Allegion plc

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

Thank you, Stephan. Good morning, everyone, and thank you for joining us for Allegiant's fourth quarter 2025 earnings call. With me today are John Stone, President and Chief Executive Officer, and Mike Wideness, Senior Vice President and Chief Financial Officer of Allegiant. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to slide three, and I'll turn the call over to John.

Thanks, Josh. Good morning, everyone. Thanks for joining the call. Allegiant 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 Allegiant 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 America's non-residential. U.S. residential markets were softer than expected in the fourth quarter, and our outlook contemplates that residential remains 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 four. Let's take a look at capital allocation for 2025, starting with our investments for organic growth. A core element of Allegiant's portfolio strength is our brand's legacy of innovation. Brands like Schlage, Von Duprin, and LCN invented their product categories 100 years ago and are known as pioneers in our industry. Allegiant has 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 non-residential 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 LC enclosures, 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 aligned 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 will remain disciplined to drive returns and continue positioning Allegiant as a leading pure play in security and access. Allegiant 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 Allegiant 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 number five. As John shared, our Q4 results reflect continued strong execution from the Allegiant team as we delivered high single-digit revenue.

revenue growth for the enterprise.

Revenue for the fourth quarter was over a billion dollars, an increase of 9.3% compared to 2024. Organic revenue increased 3.3% in the quarter, led by our America's non-residential business. The organic revenue increase was driven by price realization partially offset by volume declines in our America's 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 8 cents 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 number six. Our America 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 non-residential business. Our non-residential 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 remained 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 Allegiant. Additionally, reported revenues include 1.3 points of growth from acquisitions. America's 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. Price and 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, MIPS was favorable to margin rates and offset volume D leverage in residential. Please go to slide number seven. 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 electronic businesses was more than offset by weaknesses in mechanicals. 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 non-core 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 2025. 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 1.6 times, which supports continued capital deployment. I will now hand the call back over to John.

Thanks, Mike. Please go to slide nine. 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 non-residential markets similar to 2025 levels, and this is supported by our spec writing trends. A broad end market exposure and large installed base make for a resilient business model, one that's 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 America's 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 Allegiant revenue growth to be 5% to 7%, and organic revenue growth to be 2% to 4%. Total growth includes approximately one point of foreign currency translation and two points of carryover contribution from M&A, primarily in Allegiant International. We expect organic growth of low to mid single digits in the Americas from a combination of price and volume led by our non-residential 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, Allegiant 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 non-residential 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 Allegiant team and appreciative of our strong channel partners. With that, we'll take your questions.

We will now move to the Q&A. For today's session, we'll be utilizing the Raise Hand feature. If you would like to ask a question, simply click on the Raise Hand button at the bottom of your screen. Once you've been called upon, please unmute yourself and begin to ask your question. We'll be taking one question and one follow-up question only. Thank you. We'll now pause for a moment to assemble the queue. Our first question will come from John O'Day from Wells Fargo. Please unmute your line and ask your question.

Hi, good morning.

Can you hear me? Yep. Hi, Joe.

Hi, Joe. Hey, good morning. 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 we 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 we're just on the pricing side of things as well, if there was any need to adjust price there based on the demand environment.

Yeah, Joe, thanks for the question. I think certainly Resi and the Americas ended the year softer than we had contemplated. And honestly, Resi throughout the year was a little chappy, let's say. You know, 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 growth. I would say, yeah, 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 cause 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, no, 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.

um got it and then on the on the america's uh organic outlook and the low single digit with single digit um just any color as we think about the price and volume components of that is that a little bit more price than volume um the price carry over tailwind and then how you think about that volume progression or that would suggest a little bit better demand environment as we go through 2026?

Yeah, Joe, so thanks for the question. I would say as you think about Americas for 2026, 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 two quarters. We expect that same seasonality where the middle two quarters are our largest quarters, and obviously Q4 a little less. So as you model this, I think that can help you qualitatively In addition, you do have to look at the prior year comp as you think about, you know, 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 that. 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.

Okay, Josh. Thanks, Mike.

