Allegion plc (ALLE) Earnings Call Transcript & Summary

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.