufficient, obviously, as you think about the back half of the year. We do anticipate putting that pricing increase in early February next year. We'll announce that, obviously, to channel partners first. But as you think about pricing next year, think of an elevated inflationary environment and expect Allegion to put that pricing announcement in early February, like we customarily do to drive that pricing also for the back half of the year.

Our next question comes from Tim Wojs from Baird.

Maybe just on the pricing cadence, Mike. I mean, just kind of transitioning, it sounds like a little bit to maybe more, I'd say, kind of selective pricing as well as kind of broad-based pricing. Does that change your ability to kind of line up price with inflation versus historically? I think there's been a little bit of a lag? Or does it really kind of change that timing dynamic at all?

Yes. Tim, if you think about our business over the last, I'd say, 1.5 years, we've gotten better at reacting to inflationary pressures. So you don't see that significant lag that you might have seen in 2021. Some of the challenges we encountered in '21, we've learned from. And as you've seen over the last 1.5 years, we are quicker. I don't expect to see periods of time where there's big headwinds because we're late in taking those pricing actions.

Look for us to take pricing to combat inflationary pressures and driving that PPII. We talk about neutral on a dollar basis. If you think about quarters, then over the course of the year, it tends to be neutral on a rate as you saw this year, but we're committing to at least driving that neutrality on a dollar basis.

Positive.

Positive on a dollar basis, neutral on a margin rate basis. Thank you, Josh.

On a rate basis, yes. Okay. And then I guess just a bigger picture question. Just -- John, could you kind of talk about the AI impact on your spec writing business. What you guys are working on implementing and if that's an opportunity for productivity, but also for, I guess, greater volume if you can be more efficient with the spec writing network?

Yes, it's a good question, Tim. And I think we're making some really well thought out and exciting investments internally on leverage of AI tools, and that's across every function in the business. And when you think about what does an AI model of any flavor, LLM or otherwise, need to really do a good job for you, it needs a very large and robust data set.

And when we're specifying 2.5 million openings in any given year, we've got an exceptionally large data set to train models on and use those models for efficiency, just like you're saying. That's happening right now. It's happening in conjunction with channel partners. So our responsiveness in terms of initial spec or change orders is definitely increasing for the benefit of the customer. So I think we're in the pole position really to make the best use of AI in a spec writing environment from an accuracy and a speed standpoint. And it's really built upon this enormous data set that we've built up over time, and we'll continue to build.

Our next question comes from Aanvi Patodia from Goldman Sachs.

Yes, congrats on the quarter and good growth there on the Non-Res side. I did want to touch upon the Residential growth. We saw mid-single-digit growth organically, but I believe it's largely attributed to price realization with the ABI coming in yesterday and the September read was weaker than expected, August and July was also below the 50% number. So I just wanted to understand what you've seen from a volume standpoint on the Resi side? What has happened to like underlying demand there? And when would you expect to return to positive volume growth, absent of pricing?

Yes, I appreciate the question. And I'd say consistent with our prepared remarks, you're right in that growth in our Residential business recently has been driven primarily by price. The end market volume has been kind of flattish. Price realization has driven that. And as we said, looking forward, it's tough given high inflation and high interest rates to expect any kind of strong recovery in the residential sector, but we also don't see it getting a lot worse. And so I think that informs our look into 2027 that growth in the residential space will primarily be driven by price.

Okay. Got it. That makes sense. And I guess switching gears more holistically, I wanted to touch upon your data center opportunity. Where does Allegion participate today? Is it more like the door hardware, perimeter security? Is it other solutions? And how large is this opportunity for you? What portion of your Non-Res growth is more data center linked?

Yes, it's a good question. And I'd say we are active in the data center space. I think our specification writers, our end-user consultants have done a great job in terms of getting Allegion a leading position in terms of doors and door hardware with the large data center builders.

As we mentioned in second quarter, data centers were approaching 5% of our Non-Res business. I'd say it's there now, growing rapidly and has been a source of volume growth this year, and we look for that to continue. I would -- just keep in mind, whatever you believe about data center construction and build-out, doors and door hardware are some of the last things to go into the building on the construction project. We are late cycle on each project. So we do feel good about the trends there and about our market position with respect to our core products.

[Operator Instructions]

Our next question is from David MacGregor from Longbow Research.

Congratulations on a great quarter, John. I wanted to -- and I appreciate the early sort of preliminary thoughts on 2027. I guess I wanted to ask about your acquisition program. 2025 was obviously a more M&A active year than 2026. And I'm just wondering how much of that slower pace in '26 related to the need to make progress on integrating the 25 transactions versus maybe valuations or funnel development issues. But how are you thinking about 2027? Could it be a more active year? And what would need to change to make it a more active year?

That's a really good question, David. And I would say, first off, if you look at 2025, just from a deal count perspective, we would say that was, let's just say, very high. And M&A of any sort is rather episodic in its timing. It's not something that I think anyone can do on this perfectly linear basis. So I don't think '25 as a deal count is any kind of benchmark or goal or any of that.

What we're after on acquisitions, is what we talked about at our 2025 Investor Day. Looking to complement and continue to build out our mechanical portfolio like we just did with the acquisition of Overly Door Company. Very excited about that one. Add electronics, add electromechanical acquisitions and complementary software for those faster growth verticals in our segment. And I think the point on the pace is really while we are oriented towards profitable growth, we do see acquisitions continuing to be a part of our growth story for the future. We're going to be very disciplined on what we buy strategically and what we buy from a valuation perspective.

So those acquisitions that come in, they're going to drive good value for our shareholders and not just growth for growth's sake. So I think that's going to throttle the pace of deal flow more so than anything else, just being disciplined around our strategy and around what we pay.

Just secondly, and for the cash flow model here, I'm just wondering how higher freight and logistics costs influence how you think about your inventory levels going forward?

Yes, David, obviously, if you think about cash conversion, we've thrown out that 85% to 95% cash conversion. I wouldn't expect to see any change to that percentage based on something like freight. That's a pretty big range for us. With inventory, we'll always be smart to make sure that we have the necessary parts to ship product.

So -- but if there's inflationary pressure, which there is, it will impact inventory on the balance sheet, right, because inventory costs more. The key thing for us, and as I think about it, are we driving the necessary pricing, which I talked about earlier in the call? So I would say if you think about the framework, 85% to 95% ACF conversion, I think that's a decent framework to think of us long term at. And then inventory levels, I think they won't move enough to where it impacts that framework we provided.

Our next question is from Brandon Knutson from Morgan Stanley.

I wanted to start out on electronics. So you've seen strong growth there after the year started mid-single digits, accelerating on a 2-year stack essentially as you go throughout the year. Are you seeing an acceleration in electronics adoption? And are there any actions that you're taking currently to drive that acceleration that we're seeing this year?

Yes. I think we're always striving for growth in electronics, and that comes from everything you can think of from demand generation engine with our specs, introducing new products. We have introduced a new family of connected locks in the commercial space. I'm very proud of that. Very excited about the launch. It's going well. So steady stream of new products driving organic growth, excellence in our demand generation engine and our end-user consulting.

And I'd say the way we continue to think about it is high single-digit growth driver for the business over the cycle. Quarter-to-quarter, is there some lumpiness here and there? Does the comp make things look a little lumpy from time to time? Always. But over the cycle, high single-digit growth driver for the business. And we see continued trends of both new adoption of electronics and conversion from mechanical to electronics and now even upgrades of old e-locks to new electronic locks. All those factors are coming into play, and I think we're well positioned to take advantage.

Great. And then on the Residential side, you highlighted that the growth there is primarily going to be driven by price. As you see continued sort of macro headwinds from higher interest rates [Technical Difficulty], is it getting harder to get price? Are you seeing any pushback from your customers on the pricing front? Any color there?

Yes. I think that's fair to always expect some pushback and some negotiation. That's how those things go. But inflation is real. Inflation is high. We are pushing price to cover for that, as Mike has said a couple of times on the call and in the Q&A, and we'll continue to do that. We just feel that given the current environment, we don't see reason to expect a strong recovery in the residential space in the medium term.

Our next question is from Julian Mitchell from JPMorgan.

Just wanted to start off with a question around the sort of end markets into next year. And when you look back historically at Allegion and the relationship of nonresidential orders and sales to changes in the interest rate environment, I suppose anything you could share with us on how recent rate moves have affected your commentary. So I think you talked about high single-digit organic growth again in Americas Non-Res into 2027. Are you assuming anything changes in terms of the composition of end markets driving that because of what's happened recently in rates? And when would you think rates would show up in terms of slowing any commercial new construction activity?

Yes. I appreciate the question, Julian, and I'd say a couple of things. One would be the growth in data centers. This is all new build. This is the next add to our large installed base. So that new build kind of has its own dynamics. And again, it's whatever you believe about that build-out and that continued strength we are participating, we're participating well, and we're late cycle in each of those projects. So I do feel good about our position there and the rather long tail that we would expect to see.

Elsewhere, as we've mentioned, past couple of quarters, and you can see it in the news as well, recent JLL reports have even said commercial office demand has 5 straight quarters of growth, kind of coming back from the dead after the pandemic and the work-from-home dynamics. You see that in major metro areas, New York and San Fran, really leading the way. So some tower work has come back that hasn't been there in a while. Multifamily is some places contracting, other places growing.

So I think when you look at Allegion, never forget that our portfolio, our sales force, our demand generation engine is broad-based. That's also where we feel justified in our optimism that our spec writing shows strength broad-based. So it's across all the institutional verticals and the commercial verticals have started to show some signs of life. And again, data centers just being its own dynamic right now that's very strong.

That's helpful. And then just on the margins and the aspects around that 50 bps tailwind from PPII that you've seen. Is that a good kind of placeholder, assuming no major changes in the cost inputs from here? Just wanted to check on that. And it looks like your guidance embeds a step-up in margin improvement year-on-year in Q4 from what we've seen in the last few quarters. Anything specific to call out there?

Yes, Julian, if you think about for this year, 2026, we would expect to see flat to slightly up margins for the full year. Obviously, that means Q4 has that step-up, as you just mentioned. Part of that is comp related. If you think about, especially in the Americas last year, that rate was a little lower. So we have some favorability.

As you think about next year, we expect to see margin expansion. The magnitude of that is similar to my comments earlier. When we get to February, we'll give an outlook. A couple of things we did put on the slide though, as you think about next year. Expect us to drive that PPII, right, to combat the inflationary pressure. And then in the Americas, that core incrementals that we highlighted at our Investor Day, think of next year within the parameters of that framework we laid out. So you have an idea.

As to the amount of margin expansion next year, we'll come back in February, and we'll give you that when we give you EPS. But at least we wanted to provide you some framework for you to think about next year as part of this earnings call.

At this time, I see no more callers in the queue. So I will hand the call back to John Stone for closing remarks.

Well, thank you all for joining the call, and thanks for a great Q&A. We look forward to connecting with you on our full year earnings call in February. Be safe, be healthy.

Thank you for joining the call. You may now disconnect.

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. [Operator Instructions] 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 2. 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 3, 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 nonresidential 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% to 8.5% and our outlook for organic revenue growth to 3.5% to 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 to $9.00. I'll provide additional details on this later in the call.

Please go to Slide 4. 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, 2 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. And 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 #5. 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. Pricing 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 and the balance sheet a little later in the presentation.

Please go to Slide #6. 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 nonresidential 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 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. Pricing 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 #7. 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 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 a 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 8, and I 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% to 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 1.6x.

I will now hand the call back over to John.

Thanks, Mike. Please go to Slide 9. Midway through the year, we are raising our organic revenue growth outlook to 3.5% to 4.5% and adjusted earnings per share outlook to $8.85 to $9.00. We're raising our reported revenue outlook to 7.5% to 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're 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 we'll 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 and 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. And 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're 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. And 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 and returned capital 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.

And with that, we'll take your questions.

[Operator Instructions] Our first question will come from Tim Wojs from Robert W. Baird & Company.

Can you hear me?

Yes, we can.

Okay. Great. So I guess maybe just first question, I guess, particularly on the volumes in North America, I mean, 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?

Yes, 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. Resi demand has been really solid, and we feel we'll continue to have strong demand patterns moving forward when you think of '26 and '27. 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.

I would -- 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 have seen a little pull forward as you think of Q3 into Q2, but not much. I mean underlying demand is in the high singles when you think about the second quarter, maybe just not as high as 9% for the segment. But 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 there's -- we're a little prudent to not take 1 quarter and then extrapolate that as a trend moving forward. So I think there's more modest assumptions in residential in the outlook, although I feel good that great to see our residential business growing as strongly as it did in the second quarter.

Okay. Okay. That's helpful. And then I guess maybe just stepping back, can you -- is there any way to put numbers or any sort of kind of color or trend around what you're seeing from like a spec quoting activity and how that's kind of tracked the past 3 to 4 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 3 to 4 quarters and what that might be -- what that might mean for volumes as we think about 2027 here?

Yes. Tim, this is John. It's a good question. And 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. And we're very encouraged by it. And I think certainly, we feel it supports our outlook for the current year. And with specs generally indicating or being a good indication of project work and revenue in the next 12 to 18 months, we -- 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. I think it's not prudent to do that because the line of sight to revenue is always a little lumpy. So 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 with -- that indicates some acceleration in the commercial space into 2027. So there's more signal than noise at this point for what feels like improving non-res demand.

Our next question will come from Alexander Virgo with ISI Evercore.

Hopefully, you can hear me.

Yes.

I wondered if you could talk a little bit about Europe and the evolution of demand there. I think your -- one of your main competitors last week actually reported accelerating growth in Europe, albeit low -- slow. So 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 the -- a bit of color around that deceleration or deterioration that you called out in -- especially in Germany.

Yes. 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 German -- Germany GDP growth forecast sequentially been taking that down with every update in the last 6 or 9 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 and good growth. The macro backdrop in Germany has just been worsening. And so that does have an outsized impact on us.

In our mechanical businesses, largely exposed to Southern Europe and 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.

Okay. That's very helpful. And 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. So I just wondered if you could just maybe talk a little bit about the second half and how we might think about that.

Yes. Certainly, if you think about our business, our pricing ability in North America, particularly nonresidential is our strongest across the company. I would expect, though, to see positive pricing. And as we talked about in the prepared remarks, we're also really focused on driving cost actions. So 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, but as well as restructuring and cost activity to drive better margin performance.

Our next question will come from Rafe Jadrosich with Bank of America.

Just to start, can you just talk a little bit about the -- obviously, the acceleration on Americas residential. Like how do you think about kind of quantifying the prebuy relative to the sell-through rate there? And just how do we think about potentially the cadence as we go through the back half of the year?

Yes. If you look at our performance in the second quarter for res, really strong electronics, and that's driven by consumers and retail channel and point of sale was good. So inventory levels at retailers are at normal levels, right? So this is not a big stocking order. Underlying demand was strong in the quarter. In the first question, I tried to address this. This is one quarter where we saw this, super pleased. I think the activity is getting -- 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. In addition, just be cognizant, as you think about the prior year comp, Q3 last year was particularly strong. So as you think about resi as we progress, Q3 last year was strong, that's a tougher comp.

Okay. That's very helpful. And then in terms of the input cost environment, can you just talk about how that's evolved maybe over the last 3 months or so? Obviously, there's a lot of puts and takes with 232 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. Like is that still the case? Or has that shifted at all?

Yes. I would say, as we think about our business, tariff and inflation, right, tariff is a form of inflation. And 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 PPII. I do expect for the full year, we will be neutral to slightly positive on PPII in the Americas. That would be obviously expansionary in the back half.

And then finally, as you think about the quarters, just take a look at the prior year comps as well. I mentioned earlier about Q3. But in general, think of it as all the costs that we know about are in the outlook as inflation, and we've taken the necessary pricing actions to ensure that we can cover it.

Our next question will come from Jeffrey Sprague with VRP.

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 that -- 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.

Yes. 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 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.

Yes. So 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 it's going to -- 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. But just from a full year amount, think of it as $10 million annually, a benefit.

Great. And then just back to resi, one more time or at least only one more time for 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. But like just again, curious, it seems like a surprisingly strong number.

Yes, 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. And Mike mentioned that's what drove what's going to be a strong or a tough comp as you look into second half of this year. But I think we're running our playbook. We're running our strategy, and it's working. We've 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, and there's no denying in that. You can see what the homebuilders are reporting and their commentary out there. But the point of sale and retail, like Mike said, has been pretty strong and strong because of electronics.

Our next question will come from Joseph Ritchie with Goldman Sachs. Okay. In the meantime, we'll move on to Tomo Sano from JPMorgan.

I would like to double-click on Americas nonresidential high single-digit growth in second quarter. Could you give us more color on the -- by verticals, let's say, universities, office, multifamily, John, you talked about a little bit about the data centers. How should we look at the second half outlook for those drivers as well?

Yes. Tomo, really good question. And non-res is certainly the 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 multifamily 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. But 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. And that's a future installed base that will generate aftermarket sales in the coming years. So very excited about that, too.

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

Yes. That's a great question. And I'd say really, really proud of our Americas 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. So 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 2 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. So create the specification, create the end user standard and then meet the delivery expectations with all of these SKUs in very short lead times as the projects go. And now as these hyperscalers build new campuses, we expect to be there.

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. Be safe, be healthy.

Good morning, everyone. We are excited to kick off day 1 of the Wells Fargo Industrials Conference and to start the day with CEO, John Stone, from Allegion. So John, thank you very much for being with us.

Thanks, Joe.

My name is Joe O'Dea. I lead the multis group here at Wells. Over the course of this, if you have a question, please just raise your hand. And so that way, we won't interrupt in the middle of it. We'll just get to you during the questions.

To kick things off, John. I think one of the things that I find really special about the business is the different elements of the model itself. And so you serve long-cycle demand patterns. You do that with a short-cycle book-and-ship, lots and lots of SKUs, expertise around the spec side. And so maybe just set the stage for us in terms of Allegion and talk about the business model a little bit.

Yes, absolutely. I appreciate it. And it's -- obviously, in my opinion, it's a very special company and got long-term, durable and very distinct competitive advantages. As you mentioned, we do manage millions of SKUs in the door and door hardware space. So everything that it takes to hang, seal, secure a door, and keep people safe in the building and manage the access.

Managing those millions of SKUs is quite a capital-intensive effort. It's a barrier to entry. And I think that's why you see only a couple of companies in the world that do what we do. That does a lot in terms of our pricing power. We've got category-leading brands. We've got category-creating brands, in fact, that enjoy strong market positions, industry's highest margins.

And the way the model works is we do consult very early on in the project phase with both the end user, the ultimate customer as well as the architect, the general contractor. We serve as subject matter experts to create specifications for all the doors and the door hardware. That turns into hardware schedules and takeoff drawings that our distribution channel then uses to fulfill the last mile, typically in a made-to-order fashion in about 2 weeks lead time. Managing all that is difficult. And I'd say, again, Allegion has carved out a leading position there, and that's why you see such long-term durable earnings growth from our company. And you will continue to see that in the future.

Can you elaborate on that last part a little bit in terms of the complexity around millions of SKUs being able to ship in such a short period of time to understand a little bit more around, is there standardization of the product suite and then the different SKUs are a function of configurations around that standardization? What enables you to ship that so quickly?

Yes. Yes. So material from both 2023 and 2025 Investor Day, we talked about platforming, we called it, so a modular design focus. We've made a lot of progress there on the mechanical and on the electronics side. And that certainly helps. That keeps us in a leading position, and that helps us innovate new products even faster.

On the manufacturing side, yes, absolutely, it generates economies of scale in the plant and on the assembly line. It generates economies of scale in your supply chain. And again, I think, keeps us out in front of short-line competition.

And then on the customer side of things, how fragmented is that customer base? And particularly when we think about some of the strong positions you have in institutional, whether there's some concentration there as well as the stickiness of those customers, do you tend to find that certain customers will be Allegion customers and certain customers won't? Or are they mixing and matching over time?

Yes. That's a great question. And I think the -- a couple of things to go through. One would be on the end-user standard side. So if you think large institutions like hospital chains, like school districts, like universities, we've got Allegion customers that have been our customers for decades. Relationships are very sticky. These products are very sticky. That's why our aftermarket business is so stable because you tend to replace brake-fix like-for-like. So once you're specced in, it is extremely sticky and that just adds to our already very large installed base.