Thank you. Our next question will come from Tomohiko Sano from JP Morgan. Please unmute your line and go ahead.

Good morning, everyone. Morning. I thank you for taking my questions. So you maintain sector-leading margins despite the higher costs through pricing, productivity, and acquisition synergies. Can you break down the contributions from each of these levers, and which will be most important in 2026, please?

Yeah, so we put all that information in our 10-K. So when you get a chance, you can look at it for the fourth quarter, 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 price and productivity in excess of inflation and investment. It 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 – you know, we had a favorable mix – But the residential volume deal leverage 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. You know, 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 a 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.

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

Yeah, Tomo, this is John. Appreciate that. And I think, yeah, we do see our electronics businesses leading the way. That is primarily a Western Europe-based business. And then within that, primarily a dock 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 2026. I'd say Australia and New Zealand in markets haven't been great, and, you know, 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.

Thank you, John.

Our next question will come from Brett Lindsay from Mizuho. Please unmute your line and ask a question. Brett, please unmute your line and ask a question. Okay, we'll move on to you.

Good morning. Sorry about that. So, yeah, 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.

Yeah, 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 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 in the prepared remarks. And I already talked about the rate benefit of that in a 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 know, you can kind of have an idea of each component.

I appreciate that, Mike. And then maybe just to follow up on investments, you know, 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?

Yeah, well, as I like to look at it, I 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 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 20 SIPs, you do have the carryover of that last quarter where you didn't have 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.

Treat the detail best at all.

Our next question will come from Robert Schultz with Fed. Please unmute your line and go ahead.

Hey, guys. Thanks for taking the question. 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?

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

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

Yeah, it's a good question. This is John. Pipeline is very active, I would say, in both our international and our America segments, and largely in line with the strategic overlay we shared with you at Investor Day last May in terms of core mechanical portfolio, electronics, and even complementary software. So I think Pipeline is busy. I think 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, a right to play and a right to win, and very much focused on our shareholder returns. Got it. Thank you.

Our next question will come from Andrew Oban with Bank of America. Please unmute your line and go ahead.

Yes, good morning. Hi. Good morning, Andrew. Just a question on, I guess, M&A and capital allocation. I mean, you know, 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 know, you chose to allocate a lot more capital to M&A. I'm just wondering, given that you are laying a foundation, why don't you think that Allegiant 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 Allegiant stock this year. Thank you.

Yeah, Andrew, this is John. 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, you know, 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, yeah, 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 two years is this whole theme of expect Allegiant to be balanced and disciplined and consistent with our capital allocation to drive shareholder returns.

Thank you. And maybe a little bit more color on international markets growth. You know, you sort of highlighted DAC. How is the Interflex business doing? And maybe a little bit more color with having an AXA. Thanks so much.

I'm thrilled that you asked that question, Andrew. I'm so proud of our Interflex team. You know, it's kind of an interesting business. It tends to kind of ramp up its revenue and profitability as the year goes on. So, you know, 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 amazing progress moving in beyond the core sort of German manufacturing base? Absolutely. Thanks so much. Thank you.

Thank you. Our final question in the queue comes from Chris Snyder with Morgan Stanley. Please unmute your line and ask your question.

Thank you. Hopefully everyone can hear me. I wanted to ask around America's margins. Q4 came in down year on year modestly. I understand that obviously margined zero 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, you know, 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 – you know, kind of color unpacking the year-on-year margins for Americas in Q4. Thank you.

Yeah, 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, buyers were even worse than the total residential. So that's a pretty substantial volume decline there. 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 how your rounding works, delta between the two quarters. And that explains why the margins were different.

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

Yeah, if you think about the fundamentals of the business, right, that core incrementals we laid out in Investor Day, after we get through Q1, that still holds. Think about 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 have that one more quarter we need to get through. But the business fundamentals remain sound and consistent with what we talked about in investor day, where we can leverage that volume once we get through this last quarter of that, the journey of the math.

Thank you. I appreciate all the help. Have a great rest of the day. Thanks, Chris.

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.