Allegion Q3 2026 Earnings Results & Report

Allegion EPS Results

• Actual EPS: $2.60
• Consensus EPS: $2.50
• Beat/Miss: Beat by +$0.10
• One Year Ago EPS: $2.30
• EPS Beat Rate: 6 of last 8 quarters

Allegion Revenue Results

• Actual Revenue: $1.17 billion
• Expected Revenue: $1.14 billion
• Beat/Miss: Beat by +$34.84 million
• YoY Revenue Growth: +9.60%

Allegion (NYSE:ALLE) is a global provider of security products and solutions for homes, businesses, schools, hospitals and other institutions. Its offerings include mechanical and electronic locks, access-control systems, door closers, exit devices and related door hardware.

The company sells products under brands including Schlage, Von Duprin, LCN and CISA. Its solutions are used in both commercial and residential settings, with operations serving customers in North America and other markets around the world.

Allegion was formed in 2013 when it separated from Ingersoll Rand. The company is headquartered in Dublin, Ireland, and John H. Stone has served as its president and chief executive officer since 2022.

Allegion Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Allegion raised its 2026 outlook, increasing reported revenue growth guidance to 9.5%–10.5%, organic revenue growth to 5%–6%, and adjusted EPS to $9.05–$9.10, implying low-double-digit EPS growth.
• Positive Sentiment: Third-quarter revenue rose 9.6% to approximately $1.2 billion, while adjusted EPS increased 13% to $2.60 and adjusted operating margin expanded 60 basis points to 24.7%; year-to-date available cash flow rose 11.2% to $539.4 million.
• Positive Sentiment: The Americas delivered 9.1% organic growth, led by low-double-digit non-residential growth, healthy specification activity, and strong electronics demand. Management expects non-residential momentum to continue into 2027, although residential growth remains primarily price-driven.
• Negative Sentiment: International organic revenue declined slightly as weak Western European demand, particularly in Germany, reduced volumes and pressured margins; management expects international markets to remain soft in 2027.
• Positive Sentiment: Allegion completed its approximately $90 million acquisition of Overly Door Company, invested another $40 million in Ambient.ai, launched its connected-product Optimize app, and returned $166 million to shareholders through dividends and share repurchases.

Presentation

[Operator]

Good day, everyone. My name is Shell, and I will be your conference operator today. At this time, I would like to welcome you to the Allegion third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, and if you have 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 would like to turn the call over to Josh Pokrzywinski, Vice President, Investor Relations.

[Josh Pokrzywinski, VP of Investor Relations at Allegion]

Thank you, Shell. Good morning, everyone. Thank you for joining us for Allegion's third 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 two.

[Josh Pokrzywinski, VP of Investor Relations at Allegion]

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.

[John Stone, President and CEO at Allegion]

Thanks, Josh. Good morning, everyone, and thanks for joining us. Third quarter results were driven by strong organic growth in the Americas, led by double-digit organic growth in our non-residential business. The team's performance reinforces what I hope you've come to believe about Allegion. We're a leader in security and access with premium brands and the highest margins in a great industry. Our resilient business model has the proven ability to navigate inflation and withstand cyclical forces based on the value we provide to our customers and the large installed base we serve.

[John Stone, President and CEO at Allegion]

This model continues to evolve with technology as security and access become electrified and digitized, a trend we expect to benefit market leaders like Allegion for many years to come. All of this allows us to deliver double-digit EPS growth through the cycle, as we outlined at our Investor Day in May of last year. Digging into the quarter, our Americas business is performing very well. With continued momentum and spec writing trends through our demand generation engine, we expect non-residential strength to continue into 2027, which we will comment on later in the presentation.

[John Stone, President and CEO at Allegion]

Residential has performed well in 2026 despite consumer headwinds from inflation and interest rates. However, these dynamics also make it difficult to forecast a strong recovery in the medium term. I am also pleased with another quarter of margin expansion in the Americas. We have managed inflation well thus far in 2026, primarily through agile pricing actions that continued in the third quarter. In international, we have resolved the ERP challenge we highlighted in Q1, and that business is back to normal operations and lead times.