I would say the other thing about our customers, it's a good saying from our field sales force, if you've seen one customer, you've seen one customer. So that's why this millions of SKUs is such an important aspect of our business model and such an important barrier to entry because customers have different needs, doors are different sizes, entry, egress, all those paths have their own little nuances. That's why it's so complex, and that's why architects don't want to mess with it anymore. That's why they outsource it to Allegion and our largest competitor.

I think it's very rare that we would flip an ASSA ABLOY spec. It's very rare that they would flip one of ours. It does happen, but very rare. And I would say it's about a Six Sigma event for someone else to flip either of ours. So very sticky relationships, but each customer is somewhat different. And again, I think that's why we've been able to carve out such an important space in the industry.

And then high level, but demand trends, we'll watch it through some of the higher frequency data points out there. We don't even know really how much value to put on ABI anymore these days, watching DMI. But you see the spec activity. And so that's a pretty good indicator for you. And we'll get into it more in terms of some of the segment focus later on in the discussion. But just high level, kind of what you're monitoring out there and seeing in that spec activity?

Yes, absolutely. I think if we start with the earliest of the early leading indicators that is Dodge Momentum, it has been strongly positive for a long time. So there has been a lot of planning activity. That's what that index measures. And if you take it down a notch to the ABI, it's been contractionary for most of my tenure with the company. It's been challenging. And if you look back in history, you have to go all the way back to the aftermath of the Great Financial Crisis to see a window of time this long that the ABI has been contractionary. Now what happened after that was a pretty nice period of non-res construction. History may not repeat itself, but sometimes it rhymes.

I think the other things that we're seeing, and we just heard in your analyst conversation there at the breakfast was some other trends, earthmoving machinery demand is going up. Some of that's certainly supply side, but it also doesn't feel like it's all roads and bridges like it was a couple of years ago with the Infrastructure and Jobs Act. This is something else. We see company formation in some major metropolitan areas bringing back office demand, which had been really flat after the pandemic. We see multifamily in pockets of the country making a bit of a comeback. Starts have been turned positive on multifamily for the first time in a couple of years.

So I'd say, when I look at all of that, I think if I just zoom out, Joe, because I agree, you can't ever read too much into these leading indicators, but it does feel to us with the spec activity we're seeing and if you heard me on the Q1 call, I'd call it very strong and broad-based, very strong. So we start to feel that the next 5 years are going to be better than these last 5 years.

It's a really interesting dynamic with good DMI and challenged ABI. And so good planning activity, but not yet converting to the actual architectural billings out there. How do you explain that? Because it's been persistent for a while. And we can even look like to Dodge's credit, they do pull out data centers. So you can see commercial ex data centers. It will vary, but it's not bad, right? So like the planning activity would...

Planning activity is certainly there. I think the culprits at this point are well known as to what maybe is tempering that in terms of shovel-ready or shovel-in-the-ground type projects. That's persistently high interest rates, and that's even changed over the course of this year. Inflation has kind of ticked back up, too. So the 2 of those certainly aren't helpful to a construction boom.

And so while we've got these good early leading indicators from momentum to a slight uptick in starts and ABIs to our own spec visibility into the future, we've still got persistently high interest rates and inflation to just to monitor and deal with. And I think just near term for the company, we're still in a good position. We're still growing earnings. We're still doing the right things. And so as the cycle turns, I feel we're extremely well positioned.

And you would have just partially answered the next one. But when we think about the growth algorithm that you put out at the Investor Day and so looking for kind of mid-single digit, you were there last year. This year, the guide is kind of low mid. What are those obstacles to getting into mid maybe beyond the macro, which would be more the interest rate or the inflation, anything else that you're watching out there?

Yes. The key for us as we're primarily a non-res company is non-res volume as non-res volumes have essentially been flat for the last many years, a slight uptick in non-res volume goes a long way for Allegion's success. And I think our business would grow at -- the core mechanical, at least, would grow at about a GDP rate. Volumes have been flat for a few years, and we don't think they stay that way forever.

On top of that is our electronics portfolio, which has been a continual source of outgrowth for us, typically around the high-single-digit over the cycle. And we've continued to innovate there. We've continued to add new products there. We've added complementary software products to that portfolio and see that still as a long-term driver of above-market growth that keeps us in the mid-single -- solid mid-single type organic growth.

What about the labor availability side of things? Anything with immigration policy and labor availability in the market? And we hear a little bit about like data center crowding out, the degree to which that's attracting a lot of the labor. Do you observe that as a dynamic at all in the market that's also an obstacle?

I haven't come across that in channel checks as a particular hurdle. I would say the immediate aftermath of the pandemic, you definitely felt some time of projects being way off schedule or project time lines extremely volatile because of labor availability. That has subsided, and I haven't heard a lot of evidence of it creeping back up. On the data center side, I would again say Allegion has done a fantastic job on getting specification standards and end-user standards with the who's who of data center builders. And so it's a small part of our business, growing very nicely, and I think we've carved out a leading position there, at least in our industry.

And then pivoting to the AI side of things, both in terms of opportunities for you and things that you keep an eye on, on disruption. And so how are you using it today? What benefits are you seeing? And then at the same time, is there anything that you observe as this is a disruptor potentially, and we want to make sure we're paying close attention to it?

So I think a huge opportunity. AI will be additive and helpful to a company like Allegion because, again, we make hardware. AI is not going to replace hardware. It's not going to replace a deadbolt or the exit device on the door, but it will make us faster and better at what we do to get that spec delivered and installed on the job.

We also, as you've seen, do have a small but rapidly growing complementary software business that goes to market with our electronic locks. We're already experiencing within our development teams, the 5x impact of each developer is getting 5x more productive there, which is interesting for a hardware company to be able to add software to their portfolio has become a lot easier as a result. So as we talk about this electronics growth driver really having legs, this gives me even more confidence that we've got more value to add, more value to create around the electronic lock with complementary software, and we can do it faster than ever before.

Broadly speaking, in Allegion, think of AI like a Claude or a ChatGPT as I tell my employees, think about it as your own personal intern. It should just do a lot of work for you, automate workflows for you and make you more productive. Definitely seeing results across the company. We summarize wins every month and share them. It's pretty fun and engaging just to drive advocacy.

On the threat side, I think it would be easy to think, AI might write a spec for a building. You still have to make the hardware even if AI writes the spec. And the only 2 companies that have the data to make an AI-driven spec work is us and our largest competitor. We're investing in it. I would have to assume they are, too. So we'll get there first. And then it will just make our spec writers more efficient like it would a software programmer or engineer. So I think that's also additive. We are plugged in very acutely on all things cybersecurity that comes up with AI, and I think are investing heavily to make sure all of our tools, all of our processes and our enterprise itself is as protected as it can be.

And you can't really have hallucinations as part of the spec. What do you think about in terms of the time line to where you could have a product that can reliably facilitate that spec process?

Long time, but you'll always need human oversight for that exact reason. AI can produce things that's wrong. So we've invested to continue to bring in new just civil engineers into the company and train them on specs. It's a great way to learn the business. So that pipeline of talent continues to come in. And again, just think of AI as your intern. If I'm the spec writer, I have an intern to do a lot of the grunt work, but then I'm still the quality control. I still manage the changes with the end customer. I still provide that level of expertise to supervise that intern.

On the innovation side of things, first of all, just how do you measure it internally? How do you think about the right amount to spend on R&D? We've seen that amount go up actually over time. And what are some of the primary areas of innovation outside of AI that you're focused on?

Yes. So we're pretty proud of that, Joe. I think over the last few years, very nice margin expansion on the operating income line at the same time as stepping up our R&D spend. We measure product vitality really by brand. And that means in the last few years, how much of your revenue was derived from new product launches. And that's how we govern that. I think that is how we're going to pace our organic growth, the better that we can get there.

And it's not just about how much you spend, but it's how efficient do you spend each dollar. I think Allegion does that very, very well. Leveraging these AI tools, we'll continue to get faster and more productive there on the new product development side. The primary area, while we do have various R&D efforts going on across all of our brands, primary area of focus would still be in the electronics and complementary software area. We do see that as the long-term growth driver for our business. So that's where we'll invest the most.

Can you touch on the mid-priced products a little bit because you've talked about that recently, I think primarily with a focus on accelerating aftermarket growth? But just are these products that are really designed to replace Allegion equipment in the field? Would they replace competitor equipment? And really, it's an aftermarket product, not so much an OE product.

Yes, it's a great question. And I think a couple of points. One is our engineers have done a great job across the 3 big brands, the LCN closers, Von Duprin exits and Schlage locks in terms of designing to value and designing to cost. So those mid-price point products serve a particular customer need at essentially the same gross margin as the premium products.

That being said, this was primarily in response to aftermarket business that we simply weren't very competitive for. And then also, if there was ever VA/VE exercise that might happen on a particular project, past years, Allegion would just lose that business to a competitor. Now we have our own portfolio that should there be a need to step down to that and again, step down at the same gross margin as our premium product. You still have an Allegion suite that can go in there and take care for that job. So it's primarily a competitive play, gaining market share in the aftermarket and having an Allegion suite there should you need it in a VA/VE exercise.

And the start, like the OE sale would be at a premium product level.

That's always the start.

And then the mid-tier can come in after that as a replacement product.

If need be. Typically, the replacement would be like-for-like. But I would say there will be certain customers, there will be certain verticals that do gravitate more towards this mid-price point segment. Now Allegion has a full offering to compete there, too, where previously it was a business we just didn't win.

Can you just elaborate on the time line around this product suite? When you say you have a full product suite today, how long it took to get there? And really, the heart of the question is the growth opportunity that this presents moving forward.

So I think -- and this would date to well before my arrival in the company, but the idea of having a mid-price point family of exit devices from Von Duprin, a mid-price point commercial lock family from Schlage thought about for a decade plus. Von Duprin delivered in '24, Schlage delivered in '25. So this is very recent. I think we're just starting to see the benefits from that portfolio.

To the degree that you can -- there's growth contribution now, but that can accelerate moving forward.

Right.

Okay. On tariffs and the price/cost dynamic. I think normal price timing for you, generally, we would start to see new year pricing hit the P&L toward the end of Q1. Since then, there were also tariff announcements and so some additional pricing that could be required as a response. Just explain to us the pricing you've done, magnitude of it, timing of when it's hit, everything you need to get in the market today.

Yes. So I think if you zoom it out and just include all inflationary pressures, typically, our industry does have an annual price increase in the springtime, early spring, I think end of February, 1st of March. That did go to market. This year was probably a little different for our industry because many of us, Allegion included, had some surcharges in place to deal with 2025 tariffs. As we went through that, a lot of those were then rolled into list price in the springtime price increase.

Subsequent to that, there have been more inflationary pressures. We do have a series of pricing actions that have been announced to the market. We do have a series of cost actions we've been taking internally to compensate for that. And I think our commitment, same as it was in '25, we do expect to be able to cover this for 2026 on a dollar basis at operating income and earnings line. Margin rate though, will face some pressure because of this.

What about the manufacturing footprint? Sometimes there's focus on where the tariffs are applied, what kind of an impact that could have to the competitive dynamic. Just anything that you've seen in the market as a result of tariff policy?

Yes. So I think if you go back to 2025, we disclosed pretty clearly like here's our footprint, primarily on the non-res side, at least, just think manufactured in the country that you sell. So very heavy North American factory footprint for our non-res business. Our residential business is primarily sourced from Mexico, but essentially all of it is USMCA qualified. Then as tariffs have changed and evolved, we do look through the supply base very carefully. We do look through the various material content on different products very carefully. As there are just, call it, value engineering changes to make or supplier changes to make, I think we've been pretty nimble in that regard.

In terms of has it really hurt this competitor, really hurt that, I obviously don't know their supply chain or their impact and just have focused on managing this for our company. I think the short liners who are purely trading houses probably have been hit harder, if I had to guess, because they're bringing in all typically Asian imports and then distributing those. So that's probably taken a harder hit than those of us with U.S. manufacturing footprint.

But stepping back kind of the same message is what we've heard in recent time where there are these iterations of inflationary pressure, price for it, there might be a margin impact. It's not an EPS impact.

Right. Right.

Okay. Shifting to Americas, kind of the demand and margin side there. Non-res volume was flattish in Q1. The spec activity is good. I mean how are you seeing those volume trends? How do you expect to see them unfold over the balance of the year?

Yes. I think just we would have to refer back to the opening guide for the year and in the Q1 call that we did raise the revenue outlook based on our DCI acquisition by 1 point. And I think just consistent with the guide on the Americas side, the Americas Q1 came in right about where we thought it would. I think the markets behaved right about where we thought they would. And I'd say nothing more than just affirm the guide based on the strength of the Americas business.

If we think about the different verticals on the institutional side, how different are the growth rates that you're seeing between the educational markets and the health care hospital markets?

So I think at any given time, based on this project or that project, maybe super large hospital, one quarter to the next, the rates change. But broadly speaking, the institutional verticals have less volatility than you'd see in the commercial verticals. They don't necessarily move together. But for our business, we've got the portfolio, the spec writing expertise and the channel reach that broad end market exposure is really how you have to think of us. So as there's strength here, a little bit of softness here on balance, that's where our algorithm still comes back to that mid-single organic growth.

And similar type of question on commercial. For a while, it was appreciated, things like office and multifamily under pressure. It seemed like we were nearing the end of that. I'm not sure where we are with interest rates and inflationary pressure, if there's kind of another stage of pressure in those markets or if you've seen continued stabilization in that kind of mature down...

Yes. It's right. It's the same as the opening question, I think, Joe, is that there are encouraging signs out there, little single data points like Metro New York, Class A office demand is like all-time high. Company formation has been very active. So tenant turnover and things like that is good work for a company like Allegion. We heard similar comments out in San Francisco just last month. So there are encouraging signs.

That being said, headwinds are still present. And so we need to watch how this moves forward. And for the balance of the year, I think we would just say, hey, affirm our guide. We feel confidence in that. And then let's see how interest rates, let's see how inflation and other geopolitical type headwinds evolve. between the Momentum Index, the ABI, our own specs, our own channel checks with customers, I do feel that, again, this idea -- because we operate in long cycles, you know that, right? We're not a short-cycle company. But this thought that the next 5 years should be better than these last 5 years for Allegion, we feel pretty good about that.

Yes. And then the resi side of things and maybe a little bit more exposed on the tariff piece as well. I think we did see maybe some channel impact as well and tough comps toward the end of last year. Just where are you in resi and seeing any response to an environment where rates aren't going down or you have some of the inflationary pressure?

Yes. So a small part of our business, number one. And then I'd say, number two, is, yes, resi has been under pressure for a few years now. And I think we indicated that when we released the guide, we felt it was still kind of flattish, still under some pressure. I think we and others have had some positive price realization to overcome the inflationary impacts.

70% of our resi business is aftermarket. So it's not a little bit underweight tied to new build. But I think we have released some new products in that space. We're not here to call a market as to this is when resi will inflect. But I would just remind everyone, our overall business mix is much heavier tilted towards the non-res side.

And then shifting to the International side and just markets within that business and kind of a multiyear stretch of volume declines in those markets. Just what you're observing now kind of as you move into the back half of '26? Do you see opportunities for volume in some of those markets?

Yes. I think what we see in International, and we really gave ourselves a black eye in Q1 with some of the difficulties we talked about on the call. Not happy about that at all. It was our first, I think, operational execution misstep since I've been CEO. So not happy there, one bit, and we're going to fix that.

I would say what we see in International is a year of sequential improvements quarter-to-quarter, a bit of a build through the year and work off some of those operational difficulties over the balance of the year from Q1. And then our electronics businesses that are both hardware and complementary software always tend to ramp sequentially through the year, and we see that playing out the same this year.

Our acquisitions in International have actually been performing very well. We noted that in the slide deck and on the call in Q1, margin accretive, accretive to growth. So happy with that. We do have some legacy mechanical issues we've just got to work through and perform better.

On that ERP side of things, how should we think about the impact in the remaining parts of the year? So there's still work to do in Q2, for example, not the kind of impact that it had in Q1. By the back half of the year, is that resolved? Just how we should think about it?

Yes, yes, that's right. So the easiest way to put it is we -- that legacy mechanical business dug a hole in Q1. First step is stop digging. So we stopped digging. And then get back to producing at rate, get back to selling at rate. I think we're largely there. Then the recovery of the miss continues to happen over Q3, Q4. But we do expect to have it covered this year.

Okay. Got it. On the M&A side of things, so 2025, you did 9 transactions. It included mechanical, it included on the electronic product side, Americas, International. So a lot of activity. Any common denominators behind what you were doing on the M&A side in 2025 because it was fairly broad in terms of the deals we saw, but what you were targeting there?

Yes. I think strategic acquisitions that are a part of our portfolio that help add to the portfolio and then further differentiate our competitive position. So stick to what we do, which is doors and door hardware and the complementary software that makes the electronic locks work. Stick to the geographies where we've got brand and distribution strength. So that means Americas, that means Western Europe, that means Australia, New Zealand. We are not looking for super, extra-large speculative acquisitions. We're not looking to acquire our way into a new geography. But we see a long runway of just industry consolidation and roll-up in some spaces and then adding to our portfolio where we've had competitive gaps in the past.

Yes. This year, you've announced one deal. Just in terms of the capital allocation side of things and priorities around capital allocation when you think about M&A and you think about share repo and just in the context of what you see in the stock, like how you're thinking about those priorities?

Yes. Certainly, we are committed to balanced, consistent and disciplined capital allocation. We are very much returns focused. Our priority is profitable growth. But given where we're trading right now, repurchase is very attractive.

You mentioned no large deals. I wanted to ask a little bit about access control as a market and you have a product for multifamily. A couple of years ago, there was speculation on what might happen with a larger asset that was out in the market. Just how you think about your access control offering today and where you want to go with that?

Yes. A great way to think about that is think of it like -- you hear the phrase, technology stack. So think of the stack. You've got the base hardware, which is really us and our largest competitor. There are 2 of us here in that space. And the access control layer that comes next, there's probably 50. So it's a quite fragmented space, sometimes very vertical specific. And that's where we found multifamily as underserved market, something that we could develop organically and go to market with. And it's going pretty well and growing pretty rapidly.

Is there more that can happen there? I think probably yes. As you go up further, you see the video surveillance companies, think of Motorola, Genetech, these type of guys, they've been working their way down into some of the access control space and partnering with us as the hardware partner of choice. So I think that segment of our industry is ripe for a little bit of disruption. Some of it's going to come from the video guys, some of it's going to come from the hardware guys. And like I mentioned earlier, it just became a lot easier to develop software products, and we intend to keep going in a pragmatic way.

We have time for one more, just on electronics, saw really good growth in 2022, 2023. I think that led to some tough comps, maybe a little pause in '24, back to good growth in '25. Just where you think you are in that trajectory? And you talked about the growth algorithm. Is that really now set to operate at that kind of algo target?

Yes, I think so. And 2022, you almost have to throw away because 2021 was not great for our Allegion's ability to ship electronics because of supply chain problems. But overall, you see this as adding about 1 point of outgrowth of above-market growth to Allegion's business because of electronics, and that is where the majority of our R&D is going.

Terrific. Well, thank you very much. Really appreciate the time. Thanks for being here.

Thank you. All right. Thanks a lot.

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 Allegion's first quarter earnings call. [Operator Instructions] At this time, I'd like to turn the call over [indiscernible], director of Investor Relations.

Thank you, Stefan. Good morning, everyone. Thank you for joining us for Allegion's First Quarter 2026 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Michael 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 2. 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 3, and I'll turn the call over to John.

Good morning, everyone. Thanks for joining us. The Allegion team has remained agile in a volatile environment and stayed focused on serving our customers alongside our strong channel partners. In Q1, we delivered high single-digit revenue growth, led by the Americas nonresidential business and contributions from acquisitions. In the Americas, performance was in line with our expectations we outlined back in February. In our International segment, top line growth was led by acquisitions, which are on track. However, our Q1 organic revenue growth and margins in International were negatively impacted by an ERP implementation in one of our legacy mechanical businesses.

