Prepared remarks
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. 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, two flagship university deployments turned into multimillion-dollar opportunities for our company, stemming from thousands of Allegion reader and lock upgrades paired with system-wide Allegion credential standardization. We also see off-campus housing and property managers adopting the same approach, extending secure, seamless access from the campuses where students learn into the communities where they live and connect. These upgrades deliver real benefits: simpler credential management and updates, lower installation costs, faster integration and improved security and convenience for the end user. As mobile credential adoption spreads across core institutional markets, our organic investments position Allegion to capture these hardware upgrade cycles, driving deeper customer loyalty and long-term electronics growth and shareholder value. Turning to M&A. We spent $70 million in acquisitions in the first quarter and did not complete any acquisitions in the second quarter. We continue to cultivate a pipeline of opportunities that complement our portfolio. Allegion paid $47 million in dividends, and we repurchased $120 million of Allegion shares in the second quarter. 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 nonresidential products remains healthy. And as John mentioned earlier, specification activity continues to be strong. Our residential business also grew high single digits, driven by both price and volume. Residential 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 residential and nonresidential 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 available cash flow 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 nonresidential. 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.
Questions and answers
Can you hear me? I just want to make sure I figure this whole tech thing out. Okay. Great. So I guess maybe just first question, particularly on the volumes in North America, it seems like the quarter itself was better from a volume perspective for you guys. I'm just kind of curious what was better relative to your expectations? And what is your expectation for Americas volume in the second half of the year?
Yes, Tim, certainly, we had a really strong second quarter from both volume and total revenue. The quarter itself was as strong as I can remember in some time. There was strength across both residential and nonresidential. Residential demand has been really solid, and we feel we'll continue to have strong demand patterns moving forward when you think of 2026 and 2027. Residential was certainly stronger than we expected, high single digit at the higher end of that, with the close to 9% organic. That was a little stronger, and it was driven by electronics. One item I would note for Allegion here in the second quarter in the Americas is 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 from Q3 into Q2, but not much. Underlying demand is in the high singles when you think about the second quarter, maybe just not as high as 9% for the segment. But overall, really good demand. And as you think moving forward, nonresidential feels real good. In the case of residential, we're encouraged by the quarter we just had. I would say the outlook doesn't assume that level of performance moving forward. We're a little prudent to not take one quarter and then extrapolate that as a trend. So I think there's more modest assumptions in residential in the outlook, although I feel good seeing our residential business grow as strongly as it did in the second quarter.
Okay. Okay. That's helpful. And then I guess maybe just stepping back, is there any way to put numbers or any sort of color or trend around what you're seeing from spec quoting activity and how that's tracked the past three to four quarters? I'm just trying to get a better visual or understanding of how that specific nonresidential spec activity has changed over the last three to four quarters and what that might mean for volumes as we think about 2027 here?
Yes, Tim, this is John. It's a good question. I think you picked up on the commentary from Q1, where we said specification activity was strong to even very strong. That strength and momentum has continued through the second quarter. It's as strong as I've seen since I joined the company, and we're very encouraged by it. We feel it supports our outlook for the current year. With specs generally indicating or being a good indication of project work and revenue in the next 12 to 18 months, we feel this lays a good foundation for organic growth in nonresidential for the next couple of years. We don't release specific numbers around spec because the line of sight to revenue is always a little lumpy, so it's not prudent to do that. To be clear, as we said in the prepared remarks, we see broad-based strength across the core institutional verticals. We do see cyclical recovery in commercial verticals. The AIA consensus came out this week indicating some acceleration in the commercial space into 2027. So there's more signal than noise at this point for what feels like improving nonresidential demand.
Hopefully, you can hear me. I wondered if you could talk a little bit about Europe and the evolution of demand there. I think one of your main competitors last week actually reported accelerating growth in Europe, albeit slow. So I just wondered if you could give us a little bit of comment around some of the drivers of the difference in performance and perhaps a bit of color around that deceleration or deterioration that you called out, especially in Germany.
Yes. Very fair question and something we've been watching closely. When you look at our exposure in Europe, we are primarily in Southern Europe and are overweight in Germany. German GDP growth forecasts have been revised down with every update in the last six to nine months, and we're feeling that. I think we're confident in the businesses there; they're good businesses. Our electronics businesses in Europe are very strong, with good margins and good growth. The macro backdrop in Germany has just been worsening, and that has an outsized impact on us. In our mechanical businesses, largely exposed to Southern Europe and countries like Italy and Spain, they have been hanging in there consistent with our expectations. It's not great, but hanging in with expectations. It's 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 an extension of that, 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 internationally makes pricing a little bit more difficult. So I just wondered if you could talk a little bit about the second half and how we might think about that.