[John Stone, President and CEO at Allegion]

However, as discussed last quarter, macro conditions are difficult across Western Europe, particularly in our largest market, Germany, and we continue to be focused on execution and cost management in our international segment. With respect to our full year, we are raising our reported revenue outlook to 9.5%-10.5% and our outlook for organic revenue growth to 5%-6% based on stronger demand and favorable price in the Americas. We are raising our adjusted earnings per share outlook to $9.05-$9.10. I will provide additional details on this later in the call.

[John Stone, President and CEO at Allegion]

Please go to slide four, and let us take a look at capital allocation, starting with our organic investments. In September, we launched the Allegion Optimize app in the Americas. Optimize gives installers, end users, and our channel partners one tool to commission, configure, manage, and troubleshoot our connected products throughout their life cycle. We are rolling Optimize out initially across electronic door controls and e-locks, and we expect this app will ultimately manage our full non-residential connected portfolio globally.

[John Stone, President and CEO at Allegion]

Offering a single app to cover management of multiple product categories is a first in our industry. Customers will benefit from faster, easier experiences with our intuitive interface that eliminates the friction of switching between multiple standalone apps for connected devices. Turning to M&A, we completed the acquisition of the Overly Door Company in early October for approximately $90 million. Overly manufactures specialty doors for acoustics, blast, bullet resistance, and vault security. Overly's high-security solutions serve commercial and institutional customers with strength across U.S. government, education, and healthcare markets.

[John Stone, President and CEO at Allegion]

Similar to our 2024 acquisition of Krieger Specialty Products, this complements our hollow metal portfolio with additional specialty products and regional capability. We expect Overly to add approximately one point to Americas revenues on an annualized basis at margins consistent with the overall enterprise. Recently, we also made a $40 million follow-on investment in Ambient.ai through Allegion Ventures. Ambient continues to prove the transformative potential of purpose-built AI and physical security, helping customers shift their security operations from reactive to proactive.

[John Stone, President and CEO at Allegion]

This investment underscores our confidence in their technology, their leadership, and our increased collaboration. Allegion paid $46 million in dividends and repurchased $120 million of shares in the quarter. We see attractive valuation in Allegion shares and expect to remain active in share repurchase. As we have said in the past, you can expect Allegion to be balanced, disciplined, and consistent with capital deployment oriented to profitable growth and driving long-term returns for shareholders. Mike will now walk you through the third quarter financial results.

[Mike Wagnes, SVP and CFO at Allegion]

Thanks, John, and good morning, everyone. Thanks for joining today's call. Please go to slide number five. Revenue for the third quarter was approximately $1.2 billion, an increase of 9.6% compared to last year. Organic revenue increased 7.2% in the quarter, driven by strength in our Americas segment. The enterprise organic revenue increase was driven by both price realization and volume growth. Q3 adjusted operating margin was 24.7%, up 60 basis points compared to last year. Price and productivity, net of inflation and investment, was favorable by $15.6 million and was a 50 basis point tailwind to margin rate.

[Mike Wagnes, SVP and CFO at Allegion]

Volume leverage was also a tailwind to margin rate in the quarter. This favorability was partially offset by acquisitions, which were a 20 basis point headwind to margins. I will provide more details on revenue and margins within each of the regions. Adjusted earnings per share of $2.60 increased $0.30, or 13%, versus the prior year. Operating income, inclusive of acquisitions, drove the majority of the year-over-year EPS growth. Additionally, benefits from interest and other and share count were offset by a headwind from tax.

[Mike Wagnes, SVP and CFO at Allegion]

Please note, third quarter 2026 adjusted operating income and adjusted earnings per share exclude the favorable impact from IEEPA tariff refunds. You can find additional information regarding this in our press release and 10-Q, which were filed this morning. Finally, year-to-date available cash flow was $539.4 million, up 11.2% from the prior year. I will provide more details on cash flow in the balance sheet a little later in the presentation. Please go to slide number six. Our Americas segment delivered revenue of $942.4 million, which was up 11.7% on a reported basis and up 9.1% on an organic basis.