Production rates there have started to improve, and we expect to recover the Q1 shortfall over the remainder of the year.

As you'll see on the next slide, Allegion remains committed to balanced, disciplined and consistent capital deployment. And finally, with respect to our outlook for the year, we are raising our reported revenue outlook to 6% to 8% to include the DCI acquisition, and we are affirming our outlook for organic revenue growth of 2% to 4% and adjusted earnings per share of $8.70 to $8.90.

Please go to Slide 4. Taking a look at capital allocation for the first quarter, starting with our investments for organic growth. The latest example of this is our next-generation LCN Senior Swing series of auto operators for heavy-use doors across health care offices and other high-traffic environments. Easy to install and upkeep, these automatic door operators self-adjust in real-time to external pressures like wind, allowing smooth, safe and consistent operation while saving the building time, energy and maintenance calls.

Turning to acquisitions. Earlier in March, we closed the acquisition of DCI, a West Coast-based manufacturer of holly metal doors and frames, specializing in custom design and quick ship capability. Historically, we've had to rely on our Cincinnati, Ohio, manufacturing facility to serve customers on the West Coast, which extended lead times and drove higher freight costs compared to local suppliers. DCI makes us far more competitive on the West Coast, helping the totality of our Americas nonres business, not just our door offering as customers purchase complete door and hardware packages together. DCI today has a low double-digit EBITDA margin, resulting in limited EPS accretion in the current fiscal year. But the strategic nature of this acquisition gives us significant improvement in serving our customers at a better cost position.

I'm confident our execution and pricing discipline will drive higher profitability over time and expect performance to improve moving forward.

Moving to dividends. Allegion paid $47 million in dividends in the quarter, consistent with the long-term framework we outlined at our Investor Day last year. We repurchased $40 million of Allegion shares in the first quarter. Our Board also recently approved a new $500 million repurchase program. 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, including share repurchase as appropriate.

Mike will now walk you through the first quarter results.

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. Revenue for the first quarter was over $1 billion, an increase of 9.7% compared to 2025. Organic revenue increased 2.6% in the quarter, led by our Americas nonresidential business. The enterprise organic revenue increase was driven by price realization, partially offset by volume declines.

Q1 adjusted operating margin was 21.2%, down 150 basis points compared to last year, partially driven by a combination of volume declines and mix. Price and productivity net of inflation and investment and inclusive of transactional FX were favorable by $5.3 million. However, this resulted in a 40-basis-point headwind to margin rate in the quarter. I'll provide more details on revenue and margins within each of the regions.

Adjusted earnings per share of $1.80 decreased $0.06 or 3.2% versus the prior year. EPS from acquisitions was more than offset by higher tax and interest and other in the quarter.

Finally, year-to-date available cash flow was $80.3 million, consistent with the prior year.

Please go to Slide #6. Our Americas segment delivered revenue of $809.9 million, which was up 6.9% on a reported basis and up 4.5% on an organic basis. Our nonresidential business increased mid-single digits organically, driven by price realization. Demand for our nonres products remains healthy and spec activity continues to be strong. Our residential business was flat in the quarter, with price realization offset by volume declines as residential markets remain soft. Electronics revenue was up mid-single digits for the quarter, and we continue to see electronics as a long-term growth driver of the business. In addition, reported revenues increased 2.1 points of growth from acquisitions and a slight tailwind from foreign currency.

Americas adjusted operating income of $227.4 million increased 2.9% versus the prior year. Adjusted operating margins were down 110 basis points in the quarter. Price and productivity net of inflation and investment and inclusive of transactional foreign currency was favorable by $9.9 million. However, this was a 30-basis-point headwind to margin rate. The transactional foreign currency headwind relates to the prior year benefit of $3 million that we disclosed in Q1 last year, driven by the Mexican peso. Operating margins were also impacted by acquisitions, which were a 40-basis-point headwind. Additionally, volume declines and unfavorable mix were a headwind to margin rates.

Please go to Slide #7. Our International segment delivered revenue of $223.7 million, which was up 21.5% on a reported basis and down 5.3% organically. Organic revenue declines were the result of volume weaknesses in our mechanical business, primarily related to the ERP disruptions John discussed earlier. This was partially offset by growth in electronics and price realization.

Net acquisitions contributed 15.9% to segment revenue. Currency was also a tailwind, positively impacted reported revenues by 10.9%. International adjusted operating income of $17.9 million decreased 4.8% versus the prior year period. Adjusted operating margin for the quarter decreased 220 basis points. Price and productivity net of inflation and investment was a 210-basis-point headwind, inclusive of operational inefficiencies associated with the ERP mentioned earlier. Additionally, volume declines were a headwind to margin rates, which was mostly offset by acquisitions.

Please go to Slide #8, and I will provide an overview of our cash flow and our balance sheet. Year-to-date available cash flow was $80.3 million, consistent with the prior year. For 2026, we still anticipate our ACF conversion will be approximately 85% to 95% of adjusted net income.

Next, working capital as a percent of revenue increased in the first quarter due to acquired working capital, which does not impact cash flow.

Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.7x, which supports continued capital deployment.

I will now hand the call back over to John.

Thanks, Mike. Please go to Slide 9. One quarter into the year, we are affirming our organic revenue growth outlook of 2% to 4% and adjusted earnings per share outlook of $8.70 to $8.90. We are raising our reported revenue outlook by 1 point to 6% to 8% to include the acquisition of DCI. You can find more details on our outlook in the appendix.

While our core demand assumptions are unchanged from our February call, I'll provide some additional details on our view for the remainder of the year.

In the Americas, our markets are largely as we expected to start the year, but we're experiencing higher inflation. Based on current conditions, we anticipate an incremental headwind of approximately 1% of COGS from tariffs and other inflation. We expect to offset this on a dollar basis through a combination of price and cost actions. However, given current volatility, we are not updating our organic growth assumptions to include any incremental price at this time, similar to our approach in the first quarter of 2025. Most importantly, we expect this to be neutral to 2026 adjusted operating income dollars and earnings per share.

For international, we expect to catch up on production impacts from the ERP implementation during the remainder of the year, supported by existing orders and backlog in that business. Our core demand assumptions are similar to our prior outlook. And beyond the ERP catch-up, it's also important to note that our electronics businesses are a source of strength in the International segment, and we expect these to ramp seasonally through the year.

We have not experienced a notable demand impact from the effects of the conflict in Iran and our exposure to the Middle East is negligible.

For the organization, we're committed to serving our customers while remaining agile in the current macro and input cost environment.

Please go to Slide 10. In summary, Allegion delivered nearly 10% revenue growth in Q1 and deployed capital effectively for the benefit of our shareholders.

Before turning to Q&A, there's one more highlight from Q1 that I'm proud to share with you today. Allegion was honored for the third consecutive year with the Gallup Exceptional Workplace Award. This recognizes our team for fostering one of the most engaged workplace cultures in the world. And we are 1 of only 5 companies to earn this award with distinction in 2026. We know highly engaged teams deliver stronger results for our customers, our shareholders and our partners.

With that, we'll take your questions.

[Operator Instructions] Our first question will come from Joe O'Dea with Wells Fargo Securities.

Can you hear me?

Joe, please go ahead.

Sorry about that. Getting used to this new format. Starting on the demand side in Americas, it sounds like spec activity largely pacing as expected. But just interested in any color on the time from spec to order, if you're seeing any elongation in that with respect to what you would normally see on spec to order and what you're currently seeing the degree to which tariffs and other inflationary pressure is behind that? And then just related, we have heard some comments around kind of data center crowding out and inability to service other projects because of data centers growing more activity and the degree to which you're seeing any that?

Yes, Joe, this is John. I'll get started there. And I'd say, like we said in the prepared remarks, spec activity is strong in nonres, might go so far to even call it very strong in recent months. And I'd say it's broad-based. We've got a portfolio and a channel reach that affords us broad end market exposure. So we're seeing broad-based growth on the spec side.

Channel checks with our largest customers support that view. To the more detailed points of are we seeing elongation from spec to shovel ready or doors being hung, not really. I don't think that environment hasn't meaningfully changed. But that is the reason why we don't disclose a whole bunch of detail because the line of sight from a spec to revenue for us really depends on the vertical and the project. You could imagine smaller projects or maybe multifamily office renovations for tenant improvements could be pretty quick, something like a very large hospital complex could take a couple of years. But suffice it to say, spec activity has been strong. Channel checks also, we feel, support our outlook.

On the question about data centers crowding out other projects, I would feel like not in our space do I see that really as an impact. That being said, I feel good about the position -- the competitive position we've carved out for doors and door hardware in data centers, and that it's a small part of our business, but it has been growing nicely.

That's helpful detail. And then on the tariff side and the 1% of COGS headwind that you talked about, just in terms of how you're addressing that? Are surcharges already in the market? How much of this is price? How much of this is more kind of cost mitigation on your side? And is it primarily tied to the latest kind of tariff changes and the impact that it has from Mexico?

Yes. I think -- so there's been -- like the last many months, there's been a flurry of changes with respect to trade and tariff policy. IEEPA was declared on constitutional, right on the heels of that Section 122 was implemented. Soon after that, there was a wide range of Section 232 changes. And when you net all of that out, along with some inflationary pressures on fuel in particular, we see an impact -- a net impact of around 1 point of COGS. And think of the playbook we used a year ago. Some pricing actions, it could be surcharges, it could be list price increases, they are not yet in the market and that's why we're not yet updating any organic revenue guide as a result.

We'll certainly announce that to the market to our customers first as we work through all of the details there. And as always, there's an enormous amount of details to work through on all the different trade policies.

There are some cost actions that we're taking, I think, just normal hygiene for a company our size, and that will contribute. So when you add it all up, we expect to mitigate this on a dollar basis at the adjusted operating income line and net earnings per share.

Joe, maybe I'll just jump in and add. If you think about the mix between price and cost, obviously, it's going to come from more pricing than cost actions due to the size we discussed. But similar to last year, look for us to make sure that we're driving that price and productivity to cover that inflation and investment. That's something we've been talking to you for a number of years about.

Our next question will come from Tim Wojs with Robert W. Baird & Company.

Maybe just the first question. I guess if I look at North America margins, I was wondering if you can maybe just add a little bit of color on some of the mix puts and takes this quarter. I think it's been a while since we've had kind of a negative mix impact in the bridge there. So maybe just add some color there as to what the drivers were, and how you see that kind of playing out for the rest of the year?

Yes, Tim. So if I bring you back to Q1 of last year, we had really strong volume leverage and positive mix. And what that was, it included mix within nonres. And specifically, our nonres business is so much more than just a lock. It's the mix between the different businesses within nonres. This quarter was a little different than Q1 of last year. So it was some negative mix. If you think of the Americas and you take a step back and think of the full year, don't look at -- don't expect to see a headwind for mix for the full year for the Americas. You did have a headwind in Q1, but full year, think of it like most years mix kind of evens out over the course of the year for the Americas.

Okay. Okay. So it's mostly product mix on -- within nonres. Okay.

It's product mix, yes.

Okay. I got you. I understand. Okay. And then I guess how -- to that, like how would you kind of expect margins in North America to kind of sequence through the year? I guess, that mix impact kind of drove it, I guess, a little kind of weaker Q2 than we -- Q1 than what we thought. So just trying to understand kind of how we should expect margins in North America to kind of pace this year? Like would you expect kind of a negative variance in Q2 as well? Just trying to think through those pieces.

Yes. As you think about -- let's talk just margin rate for the Americas. As you progress throughout the year -- obviously, in Q2, we do have the peso impact from Q2 of last year. I'll call that to your attention. We put that on the earnings deck of Q2 in '25. But throughout the rest of the year, expect most of the expansion to come in the back half of the year. We'll get better sequentially. You could think of the second quarter as improving from where it was in Q1 versus the prior year, but the Q3 and Q4 is where you really start to see the margin expansion. And then for full year, I'll just add, don't forget, obviously, for each of the quarters, we got to now put in DCI. DCI is going to be a margin rate impact. You could think of it as 30 basis points for a full year. Q1 obviously only had 1 month of activity. The last 3 quarters, obviously, will have 3 months. So those are the 2 items I would call out. But if you think about margin expansion, think of it more in the back half, and part of that is the comp that you're going up against vis-a-vis 2025.

Our next question will come from Tomo Sano with JPMorgan.

Can you hear me?

Yes.

Okay. In first quarter, the Americas electronics business was up mid-single digits, which is a little step down from the double-digit growth seen in Q4. Could you provide more breakdown of volume versus price contributions for Q1? And any color on what drove the decelerations? And do you anticipate any changes in the growth perspectives after 2Q, please?

Yes. Tomo, if you think about nonres, we said in the prepared remarks, nonres was driven by price realization. Just to remind you, Q1 of last year, really strong volume growth in nonresidential. You could think of that at the higher end of mid-single-digit volume growth for nonres last year. So this year, obviously, a little less when you think of volumes. Full year for nonres, expect to see volume growth for the full year in nonresidential. I think that remains a strong market for us like we talked about. And so I think Q1 in nonres, if you think about volumes, part of that is just the comp in the prior year.

And Tomo, this is John. On the electronics side, yes, mid-single growth this quarter. Look, a year ago, it was double digit, very strong. I think when we still -- when we look over the cycle, if you will, we still see electronics being a long-term growth driver for Allegion. The adoption rates are still increasing and growing. And I think that is providing that point of outgrowth that we expect to achieve. So I still feel good about our position in electronics. We're still rolling out new products, and I think still stand firm that, that's a long-term growth driver for the company.

Just 1 follow-up. There was a commentary that ERP implementation and legacy mechanical business were key headwinds for the International segment in Q1. Were there any execution challenges associated with these factors? How do you view the prospects for recovery in International operations from second quarter, please?

Yes. It's a very timely question, Tomo. And yes, the ERP implementation was limited to one of our legacy mechanical businesses in Europe. And so while we haven't sized that exact amount, it does explain most of the organic revenue and margin decline in the quarter. I would say, since I've been here in Allegion, we've done a lot of ERP implementations. It's a core part of just investing in the core business. And we've had a lot of very old systems to update. This was one of them. We've never had to talk about this before. Every other ERP implementation has gone very well, this one we've just had a lot of struggles with.

As I said in the prepared remarks, very recently, our production rates are getting back on track. And so it's not a demand issue either. The customer orders are there, the backlog is there, it's our execution that needs to improve. And I think it is improving. I do have confidence we will recover the Q1 shortfall over the course of the year.

Our next question will come from Jeffrey Sprague with Vertical Research Partners, LLC.

John, just picking up on the ERP. So are there any other implementations that you're planning for this year? Have you -- are you done upgrading what you want to do in Europe? And also, just to comment on catching up. I've seen companies before have these snafus and they don't catch it up, right, because you fail to deliver so somebody else fill that void so you can get back to run rate, but maybe not lose -- regain what you lost. So maybe just a little bit more context on that.

Yes. Jeff, those are very salient points and something we're watching very, very carefully. I would say we have been holding on to the customer orders. We still have more inbound customer orders. We do have a backlog that supports our commentary, and our execution is improving. And so I do feel confident that we'll recover this Q1 shortfall over the balance of the year. It won't all happen like immediately, but it will happen over the balance of the year.

I think as I mentioned, we've done a bunch of these implementations over my tenure here at Allegion. We do have more in the works. There are more businesses that do need these system upgrades. And I don't anticipate we're going to have a problem like this again.

And could you just maybe address also Europe in a little more detail, right? Not a lot of direct Middle East exposure, but Europe is probably most prone to seeing collateral economic damage first from what's going on. Is there any visible change in tone there, business trajectory, orders, just kind of year to the ground, what you're seeing real time in those markets?

It's a good question. And I'd say, consistent with our prepared remarks, the demand has shaped up about the way we saw it shaping up when we introduced the guide back in February. The big miss was, again, our own challenge with that ERP. So our electronics businesses in Europe still performing well. Our acquisitions in Europe are basically right on track, so feel good about those elements. Like in general, markets are still not super strong and agree they are more directly impacted by the 2 active conflicts, but I think market demand is about how we saw it at the February guide.

Our next question will come from Joe Ritchie with Goldman Sachs. Joe, please unmute your line and ask your question.

Okay. We'll circle back to Joe. Our next question will come from Julian Mitchell with Barclays Equity Research.

Maybe just based of the commentary around the Americas margins being down year-on-year in Q2 and also the fact that the International catch-up on ERP isn't all coming in the quarter of Q2, should we expect that this year is a bit more back-end loaded than normal in terms of kind of first half, second half EPS contribution? I think in recent years, you have been sort of 47%, 48% of EPS in the first half. Should we think this year is maybe more like mid-40s because of that Americas margin pressure and ERP headwind?

Yes, Julian, as you know, we don't really give quarterly guidance, right? So if I give first half, second half, I'm giving an EPS for Q2. I'll just share just a little more from what I said earlier. In the Americas, I wouldn't expect big headwinds on margin rates year-on-year in the second quarter. I just don't expect to see much expansion there, right? So you can think of it as not expansionary.

For International, International, I think it's fair to say, second quarter, a little softer versus last year on margin rates. Similar to Q1, we talked about the sequential improvement versus Q1 of '26 will be similar to the sequential improvement you saw in '25. And then you start to see it recover some. If you think of the Americas, though, think of it more, a little more margin expansion in the back half of the year. This is not a massive margin expansion delta, it's more margin expansion in the back half and you know what Q1 was.

That's helpful. And then just on the kind of PPII, you had that 40 bps margin headwind in the first quarter kind of total company. How are you thinking about that sort of play out over the balance of the year? I think when I'm thinking about sort of total margins, you've got a volume improvement to margin rate in the back half from easier sort of volume comps so that helps with that margin step up in the second half. But just wondering kind of any puts and takes on PPII, how is kind of pricing playing out and competition and that type of thing, please?

Yes. So obviously, you saw the headwinds in Q1. If I break it out between the 2 businesses, similar to what you would expect in margin rates, Americas, expect to see for the full year, right? Our full year PPII, expect to see some margin expansion there, dollar positive. International is going to be a little tougher this year. So at an enterprise level, I expect the total company to be roughly around the Americas for the full year, a little more in the back half than first half obviously. Q1 was poor, second quarter, certainly better than what you saw in the first quarter. And then think about the core business. We expect this business to get back to that core incrementals we outlined at Investor Day, right, the core ex acquisitions and currency of that 35% plus as you think of our business for the remainder of the year.

Our next question will come from Joe Ritchie with Goldman Sachs.

Okay. Great. Moving around just the International segment, right? This is a segment that, historically, you've tried to scale via acquisition. I recognize that you had the issues with ERP this quarter and that impacted it. But I'm curious, like as you kind of think about like does it make sense for Allegion to have an international presence? The domestic business is doing so well. Is there -- does it ever make sense for it to be more of a domestic centric company and maybe it's just too difficult to scale the business internationally?

Yes. I think probably Q1 earnings call is not the time to have such a conversation, Joe, but I would say one business with an ERP challenge that we haven't had before driving a miss. I don't think such a extreme conversations are necessary right now. I'd say we've been very pleased with the growth we've seen in International. We've been very pleased with the portfolio improvements we've seen in International. The market conditions have been rather soft, but our teams have performed well. And one what I consider a temporary blip on the legacy mechanical side with this ERP implementation, we're going to overcome that. I have confidence there. It's not a demand issue. We've got some operating performance that needs to improve, and we'll improve it.

Fair enough. And then, I guess, just the follow-on is just around capital deployment. Just given kind of like the start to the year from a share perspective, I'm just wondering like how you're thinking about buyback versus M&A at this point?

Yes, it's a great question, Joe. And I think as you saw in Q1, we did repurchase $40 million worth of shares. And you saw that our Board authorized a $500 million share repurchase program. So I think, that being said, our expectation and your expectation of us should be balanced, disciplined and consistent capital deployment for the benefit of our shareholders. And certainly, we understand where we're trading right now. And I'd say, on top of that, our M&A pipeline is active with good quality, bolt-on acquisitions. So I would say expect us to do both for the benefit of our shareholders.

