Allegion plc (ALLE) — Q2 2025 Earnings Call Transcript

Thanks, Jason. Good morning, everyone. Thank you for joining us for Allegion's Second 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, and thanks for joining us. Q2 was a strong quarter, once again demonstrating the agility of our team, durability of our business and execution of our capital allocation strategy. We also achieved an exciting milestone. This was Allegion's first quarter of revenue in excess of $1 billion, and we certainly don't think it will be our last. I'm very proud of our team's performance. The high single-digit Americas non-residential organic growth and continued segment margin expansion speak to the resiliency of our business model, our broad end-market exposure 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 that complement our core and create long-term value. Midway through the year, our team's strong execution and continued demand momentum in our core non-residential Americas market gives us confidence in our full-year performance. We're raising our 2025 full-year outlook for adjusted earnings per share to $8 to $8.15. I'll be back later to provide more color on our markets and the outlook. Please go to Slide 4. Let's take a look at capital allocation for the second quarter, starting with investments for organic growth. As you may have seen at our recent Investor Day in New York, our SimonsVoss business continues to be a great success story for Allegion. A known pioneer in our industry, SimonsVoss is a leader in electronics, leveraging the global long-term growth trends we see across security and access. Most recently, SimonsVoss has introduced a new portfolio of products called FORTLOX, which is launching with some of our key SimonsVoss customers this year. FORTLOX is Allegion's first batteryless electronic cylinder, offering customers the high quality and ease of use that SimonsVoss is known for and now without the need for a battery to power it. It's an incredible evolution of SimonsVoss technology that expands applications and market segments that we can serve. Turning to M&A. Since we spoke at Q1 earnings, Allegion has announced 4 additional acquisitions. Novas closed in Q2, while ELATEC, Gatewise and Waitwhile closed early in the third quarter. I'll spend some time on the next slide discussing these recent additions to the portfolio and how they support our long-term growth strategy. Allegion continues to be a dividend-paying stock. And in the second quarter, this amounted to $0.51 per share or approximately $44 million. And lastly, we made share repurchases in the quarter of approximately $40 million. We remain committed to balancing consistent capital allocation with a clear priority of investing for growth.

Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #6. As John shared, our Q2 results reflect continued strong execution from the Allegion team, delivering another quarter with mid-single-digit top line growth. Revenue for the second quarter was over $1 billion, an increase of 5.8% compared to 2024. Organic revenue increased 3.2% in the quarter as a result of favorable price and volume led by our Americas non-residential business, where demand remains strong. Q2 adjusted operating margin was 23.7%, flat to the prior year. Both our segments had margin expansion, which was offset by increased corporate expenses, primarily for incentive compensation. Volume leverage and mix were accretive to margins, driven by our Americas non-residential business. Price and productivity, net of inflation and investment, was a headwind in the quarter of $5.3 million for the enterprise. Adjusted earnings per share of $2.04 increased $0.08 or 4.1% versus the prior year. Operational performance and accretive capital deployment were more than offset by higher tax. Our Q2 tax rate was negatively impacted by discrete items. 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 $275.4 million, which was up 56.5% as we continue to generate strong cash flow.

Thank you, Mike. Please go to Slide 11, and I'll share our updated outlook. Starting with the Americas, the non-residential markets, particularly institutional verticals remain resilient, and Allegion is performing very well in the aftermarket. Our spec activity has grown steadily over 2024 and year-to-date 2025, driven by broad end market exposure and supports our outlook. Residential markets have been soft thus far in 2025 with interest rates as the key swing factor. We are increasing our organic outlook for the Americas to mid-single digits due to strength in the non-residential business as well as the inclusion of surcharge revenue from tariffs. International markets have been largely unchanged year-to-date, and we continue to expect roughly flat organic performance. However, we are updating the outlook for completed acquisitions as well as foreign currency changes resulting from the weaker U.S. dollar. We now estimate approximately $40 million of tariff surcharge revenue in the outlook. As a result, we're raising our 2025 adjusted EPS outlook to $8 to $8.15 based on our strong operational execution thus far in the year, continued strong demand in non-residential, accretive acquisitions announced to date and updated foreign exchange rates. You can find additional details as well as below-the-line model items in the appendix. Please go to Slide 12. In summary, I feel Allegion is executing at a very high level while staying agile and steadily delivering on the long-term commitments we shared with you at our Investor Day. We've delivered strong performance 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 very proud of our team's performance in this dynamic environment, which gives us the confidence to raise our EPS outlook for the year. With that, we'll take your questions.

Just a little bit of a 2-part question in terms of activity levels in non-res and Americas. First, just with the overall kind of tariff backdrop, any signs of pull forward that you saw in the quarter to get ahead of some of the pricing? And then just bigger picture, you touched on specification activity that's up year-to-date. Just what you saw in Q2 versus Q1? Any indications of elevated uncertainty and impacts on specification activity?

Yes. Joe, this is John. That's I think both really good, really timely questions. And in terms of any abnormal ordering or pull ahead because of tariffs, I would say no. We look for that. We watch that. We monitor sell-through very closely, and there's no evidence of that on the non-res side. Project demand, project work for our customers and their customers is humming along pretty well. So we don't see evidence of pull ahead. On the spec activity, like we shared last couple of quarters, spec writing accelerated through 2024. That momentum has continued year-to-date 2025. And I would say continues to be strong, continues to grow and very much supports the outlook.

I wanted to mention that I haven't reviewed the Q yet, Mike, but as I consider some of the variables, I assume that deals are negatively impacting the margin rate and that price-cost parity on surcharge is also hurting the margin rate. Is the improvement in margin performance entirely due to mix, or are there other cost actions contributing to that?