[Mike Wagnes, SVP and CFO at Allegion]

Our non-residential business increased low double digits organically, driven by price and volume growth. Demand for our non-res products remains healthy, and as John mentioned earlier, spec activity continues to be strong. Our residential business grew mid-single digits in the quarter driven by price, consistent with year-to-date trends. Electronics revenue for the segment was up low double digits for the quarter and continues to be a long-term growth driver for the business. In addition, acquisitions contributed 2.6% of growth in the quarter.

[Mike Wagnes, SVP and CFO at Allegion]

Americas adjusted operating income of $283.8 million increased 12.6% versus the prior year. Adjusted operating margins were up 20 basis points in the quarter. Price and productivity, net of inflation and investment, was favorable by $13.5 million and was a 20 basis point tailwind to margins. Volume leverage was also a tailwind to margin rates. However, acquisitions were a 40 basis point headwind, as we expected.

[Mike Wagnes, SVP and CFO at Allegion]

Please go to slide number seven. Our International segment delivered revenue of $230.2 million, which was up 1.8% on a reported basis and down slightly organically as favorable pricing was offset by lower volumes. The volume decline was the result of continued weakness in Western Europe, as John discussed earlier. Acquisitions contributed 2.5% to segment revenue, and currency was a headwind in the quarter. International adjusted operating income of $31.9 million decreased 1.2% versus the prior year.

[Mike Wagnes, SVP and CFO at Allegion]

Adjusted operating margin for the quarter decreased 40 basis points. Price and productivity, net of inflation and investment, was a 30 basis point tailwind to margin rate in the quarter. Net acquisitions drove a benefit to margin rates of 20 basis points. These benefits were more than offset by headwinds related to lower volume and unfavorable mix. Please go to slide eight, and I'll provide an overview of our cash flow and balance sheet.

[Mike Wagnes, SVP and CFO at Allegion]

Year-to-date available cash flow was $539.4 million, an increase of 11.2% versus the prior year. The cash flow increase was primarily driven by higher earnings. For 2026, we still anticipate our ACF conversion will be in the range of 85%-95% of adjusted net income. Next, working capital as a percent of revenue was 7.9%, consistent with the prior year. Finally, our balance sheet remains healthy with a net debt to adjusted EBITDA at 1.5x. I will now hand the call back over to John.

[John Stone, President and CEO at Allegion]

Thanks, Mike. Please go to slide nine. With one quarter remaining in the year, we're raising our organic revenue growth outlook to 5%-6% and adjusted EPS outlook to $9.05-$9.10. We are raising our reported revenue outlook to 9.5%-10.5% based on changes to the organic growth range and acquisitions. You can find more details on our outlook in the appendix. In the Americas, we're raising our organic growth assumption to 7%-8%, consistent with year-to-date organic growth in the segment. This is a result of a healthier non-res demand environment and higher price realization.

[John Stone, President and CEO at Allegion]

For international, our organic growth outlook remains unchanged at down low single digits as market demand in Europe, particularly Germany, remains weak. For full year 2026, we expect to deliver low double-digit EPS growth consistent with our long-term earnings framework. As in prior periods, this outlook excludes the benefit of future capital deployment and therefore assumes a share count of 85.6 million. Please go to slide 10. Now, we'll provide our full 2027 outlook in February. But in the meantime, consistent with our usual practice, we'll share some high-level perspectives on the year ahead.

[John Stone, President and CEO at Allegion]

We expect demand in our major end markets to be similar to current year, with growth led by strength in the Americas. Spec writing trends support optimism on non-residential markets over the next several years, particularly in the context of our late cycle business model. Residential markets continue to face headwinds from inflation and high interest rates, but multiple years of low activity supports a stable demand outlook in 2027, with growth driven primarily by price. International markets are expected to remain soft, driven by weak economic activity and persistent inflation.

[John Stone, President and CEO at Allegion]

We expect to remain in an inflationary environment and will continue to drive pricing to protect operating profit dollars. Operating leverage in the Americas segment should be consistent with our long-term framework for incremental margins. Internationally, we remain focused on self-help and have some benefit of carryover cost savings from 2026 actions. We plan to stay active in deploying capital, pairing bolt-on acquisitions with share repurchase.