[Operator Instructions] Our next question will come from [ Reef Judd Rose. ]

I just wanted to follow up on the electronics growth in the quarter, just the mid-single digit. I think in the fourth quarter, it was low double, which is what you did through 2025, if I remember right. You're calling out like a tougher comp there. How should we think about that growth through 2026? And maybe just a little bit more color around the deceleration?

Yes. I have to apologize. When I answered that previous question, I struggled to hear the question. I answered about the nonres business, so I apologize. With respect to electronics, electronics was really strong for us last year, right? And it was strong in each of the 4 quarters. I expect to see electronics to be a long-term driver of growth for us. We keep on talking about this, including Investor Day. Quarter-to-quarter, it can move around a little. But if you think about electronics for us, think of it as, hey, this is going to be the accelerated growth driver. And over the course of the year, it tends to outgrow the mechanical. We expect that to be the case for 2026 as well.

Okay. That's helpful. And then just on the 1% of incremental inflation on COGS, is there any way to parse out how much is tariffs or like incremental 232 versus just broader metals inflation and anything else? And then just the -- you've had a lot of success historically offsetting price. How do we think about the cadence of that through the year? How much of a lag is there between when you start to see the inflation versus when you can raise price?

Yes. If you think of our business, we try to manage all cost inputs. So when we talk about it, we talk about pricing and productivity has to cover that inflation in those incremental investments. Tend not to give details by each subsection, just think of it as a total cost inflation number we provided. And then as far as lags, I would say, historically, there is a little lag between pricing and inflation, meaning the inflation could be a little sooner, but it's not enough where I would call it to your attention to change it much. What you tend to find is the cost inflation comes, but it sits on the balance sheet until it gets sold and flush through COGS. So it's not that dissimilar historically. We'll continue to monitor it. And as there's updates throughout the year, we'll just provide you more details.

Our last question will come from Alexander Virgo with ISI Evercore.

I wondered if you could just dig a little bit more into the ERP impact. Just what was it that surprised you? What was it that went wrong? And I guess, I appreciate your point that you've implemented many of these in the past and not had to talk about them before. So what is it that, that you're taking away from this to ensure it doesn't happen again?

And then if I could just follow up on the electronics side of things. Are you happy that you can get what you need from the perspective of chips and supply chain? Do you have enough buffer? Is it just a case of pricing that will end up coming through there?

Yes. Good question. So on the ERP, again, it's just a case of a legacy system been in place and highly customized over 25, 30 years, people got very accustomed to it. New workflows just slowed us down in this legacy mechanical business. And people are adjusting to it, people are adapting to it, people are learning and getting better with the new system. Again, as we've turned the chapter into 2Q, I do see our production rates are improving, our demand still supports the outlook, customer orders backlog still support the recovery and our operating performance is giving us confidence that we will recover the Q1 shortfall over the balance of the year.

Then shifting over to electronics on the supply chain, certainly with the conflict in the Middle East, we've been watching component supply chains very carefully. Haven't yet seen any major disruption, and I do feel, as a company, we're better positioned with respect to electronic supply chain than we were back in the pandemic time frame.

Our next question will come from David MacGregor with Longbow Research.

I just want to go back to the mix question and it was asked earlier. Just in the Americas business, how much of the margin pressures are, you think, resulting from the introduction of more value-oriented products like the Performance Series and the Von Duprin 70 and those products?

I don't think it's that, David. It's really the mix. This isn't a case where someone is trading down. This is the mix between the various businesses that we have. And so it's not a case where you're trading from a high price point to a mid-price point offering. It's more of the mix between the various product lines that we offer.

So you're not seeing any change in terms of how these jobs are being spec'd in terms of more value orientation?

No, no. I would not say that's the case at all.

Okay. All right. And just a follow-up, I guess, on the residential business, are you confident that you held market share in that business this quarter? And I guess, what are the strategic options available to you to maybe affect a stronger position versus some of the secular trends?

Yes. I think, David, on the resi side, for a while now we've been dealing with just a relatively soft end market. We've still seen electronics growth in resi. I think that has been a positive for us and continue to introduce new products in the electronics segment. As you've heard from, I think a lot of companies new build is very soft, aftermarket is probably just treading water. And so overall, the market remains a little bit soft. I think in terms of our share, all the indicators that we watch on, on point-of-sale and other things would indicate, yes, our market share is definitely holding up.

At this time, I see no callers in the queue. So I'll now hand back to the CEO, John Stone, for closing remarks.

Well, thank you all very much for the Q&A and attending the call today. We look forward to connecting with you on our Q2 earnings call in July. Be safe, be healthy.

All right. Good morning, everyone. Welcome to Allegion. This is Tomo Sano, Mid-Cap Industrials at JPMorgan. Today with me, Mike Wagnes, SVP, Chief Financial Officer. Thank you, Mike, for joining us.

And let me start by sharing why Allegion is such a relevant participant this year. Allegion is a global leader in security and access solutions with strong positions in nonresidential and institutional markets and a clear strategy to accelerate growth in electronics and software-enabled solutions supported by iconic brands and robust free cash flow. So with that, Mike, to kick things off, I think it would be helpful to start with an introduction to Allegion, who the company is and what you do and your story, please.

Thank you. Thank you, Tomo, for hosting us, and thanks, everyone, for joining us today. I got to make sure I talk into the mic. So at Allegion, I'm going to spend a few minutes just kind of going over overview. Tomo did a quick synopsis. I'll also do a quick overview, and then we'll just do Q&A.

We'll start standard traditionary cautionary statements. Just take a look at our 10-Ks and 10-Qs related to disclosures related to non-GAAP and the reconciliations and forward-looking statements.

Allegion, we're a global provider of security and access solutions. As Tomo said, iconic brands, think about it as Schlage, Von Duprin, LCN. If you're in your home, happy in the room, probably have a Schlage lock. You go to your child's school district, you'll see our products littered throughout that school district. So we are a big player in nonresidential and residential. Obviously, for us, nonresidential Americas is our biggest business.

We are -- one of the things about our business is we do a very credible job of expanding margins over time. We are a high-margin business, right? We got $4 billion of revenue, 25% EBITDA margins, and we expand them over time. And it's something we talk about at all our earnings calls, about our ability to leverage volume, expand growth, drive productivity and pricing.

And also, one of the things the last few years, I came here starting in '22, a few months after me, our CEO, John Stone, joined the company. Our ability to accelerate capital deployment over the last couple of years has improved. And so we're a consistent capital deployer to the benefit of shareholders. So as you think about incremental EPS growth from capital deployment, it's something we've been able to demonstrate over the last few years.

And then finally, as you think about our markets, they should be improving. So if you think about the next 5 years, it should be better than the last 5 years. So we think we are primed for accelerated growth, both from market as well as secular trends. We'll talk a lot about electronics, probably during the Q&A. It's important for our business. We're able to drive accelerated growth by taking advantage of our strong electronics portfolio.

Down below, we got some charts on our mix of business, mostly in Americas business. 80% of our revenue is in the Americas. I'll break that down by market in a few slides and then 20% is in our international segment or outside the Americas. And then as a business, 1/4 of our business is electronics, including software and services, we're over 30% now. And our mechanical, you see is about 2/3 of our product offering. We're much more than just the lock, right? You think of us as a lock, but it's everything you hang around the door. And when there's complexity in the building, that's where we win.

As I mentioned, we serve -- our core market is our nonresidential business in the Americas, right? Think of school safety, you think of Allegion. We have a unique demand generation model where we create demand by influencing the architect in the design phase and the institutional and end users and that we pull product through our channel. And it's a business model that only one other player in the industry really has the strength that we have in North America. And a key element to our growth is both that core strength, but as well as the improving electronics in nonres, res and international. It's across the board. Electronics is a big growth driver.

Moving over residential, much smaller for us. You can think of us our Schlage lock business and a growth driver for us there, electronics again. And then finally, international. International is a great improvement story for us. If I met you in 2013 when we were spinning out and the company was created, this business had 0 operating margin. We are now at industry standard at mid-teens and a much healthier business model and portfolio than we were 1.5 decades ago.

Then finally, end markets, right? When I speak to you all, we understand how important it is. I'll summarized by saying nonresidential, 80-20. So 80% of our business is in the nonresidential space. Of that 50% to 60% is institutional end markets. You could think of that as a very resilient, stable market, not much market fluctuation when you think about institutional markets. It's why when you see Allegion, even in bad markets over the last few years, so if you think about '23, '22, '21, very poor Dodge growth data and we still were able to grow our business.

Commercial markets, this is about 30% to 35% in there. That is commercial office, industrial, data centers. For us, data centers is very small, but growing nicely. And then finally, multifamily for Allegion, we put multifamily in our nonres business. Most of the products there are the same nonresidential applications. So you'll see that's where we included in our results.

So as you walk away, think of us nonresi institutional stable business. So with that, we're going to -- I'm going to come back for Q&A.

This is a great intro for everybody, and let's dive into Q&A. And let's talk about the company transformation and cultural leadership. And I think Allegion has evolved from traditional mechanical companies, a hardware company to a more platform-based innovation-driven leader in security and access solutions. What have been the most important cultural or organizational changes driving this transformation, Mike?

Yes. As I mentioned earlier, if you've been listening to Allegion, we talk about electronics and our industry is kind of steadily evolving from a historically mechanical-only business to an electromechanical business as well. It's now over 30% of the portfolio. And it's really been a net positive for us because it grows faster than the traditional mechanical.

So if you listen to us on our earnings calls, we believe in our Investor Day, we can grow this business at a high single-digit to low double-digit clip. And if you look over history, we've been able to demonstrate that. So we're able to get accelerated growth from this electronics trend. And I think the positive that we also see there is products get more complex, the market leaders do better. So electronics is a net plus for the market leaders like Allegion, and we're able to capitalize on this industry trend to drive that accelerated growth.

If you could touch on the -- for technological or engineering perspective, how the people actually in your employee bases transforming that, actually driving those from the manufacturing standpoint and design perspective? And could you talk about that?

Yes, sure. When we first started off, traditional mechanical, we had to change our engineering base, right? So now that we have more electronic engineers than mechanical, electronic and software. We also have done an effort to platform our electronics offering. So go back 10, 12 years ago, we probably offered point solutions. Today, when we come out with offerings, these are platform solutions, really accelerates our speed to market for future generations and allows us to innovate more quickly and more efficiently.

So this is an improvement that we've had over the last, I'd say, 4 or 5 years and we've demonstrated this. If you come to our technology center in Indianapolis, we can show you, but we highlighted this at our Investor Day a few years ago where this platforming has really resulted in an acceleration of the pace of new product development. And if you listen to our earnings calls, we always highlight some of the new products that we released to market. So think of it as a way for us to introduce more products quicker and more cost effectively.

And then if you could talk about the topical and thematic and one of your purposes of the safety. So how you actually describe yourself in terms of the safety culture and also what's going on in the market in terms of the safety as a megatrend?

Yes. So safety for us is a core value. If you think of our values, Be Safe, Be Healthy, is the top value that we have, right? So it's one of our great [indiscernible]. It's in everything that we do when we operate, whether on the plant floor, it's so important for us to keep our employees safe. But even out in the marketplace, right, school safety. For us, it's paramount. We think of these things, right?

If there's an event, right, our goal is to keep children safe. And we have examples -- John, our CEO, as an example of a cylinder that a channel partner or a customer gave to us of a cylinder, which had a bullet hole in it. And the channel partner handed it to him and said, "Hey, and you see the hole in it." This cylinder held and those children were safe and went home that day. I give it as an example because this is core to who we are. We think about this every day. And this kind of influences everything we do as we operate as a company.

And then diving into our end markets, the U.S. nonresidential, especially starting from institutional business. Could you talk about the customer new builds and replacement cycles? And so what's driving the next 3 to 5 years horizon for your revenue and your competitive landscape as well?

Yes. So I'll just quickly talk to end markets. I showed a little in the prepared remarks. For our business, and it wasn't on the slide, think of our business as being half aftermarket, right, not subject to market trends, right? From a new build perspective, half the business not really impacted. Stuff breaks, in our industry, you're going to replace it like-for-like.

And for Allegion, where we're strongest is when the premium products in that institutional vertical, the school, the health care, the higher ed building, what we create is an end user standard. We create a standard for that campus so that any aftermarket is our product as well as any new construction. If you're going to put a new engineering building on an Allegion campus, it's going to be our products. It's a way of keeping ourselves very sticky with our customers and our end users. And it really provides a lot of the stability we talk about in our business.

Now one of the efforts we've done to improve or accelerate growth is we put a concentrated effort at accelerating aftermarket growth. And one of the things we've done is come out with a new offering of mid-price point products. We highlighted that at our last earnings call, the Von Duprin, LCN and Schlage mid-price offering, it's a way for us as a premium player in the space and a market leader to do even better, right, and to accelerate growth into that mid-price point.

So it's a way for us to further diversify the revenue base away from just new build. And the thing about Allegion is don't think of us as cyclical with respect to, let's say, the Dodge data. Think of us as a kind of resilient business with half aftermarket and a sticky end user base.

If it comes to the 50% aftermarket and resilient, what would you say in terms of the market shares, given the customers' stickiness and aftermarket sales. If you look at the 10 years ago, but how is the dynamics evolving in your industry?

Yes. So if you go back to our spin in 2014 when we were created, we really didn't do as well there as we should have. We didn't get our fair share. And we've put efforts over the last decade to continue to improve that aftermarket presence. And you've seen it in our growth, right? We have industry-leading growth in the in the marketplace in North America.

Part of that is you just get a little more tailwind from aftermarket. This is something that I don't think will ever be done we have room to go as far as like improving in the aftermarket. In the institutional, we have that pretty locked down. But as we think about commercial office and others, we'll continue to just try to get a little better there. So I view it as an opportunity, significant improvement over the last decade, but still more opportunity for growth.

And if you -- when you talk about the electronics, the evolutions, what kind of customer base institutional commercial or multifamily. Would you see a bit more high introductions, adaptations of those kind of moves, please?

If you look at the industry, and I'll talk to -- first, I'll start with nonresidential. You'll see the perimeter has been electrified for a while. But if you think about the interior, whether that's a multifamily unit or an interior door at a campus, a college campus, just over the last decade, you see an acceleration of those doors being electrified. Those are great opportunities for us.

If you look at our last Investor Day, we highlighted a couple of examples. But multifamily traditionally is an old key. And when someone leaves, you got to pay for a locksmith to come and change that cylinder. We can create solutions for our customers where all you have to do is remove the access. That's operating savings for the facility owner and manager. That's why we're seeing an acceleration in growth in electronics. When you think of the interior there in multifamily, in the case of higher ed, it's the same dynamic, right?

Traditionally, you would have a key to get into your dorm room. More and more, that will be a credential, especially mobile credentials. Our first evolution of electronic locks, we didn't really -- there was no such thing as digital credentials or mobile credentials. Today, more and more, that's going to be a driver of electronics, where your credential will be on your phone, not necessarily a key fob, especially in higher ed, in multifamily. So that is also an accelerator of growth for us in electronics for both the industry and Allegion.

If you could walk us through the introduction rate for like the vertical like multifamily have more electronics versus mechanicals or nonresidential versus residentials?

Yes. Residential, think of electronics is just the perimeter to the home, right? If you live in a single-family home, a whole lot of mechanical locks in the interior, that's going to remain a mechanical solution. In the perimeter, it is becoming more electrified. And for us, one of the things about our electronic locks is you could see the average selling price being double and the useful life being shorter, right? And that's a net plus for us, right?

So you can have a home where traditionally our parents may have lived in the same house for 30, 40 years, never changed the locks, right? If you have electronics locks, it's going to cost twice to -- when you make the initial purchase. There's a shorter replacement cycle because obviously, electronic componentry doesn't have as long a useful life. But there's also a net benefit where technology will improve over time such that you will take off a working lock and put a new generational lock.

I'll give you an example, my home. My first electronic lock did not have WiFi capability. So when the new solution came out, great ad to have WiFi capabilities, so I put a new lock on the door. In the case of non-res, which is the lion's share of our business, right, a lion's share of our business is nonresidential, yet that same dynamic of a replacement cycle with being shorter and the ASP being double. There, the technology could be a digital credential. Our first adopters of electronic locks in higher ed didn't have mobile credential capability because it didn't exist.

So we're seeing some of those early customers retrofitting to the capability of having a mobile credential. It makes sense in higher ed, if you think about students, they have to get access to 10,000, 20,000 dorm rooms a year, right? So much more efficient for them to do that via an electronic solution, a mobile credential than the traditional mechanical when someone like myself was in college.

Mike, could you talk about the -- how do you accelerate the electronics versus the mechanical hardware, the movements by organic versus the M&A, like for Allegion?

From an organic growth perspective, think of electronics as that high single digit to low double-digit grower for us, and we've been able to demonstrate that over time. Our industry is -- it's slower moving on adoption. And what I mean by that, if you think about LED lighting, LED lighting, there was massive adoption in a short window. For our industry, think of it as a steady tailwind, right? Steady tailwind to growth where you're not going to grow 20%, 30%, 40% a year organically in electronics, but it takes a long time to retrofit the old massive installed base over time.

As a result, we think we can grow it at that high single, low double-digit clip, and mechanical doesn't grow at that level, right? And so it's not going to grow as well as electronics. Electronics is our real accelerated growth driver.

And if you could talk about the margin expansions and opportunities? And could you -- and then if we step back and thinking about you create high levels of margins versus the competitors, like what makes you unique? What makes you differentiated for creating margin profile?

It's part of our DNA, right? So when we think about managing margins, it's something we do extremely well. And part of it is how we manufacture our products. If you go to our Indianapolis facility where we make our exit device, we service the North American market via this one plant that is a highly configured complex offering.

What do I mean by that? We can offer millions of SKUs to our customers out of that plant. It's how we're enabled to maintain the margins that we do. We're extremely efficient, coupled with the premium brand and high-quality products that we have in our demand generation activities, which are tops in the industry as well.

But from a margin perspective, it's a combination of the great front end where we create demand in the design phase with the architect, we influence the end user and we pull the product through the channel as well as a manufacturing excellence that allows us to really serve our customers very efficiently.

And then if you could talk about the pricing strategies to expand the margins versus inflation, especially in 2025 and also in 2026. How would you manage those kind of inflation by pricing strategy?

As a company, if you listen to our earnings calls, you'll hear us talk about pricing and productivity covers inflation and investment. It is core to us. We talk to every quarter. It's how we think about managing the inputs. If there's inflation, we have to pass that along to pricing in the form of pricing. And for us, how we're able to do it is that great front end that we have in the nonresidential business where we're able to command that pricing.

In our industry, we're able to compete on value, not price. It's not an industry where it's a race to the bottom. Everyone prices for the value that they create in the marketplace. Being the premium player, we have as strong as anyone ability to get that pricing and it's part of our DNA. The other half, which is -- maybe we don't talk as much about but is really important, we have to drive productivity to fund our investments as part of what we do and look for us to continue to invest in automation in order to do that as well as drive an efficient operation. It's a combination of both. It's that pricing and productivity that helps provide some of the tailwinds to margins.

If you look at '25, we were subject to significant increases in inflation because of tariffs. And as you saw, we were able to manage that and have net positive dollar coming from pricing and productivity in excess of the inflation and investment. If you look at our history, we had a slide in our earnings deck a couple of year ends ago, where we showed that trend over a 5-year period. And what you see if you go to that slide, is a history of being able to demonstrate that pricing excellence and productivity excellence to drive margin expansion.

Mike, if I could double-click on productivities by automation, platforming and digitalization, could you give us some examples like for -- like having those kind of impact?

Sure. In the case of platforming, I talked about that earlier. And for us, it's not just electronics. We're also doing it in our mechanical portfolio. It allows us to drive efficiencies, speed in the case of new product introduction, so you get some leverage on the R&D spend. But even operationally as you operate your factory, if we can eliminate some of the internal complexity, allows us to run more efficiency.

So platforming has been a leg of that. Automation is another leg of that. As a company, we've been increasing our level of CapEx in our plants to drive productivity. We are now -- we see a step-up since I became CFO to now, it's about double the dollars per year. Think of it as a 2.5% of sales CapEx. The key thing for us is we're spending the capital, but you're seeing the productivity and you're seeing the margins, right? And so investing in automation, both in the plant, but even in the SG&A space, makes us more efficient and look for us to continue to do that.