Certainly. If you think about our business, our pricing ability in North America, particularly nonresidential, is our strongest across the company. I would expect to see positive pricing in International as well. As we talked about in the prepared remarks, we're focused on driving cost actions. So as you think about margin performance for the international business, you should see expansion in the second half of margins, and that would be a combination of pricing, restructuring and cost activity to drive better margin performance.
Just to start, can you talk a little bit about the acceleration in Americas residential? How do you think about quantifying the prebuy relative to the sell-through rate there? And how do we think about the cadence as we go through the back half of the year?
If you look at our performance in the second quarter for residential, we saw really strong electronics, and that was driven by consumers and the retail channel; point of sale was good. Inventory levels at retailers are at normal levels, so this is not a big stocking order. Underlying demand was strong in the quarter. This was one quarter where we were really pleased. We want to see a few more quarters of positivity before extrapolating a trend. Also be cognizant that Q3 last year was particularly strong, so it's a tougher comp. In short, the activity was stronger in the quarter, but the outlook doesn't assume that same level yet.
Okay. That's very helpful. And then in terms of the input cost environment, can you talk about how that's evolved over the last three months or so? There's a lot of puts and takes with 232 and steel prices. Last time you mentioned maybe a 30 basis point margin rate headwind, but dollar neutral, 1% of revenue in terms of input cost pressure. Is that still the case or has that shifted at all?
I would say, as we think about our business, tariff and inflation—tariff is a form of inflation—and what we're going to do is manage those inputs. We're going to drive pricing and productivity such that we cover the inflation and the investments. What you saw in the second quarter is we're back to expanding margins and covering the cost basis. Q1 had a little pressure in the Americas; Q2 returned to expansionary margins. I do expect for the full year we will be neutral to slightly positive on PPII in the Americas, which would be expansionary in the back half. As you think about the quarters, take a look at prior year comps as well. 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 we can cover it.
John, I just wondered if you could shed a little more light on the nature and scope of the restructuring that you're doing in Europe? 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.
Jeff, I'll start and ask Mike to add a couple of comments. With regard to the restructurings and the cost actions we took, there are a couple of different flavors. Some of it was capturing acquisition cost synergies from acquisitions we made a year ago. Some of it, admittedly, was in response to softer demand environments that have persisted for a little while and just reducing the overall cost structure in a couple of those segments.
Jeff, if you think about the benefit, think of it as approximately $10 million annually of cost benefit. We'll get the full run rate in Q4. The actions have been addressed and are already completed. You'll see a partial quarter in Q3 and the full quarter benefit in Q4, and then you'll get the carryover into the first half of next year. From a full year perspective, think of it as $10 million annually in benefit.
Great. And then just back to residential, was there anything going on with new product launches or anything that caused stimulation of demand? You said there was no unusual inventory build and point of sale seems good. I'm just curious; it seems like a surprisingly strong number.
Jeff, consistent with the prepared remarks and Mike's answer earlier, it was stronger than we expected in the quarter and was driven by electronics. The new product launch was a year ago in Q3 2025, which will make Q3 a tough comp. We're executing our playbook and strategy, and it's working. Our residential business is about 70% weighted to aftermarket and about 30% to new build. New build is still weak, consistent with what homebuilders are reporting, but point of sale and retail have been strong because of electronics.
I would like to double-click on Americas nonresidential high single-digit growth in the second quarter. Could you give us more color by verticals, such as universities, office, multifamily? John, you talked a bit about data centers. How should we look at the second half outlook for those drivers as well?
Tomo, good question. Nonresidential is certainly the largest part of Allegion's business, and demand has been improving. Momentum is good. Forward-looking signals around spec activity and the AIA consensus are favorable. We feel good about that. Our customers' backlogs are broad-based. 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 is hanging in there. We highlighted higher education earlier as an example. Broad-based is how we'd describe the acceleration in nonresidential demand. Data centers are a rapidly growing space, still small but probably approaching 5% of our nonresidential business and growing quickly. That creates a future installed base that will generate aftermarket sales in coming years, so we're very excited about that opportunity as well.
If I may follow up on data centers as this emerges as a new area of technology-driven demand, how does Allegion differentiate itself for these customers versus competitors?
That's a great question. I'm proud of our Americas field sales and marketing team, our spec writers and our end-user demand generation playbook. We're getting in early in the design phase, creating end-user standards that meet code and specification, ensuring SKU availability that meets the specifics around data centers. A very important acquisition we made two years ago, Krieger Specialty Products, provides high-technology doors that are new for us and are helping in the data center vertical. We create the specification, create the end-user standard and meet delivery expectations with SKUs available in short lead times as the projects proceed. As hyperscalers build new campuses, we expect to be there. 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.