[John Stone, President and CEO at Allegion]

Please go to slide 11. In summary, Allegion delivered high single-digit organic revenue growth this quarter, fueled by the strength of our Americas non-residential business. For the full year 2026, we're raising our reported revenue outlook and our adjusted EPS outlook. We remain agile and focused on strong execution. The Allegion team expects to continue delivering on our commitments and driving value for shareholders. With that, we'll take the questions.

[Operator]

Thank you. We will now begin the Q&A. For today's session, we will 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 on, please unmute yourself and begin to ask your question. Thank you. We will now pause a moment to assemble the queue. Our first question comes from Joe O'Dea from Vertical Research. Please unmute your line and ask your question.

[Joe O'Dea, Analyst at Vertical Research]

Hi. Good morning. Can you hear me?

[John Stone, President and CEO at Allegion]

Yep. Good morning, Joe.

[Joe O'Dea, Analyst at Vertical Research]

Hi. John, can you just talk a little bit more and unpack some of the strength that you are seeing in America's non-res, the organic this quarter kind of equal parts volume and price. In particular, volume that is kind of in that mid-single digit type of territory. If you could talk a little bit about the end market strength there, where the spec writing activity is seeing signs of strength and any degree to which you think you are winning in the market and some of this is share related.

[John Stone, President and CEO at Allegion]

Yeah. Joe, appreciate the question. Certainly, as you know, America's non-res is the largest business segment of the company and really our most important. Up high single digits this year, combination of volume and price. Our spec activity continues to be strong, as we have said the past few quarters, and that strength continues to be broad-based. Certainly growth in data center forms a good base for 2027 volume growth as we look forward, but we do expect other verticals to contribute there as well. As we mentioned in the prepared remarks, we see an inflationary environment continuing, and you should expect price to remain elevated as a result.

[John Stone, President and CEO at Allegion]

We do feel that I think trade labor, skilled trade labor, can be a bit of a governor on a year-on-year market growth. Again, as we said in the kind of looking forward into 2027, that kind of high single digit environment with a combination of price and volume, what we feel is quite well supported by our spec activity. With respect to where are we winning, I think our team wins every time we step on the field. We have got great brands. We have got a great field marketing and sales force. We have got great distribution partners, and I think tough to say with share as we have answered many times in the past, we sell through distribution, so pinning down market share numbers in this space is kind of hard.

[Joe O'Dea, Analyst at Vertical Research]

I appreciate that color. Then just given some of the headlines earlier this month, I wanted to ask about your technology integration with smart home providers. If you could give a little bit of color on developments around the technology integration, how broadly penetrated you are with that across different providers and your perception of any risks attached to new entrants into the hardware space.

[John Stone, President and CEO at Allegion]

It's a timely question. We saw the news media headlines as well as you did. I would say first off, Allegion through our Schlage brand, has been an innovation leader there in electronic and connected locking in the residential space. For the past seven years, Schlage is America's most trusted lock brand. We've got a great brand reputation, great product portfolio. We're integrated with all the major smart home devices and providers. We're integrated with Airbnb, as we've talked about on previous calls as well. You wind the clock back, it'd be maybe eight or nine years ago, we were the first Wi-Fi connected deadbolt that integrated with Apple HomeKit.

[John Stone, President and CEO at Allegion]

That innovation has not slowed down. I'd say, with regards to new entrants into the space, that happens from time to time. I would say the product category that these companies have indicated they might be introducing a lock into represents a low single-digit percentage of Americas revenue and an even smaller portion of Americas operating profit, just to size it for you. But we feel confident in the Schlage brand and Schlage portfolio, and I think our performance this year in a rather soft demand environment speaks for itself.

[Joe O'Dea, Analyst at Vertical Research]

Great color. Thank you.

[John Stone, President and CEO at Allegion]

Thanks, Joe.

[Operator]

Thank you. Our next question comes from Rafe Jadrosich from Bank of America. Please unmute your line and ask your question.