And let's talk about residential market in the U.S. And how do you see demand in 2026 plus your initiatives to grow for the next couple of years as a strategy?

For us on residential, we've been pretty consistent with our messaging that residential has been soft. So in 2026, during our outlook that we provided, let's say, a month ago on our earnings call, we said down slightly, right? In '25, we were down low to mid-single digits. So it's been a softer market for us. Anyone who follows resi knows that's in anyone who sells into the residential home.

For us, one of the opportunities for growth we've been taking advantage of is electronics. And our electronics in residential has also grown faster than mechanical, not at the high single-digit rate we were talking of, but certainly more than the mechanical. And so it's an opportunity for us to either mitigate the weaker market or to drive accelerated growth depending on how you use the terminology. But it is a net plus for us. In our third quarter, we highlighted this in our earnings call, where we had a new product introduction, and you see the growth that can come from innovation.

So look for us to continue to innovate in electronic locking across the portfolio. But inclusive of that, it would be the residential business where it does allow us to get some secular growth opportunity.

And then so when you talk about innovations, when it comes to AI, could you talk about the opportunities and risk of AI when it comes to your operational excellence of the business model?

If you think about operations, it's a way for us to drive efficiency, a way for us to drive productivity. It is a -- it's in the early stages. We're all trying to figure out how to leverage it better and we're going to be able to leverage that better over time. But one of the ways we've been able to initial quick win is we've been able to automate our order entry process with our customers to be more efficient in how they get us their orders, eliminating the need for as much manual intervention. So it's a way that 5 years ago, we were less efficient than we are today. I think -- when I think about I see it as an opportunity for us, especially on the cost side.

As far as threats, I really don't see a big threat from AI. We get asked by investors all the time about, is AI going to disrupt our business? And I'll just go back to that complexity of the nonresidential business where we create demand by influencing the architect, influencing the end user, creating that standard and having an installed base on a campus for decades up to centuries as well as an elaborate distribution network where we have relationships for decades and longer. All of this combined with offering a broad set of products because if you can't provide all elements to the offering of a building, you're going to be less successful.

That is a case where there's only a couple of players in North America who could really do this at scale, 2 to 3. So therefore, I think it's an opportunity as technology over time advances, it tends to be a plus for the largest players in our space.

And then could you talk about the risk of electronics evolutions when it comes to cyber securities as well as the data securities and how would you tackle with those kind of risk from Allegion?

Obviously, for electronics, this is something that the mechanical we never had to worry about, right? So it's something we put considerable time and effort to ensure we have the most secure and safe products and the leading products in the industry. Also with Allegion, and it's important to understand where we do and don't play, we are not playing in the enterprise access solutions space. Those would be other companies where we partner with them. And that is not just Allegion. Our whole industry will partner with enterprise access solutions or access control solutions.

And so as a result, when you think of Allegion, don't think of us as playing that enterprise access control, think of us as our partner of choice strategy where we partner with these players. But ensuring that we have the most safe, secure products is top of mind for us, whether that's an electronic solution or a mechanical solution.

Mike, if you could talk about the international business in terms of the growth opportunities plus the margin expansion opportunity, please?

International, as I mentioned, when we started Allegion, this journey in 2014, 0 operating margin, right? We were a breakeven business. And when I was in Investor Relations, 2016 to '19, I'd get asked all the time, why don't you guys just get out? And what we were able to demonstrate is we've been able to get to industry-leading -- industry-standard margins. So our margins in international are up there with the peak players in the space, right? Considerable improvement over time.

A couple of ways we've done that is operational excellence, bringing some of the capabilities and strengths we have in the Americas and leveraging that internationally. We've also spent some effort on the portfolio, both on the addition side, where we've added great electronics businesses that drive faster growth and more profitability. And on the sales side, where we've divested some underperforming assets. Think of the Middle East, Korea, China, et cetera.

So I think it's a combination of both where if you listen to our earnings calls, we'll say this all the time. It is a much healthier portfolio of products today than 15 years ago. I think it positions us, so if we think about the next decade, we're going to be in a much better place than we were 10 years ago, right? And so that's something we're quite proud of the improvement in the International segment as a company.

And capital allocation, M&A. Mike, could you talk about the -- with the strong balance sheet, robust cash generation, how do you prioritize between organic investment, targeted M&A, share repurchase, dividends?

Yes. We talked about this a bunch at our Investor Day last May. I recommend you all listen to it. We probably spent a good 15, 20 minutes on it. I would say it starts with organic growth. Look for us to continue to invest in R&D to drive the right products. That is core to us. We'll continue to do that, right? We help pay for that by driving productivity, but we're always going to continue to invest in R&D. And we've increased our R&D rate. From 2021, the rate then to today, 1.5x. What do I mean by that? The $1 spent today are 1.5x the dollar spent in '21. So organic growth is key.

Then with the remaining free cash flow because organic investments, R&D, that's within free cash flow. Historically, think of us as about 50% of our free cash flow will go to M&A. Dividends payout ratio is about 30%. The remaining 20%, that's where you'll see a share buyback or M&A. We call it the swing factor. Historically, if you look at the historics in that Investor Day deck, you'll see that equates to what share buyback is.

You could think of it over time. Last year, obviously, more M&A. So it's a little more last year. But over time, think of it as roughly half the cash flow will go to -- free cash flow will go to acquisitions, 30% dividend and then we also have the buyback.

I think the time is up. So I'll wrap it up. Thank you very much, Mike, and thank you for everyone for joining today.

Thank you.

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next, Allegion. We have John Stone, President and CEO; and Josh Pokrzywinski from Investor Relations. Welcome both of you, and thanks very much for being here.

Thank you.

Maybe kind of first off, you had your earnings sort of fairly recently. So just help us understand kind of how you see the shape of the year playing out? Anything we should bear in minds, kind of, seasonality wise, are we expecting sort of first quarter year-on-year in terms of growth and margins look pretty similar to the fourth quarter you just reported?

Yes, I think that's fair. And as we mentioned the guide that we're looking for is on the non-res side of our business. We see volume growth at a level rather commensurate with 2025. That's the largest part of our business. So certainly, that's helpful.

Then on the international side, we do see organic growth as well, mix of price and volume. We talked about on the resi side of our business, the residential side. We're starting the year with a rather prudent view and I think continued softness is what we would see there. And just we'll stay watchful for any catalyst that might change that.

Your point on Q1 looking a little bit like Q4. I mean that's rather typical for Allegion. I think you see, and it's not surprising with the way construction works. Q2, Q3 usually very busy quarters. Q1, Q4, maybe a little lighter on that. And so I think that is a fair way to look at the year ahead. And I think, continuing to drive organic growth and looking forward to a good year.

And when you look at the non-residential business, there's a lot of different verticals there. Allegion is better positioned or stronger weighting in the institutional side of things. How does institutional markets playing out? There's been some noise in government activity last year for various reasons, education, the K-12 maybe had some stimulus help in the rearview mirror. How do you feel about the institutional outlook?

Yes. A few things going on there. I think the most important headline when you look at Allegion's non-res business is our portfolio, our brands, our spec writing capability affords us broad end market exposure. So we are a bit heavily weighted towards institutional. We're transparent on that. But no one single vertical is going to make or break a particular year. So broadly speaking, we do see organic growth across non-res.

I'd say, yes, certainly, in 2025, higher education came under some federal government pressure. You could see budgets being pressured as a result. On the upside, though, you see municipal bond issuance still at very strong levels. And then certainly, last couple of years, muni bond issuance has been strong. It obviously takes a while for that to become shovel-ready type projects. So that should have a bit of a tail.

Then I'd say, don't discount the importance and the size of our installed base in the institutional segment. And anyway, if our business is roughly half new build, half aftermarket, that aftermarket part of the business because of that installed base, is quite stable. And so institutional in general, doesn't have the volatility that some of the commercial verticals do. It's just a little more stable. And I don't see that changing dramatically.

And on that commercial side of things, how is that playing out? It seems like office hit bottom kind of what pace of recovery are we seeing there? What's happening in some of those other commercial markets in the U.S.?

Yes, absolutely. And I think the commercial verticals and office in particular, '22, '23 post-pandemic, tough time for them, right? Vacancies were very high, et cetera. If you look at office today, you can see some bright spots here and there. Metro New York being one. Office demand, particularly in the Class A space, just recently hit a 20-year high. We'll see do other major metro areas kind of follow suit. Is New York leading the way? I think that's yet to be seen.

On the multifamily side, a lot of new build '22, '23 came online in '24, maybe early part of '25. So new build has been a little soft. And we have seen a bit of an uptick in different parts of the country on the multifamily side. So happy to see what we hope are some green shoots there.

And residential, it's been very sort of bumpy for you. I think, it was pretty good from some product launches and then a soft end to the year. So how are you thinking about kind of what changed, if anything, late last year? And again, it seems very choppy. So has it kind of evened out again, most recently since then? How should we think about that range?

Yes, I think overall, I would say, we are going into 2026, assuming resi remains kind of soft. And it can get lumpy certainly. And you do have to look -- that's one reason why we don't guide quarters. It is lumpy. I would say if you also look at the channel dynamics, selling through e-commerce and big-box retail, our channel doesn't hold a lot of inventory. So inventory correction type things do happen, but they're always very short-lived. It's not something you would see a "destocking" happening for like 12 months. That wouldn't happen in our space.

So, I think, lumpiness can certainly be there. And even if you recall, Q4 of '24, so the year-on-year comp that we were up against this last Q4, we called out some rather large orders that we saw from our channel that looked a bit peculiar and we attributed it to maybe there was some pre-buy in anticipation of tariffs. So that lumpiness, I think, can always be there in the resi space. And you saw lumpiness because of a new product launch in Q3. We're putting up mid-single growth at a time when resi is soft. So that probably looked a little bizarre as well.

But overall, just soft is the way I think about that res, and you just got to understand there can be some lumpiness here and there.

And when you think about market share for Allegion domestically, I said the tariffs are still relatively recent, even though it doesn't feel like it to people in this room, I'm sure. But have you seen any shift in market share, competitive behavior? Have any lower-tier rivals being kind of squeezed out of the market by tariffs or it has been pretty steady?

Yes. Since our industry, we all sell through distribution. Market share to any degree of precision is quite elusive. I would say, to pinpoint. I would say, over the last, really, 3 years, I'm very pleased with the organic growth. We've put up with respect to our largest competitor in the Americas. And I think still probably the trend could be that the two of us, the largest two in the space have gained a little bit of share against some of the short liners. But again, it's very difficult to put pinpoint accurate numbers around share in our space.

And I think on the sort of pricing and cost side of things, reasonably high kind of metals buy-in for some of the mechanical locks. How comfortable do you feel about the ability to pass on higher metals costs and sort of broader cost inflation to customers?

No, I think on the non-res side of our business, we do enjoy pretty strong pricing power, disciplined industry structure. You've got safety critical life-saving products that are very modest portion of the overall building cost and the ability to spec your product in, the sales process is very consultative on the proper standards that you need to meet code.

And then, you add all that together along with very strong brands, category-creating brands. In fact, end-user relationships that have lasted and endured decades, distribution relationships that have endured for decades, add that together with the industry structure we have, and we do enjoy good pricing power there.

It's never something that we would abuse. And that was why as the tariffs did come in, obviously, it takes some time to process that and understand what is the real impact to us and then communicate to our investors and to our customers, we do expect to pass on and cover the dollar value of that inflation.

We never wanted to profiteer off of tariffs. And just, again, would never abuse that pricing power, but price to the value that our products deliver, and we do look to price to cover inflation.

Great. And on the residential side, how comfortable do you feel about that price cost element? I think the margins ending the year, there was some pressure in the Americas on resi, but I'm not sure is that more volume related? It seems...

Volume related, definitely. And certainly, in the resi space, given customer concentration and the dynamics there, the pricing power is less when compared to our non-res business. We did pass price due to tariffs that came through, I think, still pushed pricing there. And I would say, yes, the volume deleverage did have an impact in Q4, certainly. Yes.

And when we look at operating margins this year, I think a lot of companies at this conference, first half margins under pressure, tariffs, a bit less volume growth than second half, people are assuming stronger volume growth, the anniversary the tariff cost pressure, so margins kind of pick up year-on-year. Is that kind of similar to what we should expect from Allegion in terms of like margins year-on-year, first half, second half?

Yes. I would think of it more as a -- really a targeted first quarter comment, Julian. So it's kind of on the back of what John was talking about in terms of the price recovery more on a dollar basis than a margin basis, you did see that tiering of the math in the fourth quarter. That will continue in the first quarter. It might even be a little bit more acute. When we talked about that margin range being somewhere between where we finished in the fourth quarter in the Americas and where we were in the first quarter of '25, which, as you know, predated tariffs had some pretty good mix as well.

But if you look at the totality of the year, I would say operating leverage consistent with what we would have said at Investor Day and kind of that longer term, call it, 50-ish basis points a year. Just has that comp in the first quarter that you'll see a little bit of pressure on.

Perfect. And then if we're thinking about chip supply, that was an issue for Allegion and some bunch of other companies here just after COVID. I guess, there was a lot of learnings from that. And so when we hear about possible chip constraints and higher chip prices today, do you feel pretty comfortable with that because of what Allegion learned from the issues kind of 4 years ago?

Yes. I think some of the things we learned were that IoT-type chips, right? These low processing, low memory type chips are typically on different fabs than cellphones, data centers, these other chips that might be impacted by today. So that was one lesson.

We also modularized our embedded software, our firmware, if you will, that so we can accommodate different microprocessors in our electronic components that again, diversify your supply base a little bit. So I think we did learn important lessons and have taken good steps to mitigate the risk in the supply chain. And at this point, feel okay with what's contemplated for 2026.

Got it. And when we -- obviously, the chips are sort of feeding into the electronics, electromechanical parts of your portfolio. How are you feeling about organic growth for that part of it? And where did 2025 end up roughly with that share of the total Allegion revenue coming from electronics?

Yes. I think if you look at the K, we've got electronics, software and services, not 33% of the total. And that's even while some acquisitions and organic growth on the mechanical side was still progressing very nicely. Really pleased with the electronics growth, double-digit growth in 2025. And we do anticipate that electronics continues to outgrow mechanical in our portfolio. And happy with the acquisitions that we've made in that space too. ELATEC being the largest acquisition with global portfolio of readers and credentials. Right in line with the business case that we were anticipating as we made the acquisition. So off to a very good start. We're happy about that. We see a lot of reasons for that to continue.

And when you look at that kind of software and services part of the business, maybe help us understand kind of what are a couple of areas there that you're most excited about the growth that Allegion is seeing right now in software and services? And do you think we'll see a pickup in M&A activity by Allegion there or will be fairly steady?

Yes. I think hit that last point first. We do anticipate to continue to grow through acquisition, profitably grow through acquisition. I'm happy with what we've done in the last 2 years. You should not extrapolate a dollar value or a deal volume necessarily. We're going to be disciplined there and make sure it's a strategic fit that helps our customers, generates good returns for our shareholders, et cetera.

And certainly, electronics and complementary software, as we shared in Investor Day, we'll be a part of that strategy. I think the way we see software, in particular is, it has to be related to and differentiating for our hardware. That's why we would look to extend into that.

And what's going to happen? If I look at the evolution of electronic locking, a decade plus ago, it was offline locks. That has kind of evolved into wired solutions with panels and door controllers and WiFi gateways and things like this, where that's moving is to connected locks.

And the connected lock affords you the opportunity for 40% or 50% lower cost total install, because you don't need some of those other electronic components like a gateway. The lock has more functionality and can be real-time connected, real-time visible can have over-the-year updates for the credential library that gets you in and out of that door. So lower cost to install, presumably, you save some labor time as well on that.

And then more functionality at the door and within the lock. I think that then affords the opportunity for a company like Allegion to make better use of the data that comes off the lock that really isn't used today, but can be in the future. And so something like a Waitwhile, that we acquired last year, got their start with virtual queuing.

If I can fix an encrypted credential to your position in the virtual queue, then you can get the most seamless and also simple and secure access to wherever you're going. And that's functionality that's not existing in our space today, that going to be excited to deliver soon. So think along those lines that software that interacts with and differentiates Allegion hardware is where we would focus.

And is there anything kind of interesting for you in the sort of subscriptions type world or not necessarily? You think, sort of hardware and then software that can enable the hardware is where you'll stay for focused.

Gatewise that we acquired some organic development we've made for multifamily access control, Waitwhile itself. Those are recurring revenue models, small but growing nicely. And I think we would stop short of giving you a particular quantified target of where we're aiming and just stay much more in line with we do see great opportunities to drive this next evolution of electronic locking to the real-time connected locks. I do feel we're leading there, and that's where we'll continue to push.

Great. And then on the international business, there was a lot of optimism when Allegion spun out, that there'd be a big wave of growth in M&A there happen in fits and starts, you've been more active on that front. And I think help us understand kind of how you see revenue growth in international kind of organically the profile? And when you're looking at M&A, in theory, there's a huge range of assets you could just keep buying because your market share is so low. What's the appetite to do that kind of roll-up in international?

Yes. Very pleased with the growth that we've delivered in international. And that's even coupled with some selective pruning. We have made a couple of divestitures in international just to improve the portfolio quality. And it was a bit a case of the International segment had to earn the right to grow, and I feel they've done that. A lot of self-help that has gone on.

And some other interesting things that are happening is we now have, I think, between the Americas and international, some good cross-segment leverage. So the Americas has built up, as we've talked at Investor Day modular designs that can be translated over to the International segment and new electronic locking can be developed in a fraction of the time with a fraction of the engineering resources that it used to take, and we can get to market faster.

On the International side, we last year introduced our first batteryless e-cylinder that does have global relevance, as well as we acquired electronic strikes with a company called DORCAS in Spain back in 2024. That also has global relevance as do ELATEC, readers and credentials. So I think that will continue to evolve. We do have an active M&A pipeline in both the Americas and International.

And so, I'm excited to see continued profitable growth. They're with a much higher quality portfolio on the international side of our business.

And when you think about kind of margins versus getting that top line higher in international you'd say both are important, but it may be hard to grow the top line much through M&A, if you're very strict on the margin criteria of what to buy. So kind of maybe help us understand how you see that playing out? And should we expect kind of more dollars of EBIT growth in international rather than necessarily trying to get margins into the 20s or something?

Yes. I'm expecting you see some of both. I'm expecting you see profitable growth overall, and you will see top line growth. And I do anticipate we will continue to deliver margin expansion year-on-year. I think that's definitely the strategy.

And when you look kind of geographically within international, what are the most sort of exciting opportunities for you at the moment? Because there's quite a concentrated business in a way in specific geographies.

I think geographically, that has been part of the pruning that we did, right? We did divest a small business we had in South Korea very early in my tenure. We -- I would say very gracefully exited our business in China that had been declining over time anyway. And then recently divested a locksmithing business that we owned in Australia. That's the work of our channel, not for us to do, so non-core. I think those can continue to happen.

But geographically, Australia, New Zealand, Western Europe will remain our focus for the foreseeable future, where we've got brand strength and brand recognition where we've got installed base, where we've got human capital. I don't anticipate a big push on new geographies in the foreseeable future as a source of growth. And I think the runway in the markets where we currently are is plenty for us to continue profitable growth with.

And is the issue in sort of the geographies lying out there is just lower profitability or just extreme market fragmentation? What are kind of some of the factors that keep you away from the large emerging markets?

Yes. I think, the risk and return, as compared to what we see in our current organic growth plans and our current M&A pipeline and the geographies where we're already active, the risk and return into entering a brand-new market, just doesn't pencil out. We have better opportunities in the markets where we're currently participating and a much lower risk to make an acquisition or introduce a new product, make an acquisition that I can bolt on to an existing business unit structure. I think that's a much more prudent way to grow international for the foreseeable future.

And there's no discussion here complete without mentioning the D word. So data center sort of scaling for you. What's the rough exposure there in some of the main products that you're making a push with into that vertical?