Yes. On the enterprise level, obviously, the segment margin performance in the second quarter was positive, yet the offset in corporate, as I mentioned. In the case of the Americas, which I think is where you're going. You see that strong incrementals driven by mix. We did cover, price and productivity did cover the inflation and the investments and a slight tailwind from the transactional FX, which I talked about on the first quarter. So I think you have to remember that as well.

Yes, Jeff, it's a good question. I think there's lots of factors going into that. I think the ABI has been rather depressed for pretty much my entire tenure here with Allegion. And I think the snapback in demand from the pandemic, followed by labor shortages, followed by rapid inflation, just really disrupted some of these more traditional leading indicators. And I think you had a dynamic to where construction backlog remained pretty high. Projects were delayed because of labor. So that long tail got a little bit longer on an individual project basis even. And then you've got where a lot of projects went through the planning phase, went through the design phase and hit pause, waiting for some interest rate relief. You see now today, Jeff, you've got segments that have been depressed for a long time, like commercial office, actually showing little signs of growth here and there, particularly in major metro areas where you're seeing tenant turnover, tenant fit-out starting to come back in places where it was really flatlined. I think you've got a mix of end-user verticals where some might be depressed, some might be up. The institutional, as we highlighted, health care education, in particular, have been hanging in there very well. A lot of work in both of those verticals, both from the spec activity and from the project work. So I think institutional has remained quite positive. Data center is, of course, growing very nicely. It is small for us, but growing nicely. And so you add all that together, and we're still seeing high single-digit organic growth in non-res Americas.

Maybe first off, I just wanted to try and understand that Slide 18 is kind of very useful. Maybe if you could help us with kind of that EPS guide raise, $0.30 plus or so versus a few months ago, which are sort of the biggest pieces there sort of moved around? And maybe just clarify for us what's embedded now for FX effects versus previous?

Thank you for the question, Julian. Regarding foreign exchange, there's been a significant change in currency rates affecting our international business the most. You can see this impact on our top line. FX will also affect our bottom line due to usual translational impacts, and this is influencing our earnings per share. Additionally, we've accounted for acquisitions in our EPS figure, and you can see the year-to-date metrics on the previous page. The full-year estimate is $0.15 to $0.20. This gives you an understanding of the impact from FX and acquisitions on our projected increase. Lastly, our strong performance in the first half has significantly contributed to our operating income, which you can see highlighted in the first bar. These three factors are the main contributors to the EPS increase.

I wanted to revisit the organic sales outlook for the quarter. How did the $40 million surcharge and revenue contribution compare to the original expectations on a net basis? Were there any surcharge rollbacks during the de-escalation? Do you feel confident about being covered for the remainder of the year?

Yes. We actually have updated our surcharge, not only in our estimates to you, but even the announcements to our channel partners and customers. So as this moves, these surcharges allow us to be flexible and agile to our customer base. And Brett, continue to think of it as neutral. We're going to drive the surcharge to offset the inflationary pressures. And I think as you saw in the first quarter, that price productivity inflation investment for the Americas was pretty close to that. So it was breakeven.

This is John, Brett. Appreciate the question. And I'd say each acquisition takes on a life of its own. Certainly, we had several acquisitions that came to the point of closure in a pretty tight time window. But if you just take a look at ELATEC, I mean, that's a company we've had our eye on for a long time. And so really excited to bring that into the portfolio here. Very excited to have them on the team. I think our pipeline remains active in both of our segments in international and in the Americas. It remains active in mechanical as well as electronic products. So it looks pretty good. I think our team is performing very well.

I was just going to ask, price/cost remained modestly positive in the quarter. Just your view into the second half and what you're seeing with some of the different cost buckets, if you could talk through some of those.

No, it's a fair question. And I'd say no. Project activity in the non-res space has been strong. Demand has been good. As a business, we operate predominantly in a short lead time made-to-order environment, book and ship kind of business. Our customers operate in a similar manner. And that's really the dynamic today. So I think project work continues on and have not seen that elasticity impact that you asked about.

So I'd like to ask you about the international business for the second half outlook, especially. So you had a volume decline of 3.2%. Any changes that you see from the past quarters? And how do you see the flattish market outlook on a full-year basis? Any things that we should look at in the second half for this business, please?

Yes, I understand you've been following us a bit less closely than some others on the call. Tomo, regarding our business, the fourth quarter in international is typically our strongest period. So when modeling this, it's helpful to consider the historical quarterly seasonality. As for the outlook, we still believe the year will be relatively flat. We mentioned our Q1 outlook at the start of the year and continue to expect the full year to be approximately in line with that flat organic outlook. The biggest acquisition, obviously, ELATEC, that is margin accretive for international. We gave some details when we put out the earnings release where you can calculate that and see that you're thinking mid-20s percent, which is certainly accretive to international on that business. So as I think about margin rates on M&A for international, think of it as accretive to the margin rate.

I just wanted to ask on price. I think the company in April was pushing surcharges for about $80 million of tariffs. Obviously, you guys are kind of now putting that number at $40 million. So like is Q3 price effectively lower than Q2 price? I think Q2 came in at plus 3% because of that rollback. Just any thoughts on that price trajectory intra-quarter Q2 and then as we kind of go into the back half?

No. If you think about our tariffs, think of 25% of the full year, so 25% of the $40 million will be in the second quarter, and then the remaining 75% will be pretty even over the last 6 months of the year. So that can kind of give you an idea of the tariff revenue.

Thanks very much for the engagement and the questions. Again, I would just reiterate I feel that Allegion is performing very well, executing at a high level and steadily delivering on the commitments we made to you at our Investor Day. Thank you very much.