[Rafe Jadrosich, Analyst at Bank of America]

Great. Hi, good morning. Thanks for taking my question. Just starting on the pricing in Americas. On a year-over-year basis, it maintained a similar level in 3Q versus 2Q, but you are lapping a lot tougher of a comp. Was there incremental pricing that was announced in 3Q? Then how do we think about that going forward?

[Mike Wagnes, SVP and CFO at Allegion]

Yeah, thanks for the question. If you remember last year, our pricing started to step up in the back half of 2025 as we dealt with the new tariff impacts that were implemented by the administration. So the comp got tougher starting really in Q3. So you saw that this year we have a tougher comp. The thing to remember about our business is we've been facing consistent inflationary pressure. So the days of just setting pricing once across the portfolio in early February has kind of changed over the last couple of years.

[Mike Wagnes, SVP and CFO at Allegion]

So we take pricing as needed to combat inflationary pressures. So we've put in multiple price increases across select parts of our business. I think the key thing to think about our business is we're always going to drive that pricing and productivity to try to cover that inflation and investment. As you've seen over the last couple of years, we've been able to do that, driving positive dollars.

[Mike Wagnes, SVP and CFO at Allegion]

As you think of the current year, think of it as that PPII neutral on a margin rate for the full year and some positive dollars. So there's going to be pricing actions, but it's not going to be the one time in the beginning of the year that you might have known Allegion to do in, let's say, 2014 through 2019. It's been a more consistent, adaptable environment to the changing inflationary pressures we face.

[Rafe Jadrosich, Analyst at Bank of America]

Okay. That is helpful. It does sound like there has been some incremental pricing, which is why you are not slowing on the two year. Can you just talk about your visibility on the level of inflation you are expecting into next year maybe compared to this year? What are you expecting in terms of input costs, and then how much price you would need to offset that?

[Mike Wagnes, SVP and CFO at Allegion]

I would say, obviously, the details of the magnitude of exact pricing and inflation, we will give that when we give the outlook in February, when we announce earnings. In general, though, think of it as we are planning for a high inflationary environment, and so we are going to make sure that we take the necessary actions to price our products to combat that environment that we are in today and we expect to continue into next year.

[Mike Wagnes, SVP and CFO at Allegion]

The magnitude of it, we will come back to you in February, but just remember, we are focused on driving that pricing and productivity to offset that inflation, and investments, and expect us to do that into next year as well. But the details of the actual percentages, let us finish out the year and get back to you in February.

[Rafe Jadrosich, Analyst at Bank of America]

Thank you.

[Operator]

Thank you. Our next question comes from Alexander Virgo from Evercore ISI. Please unmute your line and ask your question.

[Alexander Virgo, Analyst at Evercore ISI]

Yeah. Thanks very much. Good morning, gentlemen. Appreciate you taking the question. I wondered if you could just talk a little bit to the implied slowdown in the guide in Q4. Just thinking about, is that something that's just a reflection of prudence given the comps get easier? Just to clarify on the pricing and the carryover into the first half, I suppose, of next year, any chance you can give us a sense of how much that might end up being? Thank you.

[John Stone, President and CEO at Allegion]

Yeah. Hey, Alex. This is John. I would say a couple things. Largest business segment being our Americas non-residential business, and that's a construction-facing business. Project size has been growing, and that's going to put a little lumpiness when you look quarter-to-quarter. What we think is the better thing to look at is just the year-to-date or the full year high single-digit organic growth that that business is driving.

[John Stone, President and CEO at Allegion]

Taking one quarter and extrapolating that forward is not the best idea. There's going to be some lumpiness because of project size. There's going to be some lumpiness because we're construction-facing. In the Americas, the middle two quarters are always going to have a little bit more construction activity than the two tails. I'm going to ask Mike to step in and speak to the pricing part of the question.

[Mike Wagnes, SVP and CFO at Allegion]

Yeah, there will be carryover pricing into next year. I think it's more important for you as you think about next year, carryover wouldn't be sufficient, obviously, as you think about the back half of the year. We do anticipate putting that pricing increase in early February next year. We'll announce that, obviously, the channel partners first. As you think about pricing next year, think of an elevated inflationary environment and expect Allegion to put that pricing announcement in early February like we customarily do, to drive that pricing also for the back half of the year.