Yes. So data centers, obviously, small, but growing nicely. It is the line I've used. I would just say now that I've used it with you a couple of times, I have to say it's less small, but still growing nicely. Data centers are very high security installations, which means a very rich product mix for Allegion. So it's a very good business for us. We have end-user standards, end-user relationships with the who's who of hyperscalers. And so very proud of the way our teams have built those relationships and write those specs. And I think that, that still has quite a tail of business opportunity for Allegion and looking forward to that continuing. Yes.

That's great. Good. Well, with that, we'll switch to the audience response questions, please. So I think the first question is around current ownership of Allegion. Fairly typical 60%. No.

Second question is around general bias or attitude to Allegion right now. So, fairly neutral.

Third question is around through-cycle EPS growth against the kind of multi-industry average here. So generally in line with peers.

Next question is on capital usage and how to use excess cash. Very even both on M&A and buybacks.

Next question is on valuation.

Great. Great audience.

And what PE multiple should Allegion trade at? Sort of high teens to 20x, I suppose.

And then last question is around what's the main kind of valuation headwind or anchor right now? So organic growth, the biggest concern.

Great. With that, thanks so much, John and Josh for being here with us today. Thank you.

Thank you. All right.

Thanks a lot.

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 Fourth Quarter and Full Year Earnings Call. [Operator Instructions] 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, and thank you for joining us for Allegion's Fourth Quarter 2025 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 2. 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 3, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone. Thanks for joining the call. Allegion delivered a strong year marked by high single-digit enterprise revenue growth, more than $600 million of accretive M&A and solid execution in a dynamic and inflationary environment.

I'm proud of the Allegion team's performance in 2025. I see our results as a testament to the talent and dedication of our people, the strength of our brands and channel partnerships and our sound strategy as we deliver on our commitments to shareholders.

As we enter 2026, our broad end market exposure supports continued growth led by Americas nonresidential. U.S. residential markets were softer than expected in the fourth quarter, and our outlook contemplates that residential remained soft in 2026. However, our team has a proven track record of execution across a variety of macro conditions. We're initiating fiscal year 2026 adjusted EPS guidance of $8.70 to $8.90 per share. I'll provide more detail on our outlook later in the call.

Please go to Slide 4. Let's take a look at capital allocation for 2025, starting with our investments for organic growth. A core element of Allegion's portfolio strength is our brand's legacy of innovation. Brands like Schlage, Von Duprin and LCN invented their product categories a 100 years ago and are known as pioneers in our industry. Allegion is built on that legacy by expanding our offerings of mid-tier commercial product lines.

Last September, we launched our Schlage Performance Series locks, providing more ways to win in the nonresidential aftermarket, alongside the mid-price point Von Duprin 70 Series exit devices that were released in 2024. These are complemented by our mid-tier offerings with LCN closers where we now have a full suite of commercial grade offering from the industry's leading brands at more price points to meet customers' needs.

As you know, 2025 was an active year for acquisitions for the company with approximately $630 million of capital deployed. These acquisitions align to the strategy we outlined at our May Investor Day including additions to our core mechanical portfolio as well as electronics and complementary software solutions that meet end user needs for safety and convenience.

As we enter 2026, the pipeline is active, and we remain disciplined to drive returns and continue positioning Allegion as a leading pure play in security and access. Allegion continues to be a dividend paying stock. In 2025, we paid $175 million in dividends to shareholders.

Looking ahead to 2026, we've also just announced our 12th consecutive annual increase in dividends. While we did not repurchase shares in the fourth quarter, share repurchase was part of our capital allocation in 2025, totaling $80 million. At a minimum, we intend to offset the creep from share-based compensation. You can expect Allegion to be balanced, consistent and disciplined with capital deployment over time with a clear priority of investing for growth. Mike will now walk you through the fourth quarter financial results.

Thanks, John, and good morning, everyone. Thanks for joining today's call.

Please go to Slide #5. As John shared, our Q4 results reflect continued strong execution from the Allegion team, as we delivered high single-digit revenue growth for the enterprise. Revenue for the fourth quarter was over $1 billion, an increase of 9.3% compared to 2024.

Organic revenue increased 3.3% in the quarter, led by our Americas nonresidential business. The organic revenue increase was driven by price realization, partially offset by volume declines in our Americas residential and international businesses.

Q4 adjusted operating margin was 22.4%, up 30 basis points compared to last year. Price and productivity exceeded inflation and investment by $12 million, driving 20 basis points of margin expansion in the quarter. Favorable mix also benefited margin rates.

Adjusted earnings per share of $1.94 increased $0.08 or 4.3% versus the prior year. Operational performance and accretive acquisitions contributed over 10 points of EPS growth. This was partially offset by higher tax.

Finally, year-to-date available cash flow was strong at $685.7 million, up 17.6% versus the prior year. I'll provide more details on our balance sheet and cash flow a little later in the presentation.

Please go to Slide #6. Our Americas segment was resilient in Q4 despite a weak quarter in residential markets. Revenue of $795.5 million was up 6.1% on a reported basis and up 4.8% on an organic basis, led by our nonresidential business. Our nonresidential business increased high single digits organically, driven by a combination of price and volume growth. Demand for our products remains healthy, supported by our broad end market exposure. Our residential business declined high single digits as favorable price was more than offset by volume declines as residential markets remain soft.

Electronics revenue was up low double digits for the quarter and for the full year 2025 and continues to be a long-term growth driver for Allegion. Additionally, reported revenues include 1.3 points of growth from acquisitions.

Americas adjusted operating income of $216.2 million increased 5.4% versus the prior year. Adjusted operating margin was down 30 basis points in the quarter. Pricing productivity net of inflation and investment was a 30 basis point headwind to margin rates in the quarter. However, it was positive on a dollar basis as we were able to offset higher inflation in a dynamic environment. Additionally, mix was favorable to margin rates and offset volume deleverage in residential.

Please go to Slide #7. Our International segment delivered revenue of $237.7 million, which was up 21.5% on a reported basis and down 2.3% organically. Growth in our electronics businesses was more than offset by weaknesses in mechanical. Net acquisitions contributed 16 points to segment revenue. Currency was also a tailwind, positively impacted reported revenues by 7.8%. International adjusted operating income of $39.4 million increased 27.5% versus the prior year period. Adjusted operating margin for the quarter increased 90 basis points, driven by accretive acquisitions and favorable price and productivity net of inflation and investment. We continue to drive portfolio quality in the International segment through self-help, selective pruning of noncore assets and adding high-performing businesses where we have a right to win.

Please go to Slide 8, and I will provide an overview of our cash flow and balance sheet. Year-to-date available cash flow was $685.7 million, up over $100 million versus the prior year, primarily driven by higher EBITDA. I am pleased with the cash flow performance in '25. For 2026, we anticipate our available cash flow conversion will be approximately 85% to 95% of adjusted net income.

Next, working capital as a percent of revenue increased in 2025 due to acquired working capital, which does not impact cash flow.

Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.6x, which supports continued capital deployment.

I will now hand the call back over to John.

Thanks, Mike. Please go to Slide 9. And before we discuss the 2026 outlook, I want to provide an overview of our key end market assumptions.

In the Americas, we see continued volume growth in nonresidential markets, similar to 2025 levels, and this is supported by our spec writing trends. Our broad end market exposure and large installed base make for a resilient business model, one is less reliant on any single end market vertical to drive growth. We do expect a more modest price contribution, however, to reflect slightly lower inflation as compared to last year. If inflation were to remain higher, the business has proven our ability to manage inputs and drive the necessary pricing as you saw in 2025. Residential markets were weak throughout 2025, demand is likely to remain soft in 2026, and we expect Americas residential to be down slightly.

For international, we see modest organic growth, primarily driven by our electronics businesses. We have been focused on improving portfolio quality in international through a combination of self-help and acquisitions, which we believe supports growth in markets that remain sluggish.

Please go to Slide 10, and I'll discuss our outlook for 2026. We expect total Allegion revenue growth to be 5% to 7% and organic revenue growth to be 2% to 4%. Total growth includes approximately 1 point of foreign currency translation and 2 points of carryover contribution from M&A, primarily Allegion International. We expect organic growth of low to mid-single digits in the Americas from a combination of price and volume led by our nonresidential business. We expect electronics to outpace mechanical growth, consistent with our long-term performance and customer trends. In the International segment, our outlook assumes low single-digit growth led by electronics with largely stable mechanical markets.

Our adjusted EPS outlook is $8.70 to $8.90. This represents growth of approximately 8% at the midpoint, inclusive of an approximate $0.10 headwind from a higher tax rate. You can find more details on our outlook slide and in the appendix.

Please go to Slide 11. In summary, Allegion is executing at a high level while staying agile and steadily delivering on the long-term commitments we shared with you at our Investor Day. Our strong performance is led by an enduring business model in nonresidential Americas, double-digit electronics growth and accretive capital deployment as we acquire good businesses in markets where we have a right to win. I'm proud of the Allegion team and appreciative of our strong channel partners.

With that, we'll take your questions.

[Operator Instructions]

Our first question will come from John O'Dea from Wells Fargo.

Can you hear me?

Yes.

Yes.

Can we start on the resi side in the fourth quarter? I think you touched on it being kind of softer than anticipated. And so just what you saw develop over the course of the quarter, the degree to which that extends into the early part of this year? Whether that was more kind of destocking events or sell-through demand and what you saw on the pricing side of things as well, if there is any need to adjust price there based on the demand environment?

Yes. Joe, thanks for the question. I think certainly, resi in the Americas ended the year softer than we had contemplated. And honestly, resi throughout the year, was a little choppy, let's say. We put up mid-single-digit growth in the third quarter, really largely on the heels of a very successful new product launch and then a pretty soft Q4. I would say, yes, '26 started off better. Let's just say -- but just looking at resi, it did end softer than we had contemplated. And I think that's part of the things that just caused us to at least take what we think is a very prudent assumption into 2026 that we would expect resi to be soft.

And certainly, should there be an uptick in that market, we're positioned very well to capture upside there. I would say with your question around pricing, now there wasn't any short-term reaction on pricing nor do I think that contributed to any of the demand softness.

The last point would be our channel doesn't hold a lot of inventory. And so any inventory correction type actions are usually very short-lived.

Got it. And then on the Americas organic outlook and the low single digit, mid-single digit. Just any color as we think about price and volume components of that? Is that a little bit more price than volume, the price carryover tailwind. And then how you think about that volume progression over the course of the year? Is the volume growth expected to get better? And is that a function of comps or anything that you're seeing in the spec activity that would suggest a little bit better demand environment as we go through 2026.

Yes, Joe. So thanks for the question. I would say, as you think about Americas for '26, we expect to see both price and volume growth. But as you suggested, more pricing than volume growth for the year. Don't like to give quarterly outlook, but I'd be happy to kind of unpack it qualitatively for you.

As you know, the Americas -- as you start the year in Q1, revenue levels are similar to the revenue in Q4 in total, historically. And then from there, we tend to have higher revenue in the middle 2 quarters. We expect that same seasonality where the middle 2 quarters are our largest quarters. And obviously, Q4 a little less. So as you model this, I think that could help you qualitatively.

In addition, you do have to look at the prior year comp as you think about pricing and margins for that matter. You have to consider how we finished in each quarter for 2025 as you think about that pricing impact for the next year. Obviously, Q1 of '25, we hadn't yet felt the inflationary impacts from tariffs, so you didn't have the pricing or the inflation. So hopefully, that helps you as you think about unpacking the year from a top line.

Our next question will come from Tomohiko Sano from JPMorgan.

So you maintained sector-leading margins despite the higher cost through pricing productivities and acquisition synergies. Can you break down the contributions from each of these levers and which will be most important in 2026, please?

Yes. Tomo, we put all that information in our 10-K. So when you get a chance, you can look at it for the fourth quarter and full year, I guess, the full year is in the K. I'll share, obviously, on the enterprise level, we did get some margin tailwind from that pricing productivity in excess of inflation and investment. There was a headwind in the Americas. That's a function of the [ tyranny of the math ] we've been talking about all year long.

We also had some slightly -- we had favorable mix, but the residential volume deleverage we experienced kind of mitigated that in the Americas region as we highlighted. As you think about 2026, you get back into the full year margin expansion. We give all the components at the enterprise level. As you know, the Americas is our largest business, and we can't drive the enterprise margin expansion without the Americas being in the similar ZIP code. So it kind of provides you at least a framework for the Americas as well.

And then as far as the components, I would expect to have pricing and productivity in excess of inflation and investment on a dollar basis. And from a rate basis, I wouldn't expect that to be a headwind in 2026. It was obviously in the Americas in '25. We do have that first quarter where you have that carryover impact that last quarter, as I mentioned in the previous answer. But for the full year, expect price and productivity to be positive on a dollar basis and certainly not negative on a margin rate basis.

And a follow-up on international markets. So these markets are expected to see continued sluggishness with growth primarily from acquisition in electronics. So can you provide more color on specific geographies, particularly Western Europe and Australia and when you expect the demand recovery, please?

Yes, Tomo, this is John. I appreciate that. And I think, yes, we do see our electronics businesses leading the way. That is primarily a Western Europe base business. And then within that, primarily a DACH region businesses, but we are expanding Pan-Europe with that. And those businesses performed very well in 2025, and we expect continued growth out of them in '26.

I'd say Australia and New Zealand, end markets haven't been great. And so a little bit of improvement there off of pretty weak comps, I think is not totally out of the question. We'll have to see. And then largely, I would just say mechanical markets remaining a little sluggish, like we said in the prepared remarks, and electronics will lead the way for us, along with, again, some carryover contribution from M&A.

Our next question will come from Brett Linzey from Mizuho.

Okay. We'll move on to...

Sorry about that. So yes, I just want to come back to the pricing dynamics for this year. So it looks like the industry implemented a conversion of the surcharge to list and then some incremental list above that. Maybe just talk about the pricing capture you expect this year on a net basis and what you're calibrating within the guidance framework?

Yes, Brett. So obviously, our industry does do, as you know, a combination of some surcharges, mostly list price increases. We expect 2026 to be more list price increases. Obviously, we'll be agile and deal with the environment. We've learned a lot over the last few years that if things change, we'll just adjust accordingly.

But our going-in assumption is that inflation will be a little less than what you saw in 2025. So therefore, we'll get a little less pricing in total, as we mentioned on the -- in the prepared remarks. And I already talked about the rate benefit of that in the previous question.

And then total revenue, enterprise and Americas, just expect a little more pricing than volume. And then if you get the organic within the framework we provided, you can kind of have an idea of each component.

I appreciate that, Mike. And then maybe just a follow-up on investments. The $9 million tailwind in 4Q within Americas, is that just a function of the timing of some projects and some spending? And then how do we think about the investment allocation this year and if there's some flexibility around that budget?

Yes. Well, as I like to look at it, I'd like to look at it in combination of price and productivity has to fund the investments and the inflation. We've been talking about that a few years. Quarter-to-quarter, that can move around a little, but I would say, in general, think of it as we're going to take the necessary pricing actions and drive productivity to fund both.

And as I mentioned earlier, I do expect that to be a positive on a full year basis. Obviously, as I mentioned as well, Q1, we do have that tough comparable in the prior year where you didn't have the inflation or the investment. So the first quarter of '26, you do have the carryover of that last quarter where you didn't have the inflation investments. So that will weigh on margin rates.

But full year, you can back into the enterprise margin expansion. And just remember that the Americas will approximate that enterprise total as well from an expansion perspective.

Our next question will come from Robert Schultz with Baird.

Maybe as you think about '26 in the Americas, what are you assuming for institutional and commercial volume growth? Do you think they're pretty similar? Or do you expect outperformance in one of those verticals?

Bobby, I really -- when we think about our business, we wouldn't want to give volume growth nonres versus res. So I certainly don't want to dive into select verticals within the nonres market. I'll just kind of refer you back to John's prepared remarks, where he talked about that broad end market exposure and just understanding our business, our outlook supported by our spec activity as well. But I really don't want to give subvertical details of volume.

Understood. And then just on M&A, how does your pipeline look today? And are you seeing any increase in competition for deals now?

Yes, it's a good question. This is John. Pipeline is very active, I would say, in both our international and our Americas segments. And largely in line with the strategic overlay we shared with you at our Investor Day last May in terms of core mechanical portfolio, electronics, and even complementary software. So I think pipeline is busy. I think there's -- it's a very encouraging outlook.

And with all that being said, you can still count on us to be quite disciplined. And making sure we're sticking very close to our strategy, understanding where we've got, competitive advantage, right to play and a right to win and very much focused on our shareholder returns.

Our next question will come from Andrew Obin with Bank of America.

Just a question on, I guess, M&A and capital allocation. I mean, the markets have been sort of sluggish for a while. You guys have been able to deliver consistent EPS growth in pretty tough markets. You chose to allocate a lot more capital to M&A this year. I'm just wondering, given that you are laying a foundation, why don't you think that Allegion stock is a better sort of use of cash. Why don't you think your own stock is the best value out there?

And just maybe give us some insights how you and the Board have gone through the thought process where you sort of chose M&A acceleration versus Allegion stock this year?

Yes, Andrew, this is John. I appreciate the question. And I think that's why we have taken the time to put together a very consistent view of capital allocation across all of the different areas in our quarterly earnings deck as just a standard piece that we speak to.

And so, I'd say, the priority is towards profitable growth. And that's why we'll take time each quarter, this quarter, too, talking about some highlights around investing for organic growth. That is the top priority for our use of cash. And then as you look to what are the other elements of it, we're a dividend paying stock. We will continue to be a dividend paying stock. You can expect that dividend to grow commensurate with our earnings growth.

And then again, an orientation towards profitable growth. And so yes, as we started the year, we did have some share repurchase. We do have an open authorization with our board. And as that's the right decision at the right time when the conditions are there, we can do that. And we have a supportive board there. When we have very attractive acquisition targets that we can bolt on and integrate into an existing business unit structure and drive synergies and drive accretive returns to the shareholders, we're going to do that.

And so I thought what you saw in really the last 2 years, is this whole theme of, expect Allegion to be balanced and disciplined and consistent with our capital allocation to drive shareholder returns.

And maybe a little bit more color on international markets growth. You sort of highlighted DACH. How is Interflex business doing? And maybe a little bit more color what's happening in AXA?

I'm thrilled that you asked that question, Andrew. I'm so proud of our Interflex team. It's kind of an interesting business. It tends to kind of ramp up its revenue and profitability as the year goes on. So January is kind of slow and December looks great, right? It's just kind of an interesting business that way.

Blue-chip customer base, we've put in resources to grow the Interflex and the plano Solutions across Europe, doing very well. They had a bang-up year. They're really delighting their customers. We're finding ways to get AI into the software offerings just to help our customers get all the reports and the data that they need, and they're growing very, very nicely, just super proud of that business.

So we're making progress moving in beyond the core sort of German manufacturing base?

Absolutely.

Our final question in the queue comes from Chris Snyder with Morgan Stanley.

Hopefully, everyone can hear me. I wanted to ask around Americas margins. Q4 came in down year-on-year modestly. I understand that, obviously, margin -- 0 margin revenue via tariffs is a headwind. But that doesn't seem all that dissimilar from Q2 and Q3 when you guys were growing margins.

So did that -- is the Q4 decline just a function of resi volumes turning lower versus Q3 because it still seems like there was a lot of tailwinds in the quarter between mix. And then the productivity seems quite positive as well. So just any other kind of color unpacking the year-on-year margins for Americas in Q4?

Yes, Chris, you're thinking about it the right way. If you look at residential in the fourth quarter, down high single digits. And we did, as I mentioned in the prepared remarks, had some positive pricing. So when you think about volume, volumes were even worse than the total residential. So that's a pretty substantial volume decline. That's the delta when you think of Q3 versus Q4. Q3, right, you're growing mid-single and so that's a 15-point plus or close to that 10% to 15% depending on your rounding works, delta between the 2 quarters, and that explains why the margins were different.

I appreciate that. And then I know you've kind of flagged a couple of times that Q1 has this tough margin comp and we can certainly see that. But I guess if we look past Q1 and kind of think about Q2 to Q4, does the guide assume that Americas kind of get back to that target 35% or so incremental margin rate Q2 to Q4 once we have all the tariff revenue and the comp?

