Allegion plc (ALLE) Earnings

Management highlights

- Core Demand Trends * Strong organic growth in the Americas segment, with robust specification activity across core institutional markets for several consecutive quarters * Cyclical improvement is seen in commercial verticals including office and multifamily, with fast-growing demand from the small but expanding data center vertical that will drive future aftermarket revenue * International demand is weaker across several European markets, most notably Germany, the company's largest European market; sequential margin improvement has been achieved after Q1 2026 ERP implementation challenges, with further improvement expected in H2 2026 - Product and Growth Strategy * Secular growth is ongoing in electronics, driven by adoption of contactless mobile credentials replacing traditional plastic cards and mechanical keys across higher education and off-campus housing; this trend generates large-scale hardware upgrade cycles that drive customer loyalty and long-term growth * The company maintains a pipeline of complementary acquisition opportunities to expand its product portfolio - Capital Allocation * $70 million spent on acquisitions in Q1 2026, no acquisitions completed in Q2 2026 * Paid $47 million in dividends and repurchased $120 million of company shares in Q2 2026 * Management maintains a balanced, disciplined approach to capital deployment focused on profitable growth and long-term shareholder returns; at current share price levels, management views repurchases as attractive and expects to remain active in H2 2026 - Financial Performance * Q2 adjusted EPS was $2.40, up 17.6% year-over-year; adjusted operating margin was 24.2%, up 50 basis points year-over-year * Year-to-date available cash flow was $260.8 million, down 5.3% year-over-year primarily due to timing of sales; the balance sheet remains healthy with net debt to adjusted EBITDA at 1.6x

Guidance

- Full year 2026 reported revenue growth outlook raised to 7.5% to 8.5%, from prior guidance, driven by stronger-than-expected demand in the Americas, partially offset by weaker international demand - Full year 2026 organic revenue growth outlook raised to 3.5% to 4.5%, up from prior guidance - Full year 2026 adjusted EPS outlook raised to $8.85 to $9, with expected high single-digit to low double-digit full year EPS growth aligned with the company's long-term framework - International full year organic revenue outlook revised to a low single-digit decline, driven by weak market demand in Europe, particularly Germany; inorganic contribution assumptions are also modestly lowered due to weaker international market conditions - Management expects continued Americas margin expansion in H2 2026, and international margin expansion in H2 2026, after recovering from Q1 ERP implementation production impacts - Pricing actions have been implemented in Q2 to offset higher inflation; management will continue monitoring input and tariff costs to implement additional pricing if needed - The outlook does not include potential IEPA refunds due to timing uncertainty; any potential refunds are not expected to have a material impact on full year EPS - The outlook assumes a weighted share count of 85.9 million shares, and does not include the benefit of future share repurchases

Segment performance

1. America segment: Q2 2026 revenue was $918.6 million, up 11.8% year-over-year reported and 8.9% organic. Acquisitions contributed 2.9 percentage points of growth. Non-residential and residential businesses both grew high single digits organically, driven by price and volume growth; electronics revenue grew low teens for the quarter, with year-to-date growth at high single digits. Adjusted operating income was $276.4 million, up 12.5% year-over-year, with adjusted operating margins up 20 basis points. This segment contributed 79.8% of total Q2 revenue. 2. International segment: Q2 2026 revenue was $232.9 million, up 16.2% reported, but down 1.2% organic. Net acquisitions contributed 14.3 percentage points of growth, and currency added a 3.1 percentage point tailwind to reported revenue. The organic decline came from weaker demand in key European markets, particularly Germany. Adjusted operating income was $28.8 million, up 9.9% year-over-year, but adjusted operating margin decreased 70 basis points year-over-year; margin improved 440 basis points sequentially from Q1 2026 following Q1 ERP implementation issues. This segment contributed 20.2% of total Q2 revenue. Total company Q2 revenue was $1.2 billion, up 12.7% year-over-year with 6.9% organic growth.

Risks & headwinds

- Weaker-than-expected demand in major European markets, particularly Germany, is negatively impacting international segment revenue and performance, requiring cost restructuring to offset - ERP implementation disruptions in Q1 2026 created production and margin headwinds in the first half of the year, though sequential improvement has been achieved - Inflation, input cost volatility, and tariff changes create margin pressure that requires ongoing pricing and productivity actions to offset - Non-residential specification activity converts to revenue over a 12 to 18 month timeline, with inherent lumpiness and uncertainty in revenue conversion - New build residential demand remains weak broadly, aligned with industry trends reported by home builders

Analyst Q&A

• Q: What drove stronger-than-expected North American volume in Q2, and what is the second half volume outlook for the Americas? /

  A: Q2 2026 volume was very strong across both residential and non-residential residential demand was stronger than expected, particularly for electronics, partially driven by pull-forward demand from an end-of-May price increase that pulled a small amount of sales from Q3 into Q2. Management is prudent not to extrapolate one strong quarter into an ongoing trend, so the second half outlook uses more modest residential growth assumptions, while underlying non-residential demand remains solid for the second half and into 2027.

• Q: Why is Allegiant's European demand weaker than some competitors' performance, and what is the pricing outlook for international in H2? /

  A: Allegiant is overweighted to Germany, where sequential GDP forecast cuts have driven consistent demand decline that has an outsized impact on segment results; Southern European markets (Italy, Spain) are performing in line with expectations. While pricing power is weaker than in the Americas, management still expects positive pricing, alongside cost cuts from recently completed restructuring, to drive international margin expansion in the second half.

• Q: What is the scope and benefit of European restructuring, and what drove the surprisingly strong Q2 residential growth? /

  A: European restructuring includes capturing synergies from prior acquisitions and reducing overall cost structure to match softer demand; the actions are already completed and are expected to deliver $10 million in annual cost savings, with full run-rate benefits starting in Q4 2026. Strong residential growth was driven entirely by electronics demand: new build residential demand remains weak (70% of the residential business is aftermarket, and retail point-of-sale demand was healthy with no abnormal inventory build, so strength reflects underlying demand for the company's electronic access products.