Yes. If you think about the fundamentals of the business, right, that core incrementals we laid out at Investor Day. After we get through Q1, that still holds. Think of that core incrementals being strong once we get through that Q1. So as you think about the full year, margin expansion in the Americas, like I mentioned earlier, we just had that one more quarter we need to get through. But the business fundamentals remain sound and consistent with what we talked about at Investor Day where we can leverage that volume once we get through this last quarter of that [ tyranny of the math ].

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

Thanks very much. Thank you all for the great Q&A. We look forward to connecting with you on our Q1 earnings call in April. Be safe, be healthy.

All right. Great. Good afternoon. Thank you for joining us. I'm Tim Wojs, and I cover building products here at Baird. We're delighted to have Allegion join us again this year at our Global Industrial Conference. Allegion is one of the world's largest manufacturers of mechanical and electromechanical locks and security products.

From the company, we have President and CEO, John Stone, up here with me on stage. We have CFO, Mike Wagnes; and then we have Josh Pokrzywinski, who's VP of IR, here in the front row.

So there's going to be a few prepared remarks from John, and then we'll hop into Q&A. Apparently, that TV doesn't work.

No worries. Great. We'll get through it. I think you know the safe harbor statement, so we'll skip that. And just real quick, for those of you who might not be very familiar with Allegion, just a quick description of our revenue split here that you see on the screen.

As Tim said, we are a pure play in security and access products. We are a house of brands. You might know us through our lock brand, Schlage. Panic exit devices, Von Duprin, closers, LCN, these would be some of our flagship brands that are probably more familiar to most people than the company name Allegion.

We concluded 2024 right around $3.8 billion in revenue. Split would be something around 80-20, Americas to our International segment. Our International segment is primarily focused on Australia, New Zealand and Western Europe and then the Americas is North America focused.

These are our markets. So I would say nonresidential in the Americas is by far our largest segment. This would include the institutional verticals like health care, education, higher ed, et cetera. There would be commercial verticals in there that, for us, would encompass office, multifamily, retail data centers would be in that commercial vertical as well. And then we also do have, and it's about 20%, 25% of our Americas business is in the single-family res space, that's primarily our Schlage brand that comprises front door and interior door hardware.

Then we do have Allegion international. And again, I talked about the geographic exposure there. I would say our strategy is such that as we look at growth going forward, you can expect the geographic exposure for Allegion to remain rather consistent, that it's North America, it's West Europe, it's Australia, New Zealand focus for us.

And then lastly, a bit of the secret sauce. If you take a casual look at Allegion, I hope you're impressed with the operating margins that we've deliver. I'd say it is best of breed in our space by a pretty fair distance. And some of that secret sauce is up here on the slide that you see. So we have a unique front-end where we are out generating end-user demand for our product. We use that demand to write specifications for buildings. We spec in our own products. We use that end-user demand to then pull our products through our distribution channel.

It is a very resilient, very powerful business model. There are literally only 2 other companies in the world that have a similar business model at the kind of scale that we do. So a good industry structure. And I think we continue to invest in the various elements of the moat that you see here on this page. And that's it for the prepared remarks. I think let's get into the Q&A.

Yes. No, that's great. Thanks for those. Anybody can raise your hand if they have a question or you can e-mail [email protected].

Maybe just spend a moment kind of on the overall kind of growth strategy for Allegion. I mean, has anything really kind of changed or evolved since you've become CEO. I mean you've always had this really good North American business. It's an oligopoly, great margins. I think volumes have probably been a little weaker since COVID relative to what they were pre-COVID, but just kind of anything kind of just on the overall growth strategy and any changes or evolutions there?

Yes. I appreciate the question, Tim. I think some key things are different since I joined First would be investment for organic growth. That would be our top growth priority. And if you look at Allegion from 2022 to today, we've expanded operating margins quite a bit, well north of 200 bps.

At the same time, we're expanding those operating margins. We have invested even more in R&D. So we took R&D as a rate of spend in that same time period from around 2.5% of sales to now north of 3%. So operating margin is expanding, but we're investing more in new product development. The product vitality and the pace of new product launches has accelerated. And I think that is now and will continue to be a good driver of organic growth in the core business.

The other key change I think you've noticed, we've done 14 bolt-on acquisitions in the last 2 years. So really stepped up the pace there. We've been disciplined with respect to the targets that we've been prospecting and sourcing for potential acquisitions, disciplined on returns and disciplined on a strategic fit. So every single one of these acquisitions has bolted on directly to one of our existing business units. It's in a geography where we've got distribution channel strength where we've got brand strength where we've got a critical mass of talent.

And in some cases, there's literally been a lift and shift of product into one of our existing ERPs that happens in a matter of days or even weeks. And so quick capture synergies. Very happy with the bolt-on M&A progress that we made. I think that has been a contributing factor to the share price appreciation this year, and we'd expect that to continue as we look forward.

Okay. I guess like when you think about kind of growing the variance between growing volume, 4%, 5%, kind of pre-COVID to kind of flattish kind of post-COVID like growth. Is it -- the fact that the end markets pre-COVID were all kind of growing, but to varying degrees. And now kind of post-COVID, you've seen all this kind of choppiness. And so you have one that's down, one that's flat, when that's up and they kind of keep oscillating. I guess like you can look at it from [ agro ], it doesn't look like that you're growing, but then to kind of go between that next level. It just seems like it's really kind of like a syncing issue.

And so I guess, a, is that correct? And then b, when do you think we could start to see all these end markets kind of resync and grow again?

Yes. it's an interesting look. So you know Allegion spun out of Ingersoll Rand right at the end of 2013. If you take the time period of like '14 to right before the pandemic, non-res was in that 5% to 7% kind of ish growth. Residential is also growing very nicely, too, at that time, take 2020, 2021 out, if you will. They were kind of weird years just with the pandemic and the very quick snapback recovery.

Post that, nonres has continued to grow. It's been a very resilient business for us that's attributed to a lot of contributing factors. Residential though, has been decidedly different. It's been soft for the last 3 years. So rather than growing at a 5% to 7% or a mid-single-digit percent like it was '14 to '19, it's been flat-ish to even down low single. And I think market-wise, that's been the biggest difference in those 2 chunks of time.

Nonres continues to grow nicely, and we're seeing that this year as well. I think also with just a little bit of help on volume on the nonres side. We're able to continue to generate mid-30s kind of operating leverage on that volume, which has helped take best-in-class margins even higher, led by the nonres business.

As we look forward into 2026, like we shared on our third quarter call just a few weeks ago, from a market condition standpoint, we see market conditions, nonres continuing to grow, resi still being kind of flattish as what you could expect out of Allegion.

Okay. And I guess when you think about -- maybe just help us with the lag because the institutional market is probably your largest market. It's probably your richest mix in terms of products going through that. And there's a pretty big lag in terms of when that business starts to recover and when you kind of put your products in.

So I guess what's the outlook on the institutional side? Have we just kind of started to see that kind of pick up and there's a kind of a multiyear tailwind here? Or has it been pretty strong in the last couple of years and you just kind of see a continuation of that?

Yes. Institutional has been stable growth last couple of years. And you're right to call out, we are by our very nature, a late-cycle business. If you think of any construction project, the last thing you're going to do is hang the doors, seal the doors and secure the doors. So we're late cycle on a project basis and then late cycle overall as a business.

I think Institutional segment continues to just stable growth. As a segment, as a vertical, it would not have the kind of extreme feast or famine that you might see in some other industries. So if we say strong, okay, that could be in the high range of mid-single growth. If we say weak, that could still be low single-digit growth in a space like the institutional vertical.

If you go to the commercial side of our business, while you're right, it's not a particular commercial building won't be as product dense as an institution like a hospital or a school would be, but it makes up for that just in terms of addressable market size. So a little bit of uptick in commercial like we've seen recently with spec activity in commercial office, which has been very depressed for the last couple of years. Some signs of life here recently just with tenant turnover and tenant fit out in major metro areas that had gone silent for a couple of years with work from home and all that. So a little bit of pickup there would be a great tailwind for us.

The only other thing to call out, data centers is very fashionable to talk about. I would say we do write specifications for most of our non-res work. The spec writer that's doing an elementary school or a commercial office or a multifamily building also has the skills and capabilities to develop and write specs and end user standards for the who's who of hyperscaler data centers. So we do that too. It's a small part of our business. Of course, it's been growing very nicely. So nice to see that tailwind in the commercial part of our business.

Can you spend just -- I think it kind of gets overlooked just on the specification side, can you just talk about what that actually means, how it works and if I can recall from a long time ago, you guys have a lot of spec writers in the market. It's hard to kind of -- it's like speaking a different language to go between these 2 different -- multiple different vendors and things.

So just -- can you just talk about the advantage that you have there? And how you invest in it?

Yes. And Mike, you ran our nonres business in the Americas, so I missed anything, please just jump in. For -- I came from a 20-year career with John Deere. So coming from off-highway and farm machinery into a business where you literally spec your product into the building and then push it or pull it through the channel with that was amazing to watch at work. And I would say it is an incredible competitive advantage. There's really only one other company in the world that goes toe-to-toe with us and that capability.

How it evolved over time was doors and door hardware or it's immense in the amount of detail. It's very intense in the amount of changes -- change orders that happen over the life of a construction project to the point where architects just don't want to deal with it anymore. So they literally outsource it to Allegion and to our largest competitor, by and large.

The capability it takes to write those specs is difficult to develop. We have a dedicated apprentice program where we bring in highly talented, civil engineers, train them on how to write specs and they do that. There's a great entry-level career into the company. We have invested enormously in software tools that provide cloud-to-cloud connection from our system called Overtur into Revit, which is a very popular civil engineering tool for the architects.

So real-time data interchange, we've invested in AI tools to help automate parts of writing specs. And there are, whatever, a handful of 4, 5 continuous improvement projects that we're doing on that software tool in any given year. I would also say, as you think forward, how to maintain and even widen the moat that comes out of that, for any machine learning model or AI model to work, it's got to have a very large, clean, robust data set underneath it. And there's only 2 companies in the world that have that data set. So if anybody is going to figure out how to leverage AI to write specs for buildings, it's going to be the 2 leaders in the industry today.

The spec then turns into recognized revenue at some point in the future. It is the end user demand generation tool. But that time to revenue can be 9 months for multifamily complex or 3 years for a large sports stadium or a large hospital complex. So it's not something that we disclose a lot of numbers around because it's difficult to give you line of sight to what exactly that means. But the power of it is immense in terms of adding value all the way upstream in the design phase of the project and throughout all the changes and then ultimately, at the point of use, all these millions of SKUs that we manage, we also delivered to the project in like 10-day lead times.

So made-to-order business that we've generated the demand for sometimes a year or 2 in advance quite powerful, quite sticky and quite a high barrier to entry, I would say, into our space.

Yes. I mean you mentioned AI. I mean we've been asking this question kind of throughout the conference, but just I guess are you investing in kind of AI on the spec writing side? And I guess, what are other examples of kind of AI investments that you've made and any specific outcomes you'd point to?

Yes, it's a great question. So certainly, on the end market, area, again, we write specs for -- we've developed end-user standards for the hyperscalers and their data center. So whatever you believe about that CapEx cycle and outlook, we are late cycle in that, too. So I think a nice tailwind, but overall small part of our business.

Then I'd say, internally, we're doing all the things you would want us to be doing. So investing in AI tools to help automate elements of spec writing. We've got the data sets to do that. Others don't. We're putting AI where it's appropriate in our factories and our manufacturing facilities, computer vision systems to ensure quality and safety, et cetera, we're using generative AI tools for office function efficiencies like you would expect us to do. Even something that sounds as simple as digitizing purchase orders because we have thousands of contract hardware distributors as direct customers.

We get purchase orders in lots of different formats with lots of different -- sometimes even handwritten names for the same piece of hardware, and this is our industry. Digitizing that into machine-readable language is something that we've done and the efficiency gains are pretty amazing. They're a game changer for our space.

The last thing I'd have you look at, please go visit our website, look at Allegion Ventures portfolio. So on the further reaching technology side of how will AI impact the world of physical security. We've made 2 very notable investments recently. You look on the cap tables that we're on, they're with companies like Insight Partners and Andreessen Horowitz. One was a company called Ambient AI, the other one is Asylon Robotics. Take a look at what these 2 companies do. They're category leaders in their space, and Allegion has a position on the cap table and therefore, a front row seat to see how these technologies play out in the realm of physical security and how these particular companies do in their space. So very excited about that from a further reaching front row seat on technology.

I guess, speaking about technology, just kind of the electromechanical kind of business, just kind of big picture, kind of where is that today? And kind of how would you kind of discern the adoption levels within kind of the residential market versus kind of the non-res market? Because I mean, it's obvious, we used a lot of stuff residential and you see digital things. But there's a lot of digital, I think that's kind of in the nonres space. So just kind of where are you on those adoption curves in both of those end markets?

Yes. So adoption is accelerating, I'd say, in both segments. And what you tend to see is one of the advantages of our residential business is our partnership with the mega-techs with the smartphone manufacturers. So Allegion -- I mean a company our size, we definitely punch above our weight in our relationship with Apple, Google, Samsung, we're a trusted innovation partner to help them expand the shoreline of what they can do with their wallet.

And so we were the first to integrate student IDs, employee IDs, resident keys and the Apple wallet. We're the first to integrate both Google Wearables and the Google Wallet with the resident key. So again, those kinds of technologies, those kinds of near-field tap to unlock technologies to start to become more and more commonplace and increasing adoption on a home front or translating into the commercial space of electronic locks where spec data would also tell us adoption is increasing rapidly and makes us confident in the outlook.

When we talk about our growth entitlement and why we can grow above GDP or above market by a point. It's because of this electronics adoption and our innovation leadership in the space. Commercial e-locks are not new. But think of it on a development continuum of 15 years ago, it was off-line, electronic locks, prox card or whatever would get you in the door. Security improvements, electronic architecture improvements to wired solutions that's still kind of state-of-the-art today where a control panel is controlling maybe 4 doors or there's a dedicated door controller on a single door to lock and unlock where the puck is going and where Allegion is skating to. There's real-time connected locks.

We've introduced that family some months ago. We're exceeding our business case for 2025. excited about where that's headed. We hosted our first developers conference just 2 weeks ago, bringing in video surveillance companies and physical access control, building automation companies to teach them how to integrate quickly with our new connected locks that now is going to be done in hours instead of months that it used to take back in the wired solution or off-line days.

So big efficiency improvements for the industry. I think that's where innovation is going. I feel we've carved out a good leadership position on the new commercial Elock family. And we feel that this idea of a point of outgrowth and Allegion's growth entitlement is very much intact.

And what you say -- you're talking about hours versus months. I mean is that the installation of the projects?

That's the actual system being able to discover and talk to the lock and make the lock and unlock decision. We do that at the door. The connected lot can do it without the added interface of a panel. So there's a lot less low-level code that has to figure out how to talk to each other.

Okay. And then I guess, on the software side, you've talked a little bit about implementing more software kind of selectively in certain verticals. I guess how do you decide which verticals you want to kind of play in from a software perspective versus maybe do kind of working more of a kind of partnership or kind of an integrator type model that's been there historically?

Yes, it's a great question. And I think from a legacy standpoint, our Interflex business in Germany, very successful, fast-growing, good margins, has been doing access control, time and attendance, workforce management for large enterprises for a long time.

So leave that as its own entity, so to speak, we expect to continue to grow that. It's primarily custom designed for European working environments, European labor laws and things like that. So kind of a regional product.

In the Americas, we see historically underserved verticals like education, like multifamily as spaces where Allegion would have a right to play and a right to win in not only the core mechanical hardware and electronic hardware, but also the controlling access control software.

We've made investments organically for access control software for multifamily with our tool known as Zentra. That's been in the market for a little over a year now, growing very rapidly. We like having that. We acquired this year, a company called Gatewise that does electronic access at the gate for car parks or the perimeter entrance for multifamily.

And now Allegion has the ability to go to multifamily with the full solution set. And we can also go a la carte. So it doesn't matter, does Gatewise or Zentra or does the Elock lead the sale. We can offer all of that or we can offer pieces as we go. So I like our position there, and I do feel we have a right to win.

The other software acquisition we made was a company called Waitwhile. They do virtual queuing. This could be today, think of something like a Costco. If you're a Costco shopper and you're going to get some auto work done, get your tires change or something like this. You use your Waitwhile app through Costco to get your point in the queue. You can go shop, you get real-time updates and really the only thing you lose is time in the line is their value prop.

What we see going forward with Waitwhile is just imagine connecting that virtual queue that they set up to an encrypted credential that hits your smartphone wallet and gets you in the door. So an easy use case might be think about a university that has hundreds of professors that need to have office hours before big exams. And you've got an electronic locking system throughout the faculty buildings. You want to control that. You want to keep people safe, but you also want a perfectly seamless experience for the student when it's their turn to show up. So Waitwhile gets you in the queue, attaches a slag credential that gets you through our electronic lock at the right time, then through Waitwhile the university gets just reams of helpful data to help them plan their access and their operation better.

So excited to see what we can do with that. And just think about our software strategy as being continuously developing and acquiring software that differentiates our hardware. We're not off to find far flung speculative adjacencies. We're not off to find software for software's sake. This is software that is connected to and adds value to Allegion hardware is what we're pushing for there and excited about the potential.

I mean maybe just on the M&A side. I mean, you have done a lot of smaller tuck-in acquisitions. What are the 2 or 3 criteria that you're really kind of looking for and assessing, does it have to kind of fit with your spec? Does it have to -- is there kind of a market expansion type play? Like what are kind of the 2 or 3 things that you're really looking for when you're doing these deals?

Great question. And I'm really pleased with the step-up in M&A that we've done. And I think you can look for us to continue that from a management bandwidth, we can continue the pace we've been on from a balance sheet, you see at the end of the third quarter presentation after roughly almost $600 million spent this year on acquisitions, net leverage is at 1.8 turns.

So we feel pretty good about balance sheet capacity. We will never put our investment-grade credit rating at risk as we may tap the balance sheet for accretive acquisitions. But the best material we've got out there is our Capital Markets Day from May material. It will show you our view from a product category segmentation on parts of our industry that are still less consolidated or even more fragmented.

There is roll-up potential there. You can look for us to be disciplined on what are we looking for. It has to fit our strategy. We're a pure play in security and access. It has to generate accretive shareholder returns. So you could think on an ROIC north of the cost of capital, very quickly on some of these mechanical deals, maybe in year 3 to 5 at the far end on some of the more electronics or software transactions, but still accretive returns for our shareholders. And then good cultural fit on the people side.

So strategic fit, good returns, good cultural fit and bolting on to one of our existing business units. The only other constraint I'd ask you to remember when you think about Allegion and the acquisitions is the geographies that we're looking in addition to the product categories are where we are today. So this is Western Europe. This is North America. This is Australia and New Zealand. We are not looking for an acquisition to provide a beachhead into a new geography. That's not contemplated at this point.

What about like the margins? I mean you've -- I think what's surprised us a little bit is not just the pace of the M&A activity, but also the margins of the companies that you're acquiring? Kind of before integration even. So how important is the margin aspect of it?

It's very important. And I'd say that's part of being disciplined in the mechanical space, for sure, but also in the technology space. You could imagine in any industry, when you look into high technology or software, there's frequently more sizzle than there is stake. So we'll proceed very prudently on that. And yes, we're proud of the margins we generate in our industry, and I don't think our M&A strategy is going to put those at risk.

Great. We're out of time. So please join me in thanking the Allegion team for being here.

Thanks, everyone, for attending.

Good day, and welcome to the Allegion Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Josh Pokrzywinski. Please go ahead.

Thank you, Betsy. Good morning, everyone. Thank you for joining us for Allegion's Third Quarter 2025 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 2. Statements made in today's call that are not historical facts are considered forward-looking statements that 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 3, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone. Thanks for joining. Q3 was another strong quarter as we execute our long-term strategy and steadily deliver on our commitments to shareholders. I'm proud of our team's performance as we've remained agile in a dynamic operating environment. The double-digit revenue growth for the enterprise and continued segment margin expansion speaks to the resiliency of our model, our broad end market exposures and the depth of our relationships with channel partners and end users.

We continue to take advantage of our business' strong cash generation, returning cash to shareholders and growing our business through accretive acquisitions. Year-to-date, we have allocated approximately $600 million to acquiring businesses consistent with the priorities we outlined at our Investor Day. As we approach year-end, the key market trends supporting our outlook are largely unchanged. Our team continues to execute well, and we are allocating capital for the long-term benefit of our shareholders. As such, we are raising our 2025 full year outlook for adjusted earnings per share to $8.10 to $8.20. I'll be back later to discuss the outlook and share some early views on markets for 2026.

Please go to Slide 4. Let's take a look at capital allocation for the third quarter, starting with our investments for organic growth. In September, the Allegion team launched a new mid-tier commercial product line for Schlage, our Performance Series locks. These locks bring Schlage quality to more price points in nonresidential applications, giving us more ways to win in the aftermarket and building on the success of the mid-price point Von Duprin 70 Series exit devices released last year.

Turning to M&A. Since we spoke at Q2 earnings, Allegion has announced 2 more acquisitions, UAP and Brisant. These U.K.-based businesses strengthen our product portfolio, including electronic locks in addition to enhancing our cost position. As discussed previously, the acquisitions of ELATEC, Gatewise and Waitwhile closed earlier in the third quarter. Allegion continues to be a dividend paying stock, and in the third quarter, this amounted to $0.51 per share or approximately $44 million. We did not repurchase shares in the quarter. And you can continue to expect Allegion to be balanced, consistent and disciplined with capital deployment over time with a clear priority of investing for profitable growth.

Mike will now walk you through the third quarter financial results.

Thanks, John, and good morning, everyone. Thank you for joining today's call.

Please go to Slide #5. As John shared, our Q3 results reflect continued strong execution from the Allegion team, delivering double-digit revenue growth for the enterprise. Revenue for the third quarter was over $1 billion, an increase of 10.7% compared to 2024. Organic revenue increased 5.9% in the quarter as a result of favorable price and volume led by our Americas nonresidential business, where demand remains healthy. Q3 adjusted operating margin was 24.1%, down 10 basis points compared to last year. Both our segments had margin expansion which was offset by higher corporate expenses relative to the prior year comparable. Volume leverage and mix were accretive to margins.

Additionally, price and productivity, net of inflation and investment was a tailwind of $2.2 million. Adjusted earnings per share of $2.30 increased $0.14 or 6.5% versus the prior year. Operational performance and accretive acquisitions contributed 10.6 points of EPS growth. This was partially offset by higher tax and interest and other. We still anticipate the full year tax rate to be in the range of 17% to 18%. Finally, year-to-date available cash flow was $485.2 million, which was up 25.1% as we continue to generate strong cash flow. I'll provide more details on the balance sheet and cash flow a little later in the presentation.

Please go to Slide #6. Our Americas segment delivered strong operating results in Q3. Revenue of $844 million was up 7.9% on a reported basis and up 6.4% on an organic basis, led by our nonresidential business. Organic growth included both favorable price and volume in the quarter. Reported revenue includes 1.5 points of growth from acquisitions. Pricing in our Americas segment was 4.6% in the quarter. This includes a combination of core pricing and surcharges as we cover inflation, including tariffs. Our nonresidential business increased mid-single digits organically and demand for our products remains healthy, supported by our broad end market exposure.

Our residential business grew mid-single digits, primarily driven by volume associated with new electronic products that we launched in the quarter and price. However, we still consider overall residential market demand to be soft, consistent with year-to-date growth rates. Electronics revenue was up mid-teens and continues to be a long-term growth driver for Allegion. Americas adjusted operating income of $252 million increased 9% versus the prior year. Adjusted operating margin was up 40 basis points as volume leverage and favorable mix were accretive to margins. Price and productivity, net of inflation and investments was a tailwind of $10.2 million.

Please go to Slide #7. Our International segment delivered revenue of $226 million, which was up 22.5% on a reported basis and up 3.6% organically, led by our electronics businesses. Acquisitions contributed 13.6% to segment revenue, consisting of the acquisitions John mentioned earlier, net of the previously announced divestiture of API. Currency was also a tailwind, positively impacting reported revenue by 5.3%. International adjusted operating income of $32.3 million increased 28.2% versus the prior year period. Adjusted operating margin for the quarter increased 70 basis points, driven by volume leverage and mix. Acquisitions were accretive to segment margin rates, although slightly dilutive to the enterprise rates. We continue to drive portfolio quality in the International segment through self-help and adding high-performing businesses where we have a right to win.

Please go to Slide 8, and I will provide an overview on our cash flow and balance sheet. Year-to-date available cash flow was $485.2 million, up nearly $100 million versus the prior year. This increase is driven by higher earnings, lower capital expenditures and improvements in working capital. I am pleased with the strong cash generation in 2025. And based on year-to-date performance, we see upside to our previous cash flow outlook. We now expect conversion of 85% to 95% of adjusted net income. Working capital as a percent of revenue increased due to acquired working capital, which does not impact cash flow. Organic working capital improved compared to prior year. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.8x. We continue to generate strong cash flow and our balance sheet supports continued capital deployment. I will now hand the call back over to John.

Thanks, Mike. Please go to Slide 9, and I'll share our updated outlook. With one quarter remaining in the year, our markets remain largely consistent with our prior outlook. And the Americas nonresidential markets remain resilient, and Allegion is performing well in the aftermarket. Our spec activity has grown over 2024 and year-to-date 2025, driven by our broad end market exposure, and this supports our outlook. Residential markets, however, remain soft. And as Mike mentioned, solid performance in Q3 was primarily driven by new electronic product launches. International markets have largely been unchanged year-to-date, and we continue to expect roughly flat organic performance. We expect approximately $40 million of surcharge revenue in the Americas related to tariff recovery, which does include the August 18 scope expansion for Section 232.

Based on strong execution and the recent acquisitions of UAP and Brisant, we're increasing our 2025 adjusted EPS outlook to $8.10 to $8.20. You can find additional details as well as below-the-line model items in the appendix. As you know, we'll provide Allegion's formal 2026 financial outlook during our February earnings call.

So please go to Slide 10. Today, we'd like to provide a preliminary view on our markets for next year. And I'd say, overall, we expect rather similar market conditions to 2025. In the Americas, our broad end market coverage and spec activity continue to support organic growth in our nonresidential business. Residential markets continue to be soft. The input cost environment remains dynamic with tariffs, and you can expect us to continue to drive price to offset inflation. Internationally, markets have been sluggish; however, we do expect to benefit from 2025 acquisition activity. For the enterprise, we expect carryover revenue contribution of approximately 2 points from acquisitions closed in 2025.

Please go to Slide 11. In summary, Allegion is executing at a high level, while staying agile and steadily delivering on the long-term commitments we shared with you at our Investor Day. Our performance is led by an enduring business model in nonresidential Americas, double-digit electronics growth and accretive capital deployment as we acquire good businesses in markets where we have a right to win. I'm proud of the performance by the Allegion team in this very dynamic environment, which gives us the confidence to increase our EPS outlook for the year.

With that, we'll take the questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Ritchie with Goldman Sachs.

So I appreciate all the color and the initial look into 2026. John, maybe just pulling on that thread on spec writing continuing to be up and nonres specifically, I think you mentioned last quarter that you were starting to see some positive momentum on spec writing specifically as it relates to office. Can you maybe just give us an update on the key verticals and whether there's -- there were any kind of like discernible differences between how you feel today versus how you felt a quarter ago?

Yes, it's a good question, Joe. And I think the comments would be very consistent that our spec activity accelerated over the course of 2024 and has grown year-to-date 2025. Rather than picking and choosing this vertical or that vertical, I would just say Allegion's spec writers are very versatile in their expertise and one day could be writing a specification for an elementary school. The next day, they could be doing multifamily and the next day after that, they could be doing a data center. So they have that capability and that engine never turns off. I think the main thing we'd have you take away is that spec activity has continued to grow in 2025, broadly speaking. And spec activity supports our outlook as we talked about in the prepared remarks and gives us the confidence that we still see organic growth in non-res Americas.

Okay. Great. Helpful. And then I want to also kind of just talk a little bit more about your M&A pipeline. It's been such a great part of the story, really over the last, like, 12 to 18 months. And recognize that you've kind of given us the 2 points as a placeholder for next year. Just talk about the pipeline as you see it today. And as you're kind of thinking about like the potential accretion from an earnings standpoint into next year based on what you already know, just any color around that would be helpful.

Yes, it's a great question, Joe, and it's something we're really excited about. I think the pipeline is still strong and strong in both of our reporting segments, so strong in International, strong in the Americas. And if you recall our Investor Day material, where we talked product categories that we're looking for, whether that's portfolio expansion in our mechanical business, whether that's electronics, whether that's complementary software, we've got activity in all of those categories right now. So very excited about the pipeline. And I'd say you can expect us to continue to be disciplined around the strategy and around the types of businesses we acquire and around the shareholder returns that we generate from these acquisitions. So I feel real good about it. And I think it continues to be an important part of Allegion's overall growth story.

Joe, with respect to the question on the EPS. In the appendix, we provide what the full year benefit this year is, which allows you to calculate what the EPS benefit on acquisitions is in the fourth quarter. And think about that as a carryover rate for the first 2 quarters of the year. The acquisitions were largely done early July. So that should provide you enough information for you to get a framework for the relative size of the benefit that we have.

The next question comes from Joe O'Dea with Wells Fargo.

Can you just talk about conversations with building owners, architects, overall end users on the current kind of uncertainty impact in the macro, what they're looking for? Really just trying to get a sense for what your perception is of activity that's sidelined and just waiting for a little bit better visibility and what some of those key ingredients are to bringing that activity off the sidelines?

Yes, Joe, it's a good question. And I would say there's a couple of things going on. And as we are out with customers and end users quite frequently, our own channel checks would indicate comments very consistent with what we shared with you in the prepared remarks, that nonres project activity is humming along pretty well. And I think some private finance came off the sidelines this year. A more favorable interest rate environment would certainly continue to be a swing factor that we would see to bring more of that private finance off the sidelines. But I would say, overall, positive environment and channel checks, our customers' backlogs are pretty healthy and has given them pretty good confidence about organic growth as well. And that's what we've tried to convey to you today. I think nonres overall is humming along pretty well.

Appreciate that. And then on the International side, I think this was the first quarter of volume growth after 4 of declines, actually better volume growth in International than Americas even this quarter. So just kind of unpacking a little bit more what you saw in the quarter, how you think about any momentum behind a little bit of volume growth there?

Yes. I appreciate you noticing that, Joe. I mean we were certainly really happy to see that and proud of the International team to put those numbers up on the board this quarter. I would say our view on the end markets is still largely unchanged, that it's around flattish kind of organic growth. But I would also say you've had some of the market segments there really at historical troughs, and we don't anticipate that they trend negative in perpetuity. So I think the International team has executed well in a lot of pretty challenging environments. And like Mike mentioned in the prepared remarks, our electronics businesses are still performing very well. And you add to that, we're still really excited about the ELATEC acquisition, which is a pretty sizable deal for us that will continue to add momentum there in the electronic space.

The next question comes from Julian Mitchell with Barclays.

Just wanted to start with maybe the adjusted operating margins. So those were flattish in the third quarter year-on-year. Just wanted to check, but it looks like perhaps you're assuming they pick up again with some margin expansion of a few tens of basis points in the fourth quarter. Just wanted to check if that was the right assumption and how we should think about the corporate cost movement into Q4 and next year in that context?

Yes. Thanks for the question, Julian. If you look at the third quarter, pleased with the segment margin expansion, did a really good job. We were negative in corporate. Part of that is just the year-on-year comp. Last year in the third quarter, corporate was low. This year, our third quarter is really consistent, slightly less than even what you saw in the second quarter. As you think about margin expansion for the year, you can back into it, we expect to have margin expansion for the year and in the fourth quarter. And then from a run rate perspective of corporate, the question you asked, you saw what we put up in the third quarter. Think of that as relatively what we've ran in the last couple. So you can kind of use that as a fine estimate.

That's very helpful. And just within the Americas segment for a second. You had a decent tailwind from that PPII bucket in the third quarter, and I think that was a good pickup from what you'd seen, that being flattish in the second. When we're looking out the next few quarters, should we assume that, that sort of gross price of about 4 or 5 points is a good placeholder and PPII stays as a decent tailwind? Just trying to understand operating leverage, you have that mid-30s placeholder from the Investor Day. Are we sort of on that path now leaving aside the corporate costs moving around?

Yes. If you think about the Americas, I talked about this earlier in the year. Inflation, especially associated with the tariffs, right, was a little quicker than some of the pricing benefits. We said that would improve as the year progressed. You see that in the third quarter. The big item for us on the pricing side is what is inflation and tariffs are a component of that inflation. Just look for us to drive pricing and productivity, and you've heard me mention this many times before. Pricing and productivity covers the inflation and the investment, and that helps drive the margin expansion. Overall, I feel good about the progress we're making in the Americas. I think we're doing a great job in combating a very dynamic environment of change when you think about tariffs and expect us to continue to drive that margin expansion that we talked about.

Got it. And that sort of mid-30s type rate based on inflation and mix and price, that should be achievable the next x kind of quarters. Nothing looks too out of line versus that.

Yes. Certainly, Q4 you could calculate. We'll be back in February to give you a '26 margin outlook. Think of that as a long term, right, to the long-term investors out there. Long term, we should be able to drive incrementals of 35%. Let us get to February of next year when we give our outlook and complete the annual operating plan. But certainly, for the fourth quarter, you could calculate the implied margin expansion.

The next question comes from Jeff Sprague with Vertical Research.

I want to come back to the deals, really kind of maybe a 2-part question. First, just thinking about sort of everything that you've done here. It all looks like it makes sense and fits in and is nicely moving the needle as we've seen your results. But just thinking about kind of the margin entitlement of what you've acquired, where you might be on integrating these assets? Are they all truly being integrated or any of them sort of stand-alone? Just trying to kind of get my head around kind of the journey you're on here.

Yes, I appreciate the question, Jeff. And I think if you recall our Investor Day commentary, we talked about being disciplined. And I would say some of those guardrails around being disciplined would be consistent with our strategy, consistent with our geographic exposure and consistent with markets where we've got a right to win, meaning we've got brand strength, we've got human capital and talent, we've got distribution strength.

And so yes, to specifically answer your question, all of these acquisitions are being integrated and being integrated rapidly. I think there are synergies across the board in revenue synergies, cost synergies. There are exposure to faster-growing segments that we've acquired. So I feel real good about the strategic alignment of every deal we've done and continue to feel the same way about the outlook on our pipeline there. So really good. But yes, I mean, we're not looking to acquire our way into adjacent spaces. We're not looking to expand geographic scope. We're staying in markets we know where we've got a right to win, and we're acquiring enhancements to our product portfolio in electronics and mechanical and complementary software and feel real good about it. So I think you can -- again, you can look for us to continue to be acquisitive but continue to be disciplined like we've shown.

And then I guess, discipline also includes the element of price paid. And I kind of appreciate like each individual deal, it's hard for me to press Josh or Mike for like specifics on multiples and all that. But is there a way to just step back and sort of collectively say, you gave us the dollars deployed, right, on a year-to-date basis, kind of what the average multiple has been? And when you think about the synergies, kind of what the -- maybe what the forward multiple would be looking out kind of 12, 24 months as you integrate these things?

Yes, Jeff, it's a good question. Very fair question. I think we've had some commentary around this in past quarters. So on the mechanical side, if we're expanding our mechanical portfolio, you would see something in the high single-digit EBITDA multiple would be a fair approximation. On the higher growth electronics and software, you're going to see a bit of a higher multiple there because we're expecting higher growth and higher longer-term returns.

Jeff, maybe also to help you out, the biggest acquisition is ELATEC. Clearly, that is the lion's share. So we gave that information when we released the -- when we made the acquisition and we issued the press release. You could see that and you get at least a pretty good idea of all the acquisitions, what's the biggest piece there from a multiple [ paid. ]

The next question comes from Tomo Sano with JPMorgan.

I'd like to ask you about the residential outlook for Q4 in America. So the residential revenue improved to up mid-single digit in Q3. And you mentioned no clear signs of the recovery of the market for 2026. But how do you see the residential segment performing in Q4? Could you share your current market outlook and also the new product contributions, especially for electronics in Q4, please?

Tomo, to answer your question on the residential. I apologize, we had some phone difficulties there. Overall, market demand for residential is soft. It's been that way for a while. In the third quarter, we did have that benefit associated with the new product introductions, the e-locks, that was the Arrive lock that we talked about in the first quarter earnings call. We launched it in the third quarter, and we had the benefit.

As I said on the prepared remarks, overall, think of market demand consistent with year-to-date growth rates for residential, which is down slightly. So as you think about the fourth quarter, we would not expect a mid-single-digit positive growth. We would expect it more in line with market demand, which is that softer nonresidential market that we're in -- I'm sorry, residential.

And my follow-up question is on tariffs and pricing. So you have demonstrated strong pricing power and agility in managing a tariff-related cost pressures. And are you seeing any signs of pricing fatigue or customer weakness? And how would you see the other market players reacting for pricing in the market, please?

Tomo, this is John. I would say -- I appreciate the comment. And yes, I think our teams and our customers have collectively responded well to the inflationary nature of the tariffs. I think our industry as a whole has moved up with price realization. And I'd say, just as Mike said in the prepared comments, as inflationary pressures continue, we stand ready to cover that with price. I would say the demand environment in nonres, as we mentioned, is good. It's healthy. Nonres is humming along pretty well. So I haven't yet seen something that we would call fatigue.

We have one final question in our queue today. The next question comes from Tim Wojs of Baird.

Maybe just the first one, I'm kind of thinking bigger picture about kind of spec and spec writing and just kind of content within the spec. John, how would you kind of compare the content in the spec that you're kind of writing today versus maybe what you were doing 3 years ago? And I'm just trying to kind of get at how that spec is evolving, particularly as you kind of have done some of the, I'd say, ancillary product kind of M&A over the last couple of years?

Tim, that's a great question. I appreciate you asking. I would say a couple of things come to mind in terms of spec content. We're seeing electronics adoption accelerate, and that's evident in our specs. And I think evident in the electronics growth numbers that we've been showing lately. So very pleased with that. And I think the new product launches that we've been doing in nonres, in particular, are paying dividends there. I would also say we're starting to see -- it would be very small, but starting to see even opportunities to spec in some of the complementary software that we've developed organically into like a multifamily application. So that's very exciting for us to see as well.

In terms of the new acquisitions, several of them, if you talk nonres Americas like Krieger Specialty Products, hand-in-glove fit with our spec engine, and we're excited to see the growth there. Because if you recall, that acquisition brought products that we didn't have in our hollow metal portfolio, high-margin, fast-growing niche products that we're finding great opportunities to spec into new customers even. So really good fit. Another good example from this year would be Trimco, makes high-end specialty hardware for commercial applications. If you had pulled channel customers of ours for the last couple of years, they would highlight something like a Trimco as one of the best acquisition targets for Allegion to go after. So really excited to have that team on board with us. And it's -- again, it fits right into the spec engine. So we're happy to see that momentum.

Okay. Okay. That's great to hear. And then maybe just on the modeling side. Just in International, kind of the opposite of Julian's question on PPII, that flipped negative this quarter. Is that just a timing consideration? Or is there anything kind of to read in there around price, productivity and inflation?

Yes. If you think about margins in International, good performance this quarter. It was slightly negative on the PPII. On a year-to-date basis, though, Tim, think of it as it's negative like $1 million if you add up the 3 quarters. So it's essentially covered. And look for us in International to cover that inflationary pressure. So I wouldn't look too much into the third quarter at all. Look at the year-to-date rate and you get an idea, we're doing a pretty good job there.

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, John Stone, for any closing remarks.

Thanks very much, and thanks, everyone, for the very engaging Q&A. We look forward to connecting with you on our Q4 earnings call in February. Be safe, be healthy.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.