[Alexander Virgo, Analyst at Evercore ISI]

Thanks very much, indeed.

[Operator]

Thank you. Our next question comes from Tim Wojs from Baird. Please unmute your line and ask your question.

[Tim Wojs, Analyst at Baird]

Yeah. Hey, guys. Good morning. Nice job. Maybe just on the pricing cadence, Mike, just kind of transitioning, it sounds like a little bit to maybe more, I'd say kind of selective pricing as well as kind of broad-based pricing. Does that change your ability to kind of line up price with inflation versus historically? I think there's been a little bit of a lag, or does it really kind of change that timing dynamic at all?

[Mike Wagnes, SVP and CFO at Allegion]

Yeah. Tim, if you think about our business, over the last, I'd say year and a half, we've gotten better at reacting to inflationary pressures, so you don't see that significant a lag that you might have saw in 2021. Some of the challenges we encountered in 2021, we've learned from, and as you've seen over the last year and a half, we are quicker.

[Mike Wagnes, SVP and CFO at Allegion]

I don't expect to see periods of time where there's big headwinds because we're late in taking those pricing actions. Look for us to take pricing to combat inflationary pressures, and driving that PPII. We talk about neutral on a dollar basis. If you think about quarters, then over the course of a year, it tends to be neutral on a rate as you saw this year, but we're committing to at least driving that neutrality on a dollar basis.

[Josh Pokrzywinski, VP of Investor Relations at Allegion]

Positive.

[Tim Wojs, Analyst at Baird]

Okay.

[Mike Wagnes, SVP and CFO at Allegion]

I'm sorry.

[Tim Wojs, Analyst at Baird]

Okay.

[Mike Wagnes, SVP and CFO at Allegion]

Positive on a dollar basis, neutral on a margin rate basis. Thank you, Josh.

[Tim Wojs, Analyst at Baird]

On a rate basis, yeah. Okay. I guess just a bigger picture question. Just, John, could you kind of talk about the AI impact on your spec writing business? What you guys are working on implementing and if that's an opportunity for productivity, but also for, I guess, greater volume, if you can be more efficient with the spec writing network.

[John Stone, President and CEO at Allegion]

Yeah, it's a good question, Tim, and I think we're making some really well-thought-out and exciting investments internally on leverage of AI tools, and that's across every function in the business. When you think about what does an AI model of any flavor, LLM or otherwise, need to really do a good job for you, it needs a very large and robust data set. When we're specifying 2.5 million openings in any given year, we've got an exceptionally large data set to train models on and use those models for efficiency, just like you're saying.

[John Stone, President and CEO at Allegion]

That's happening right now. It's happening in conjunction with channel partners. Our responsiveness, in terms of initial spec or change orders is definitely increasing for the benefit of the customer. I think we're in the pole position really to make the best use of AI in a spec writing environment, from an accuracy and a speed standpoint. It's really built upon this enormous data set that we've built up over time and we'll continue to build.

[Tim Wojs, Analyst at Baird]

Sounds good. Thank you.

[John Stone, President and CEO at Allegion]

Thanks.

[Operator]

Thank you. Our next question comes from Aanvi Patodia from Goldman Sachs. Please unmute your line and ask your question.

[Aanvi Patodia, Analyst at Goldman Sachs]

Hey, good morning.

[John Stone, President and CEO at Allegion]

Morning.

[Aanvi Patodia, Analyst at Goldman Sachs]

Yeah. Congrats on the quarter and good growth there on the non-res side. I did want to touch upon the residential growth. We saw mid-single digit growth organically, but I believe it's largely attributed to price realization. With the ABI coming in yesterday and the September read was weaker than expected. August and July was also below the 50 number. I just wanted to understand what you've seen from a volume standpoint on the resi side. What has happened to underlying demand there, and when would you expect a return to positive volume growth absent of pricing?

[John Stone, President and CEO at Allegion]

Yeah, I appreciate the question. I'd say, consistent with our prepared remarks, you're right in that growth in our residential business recently has been driven primarily by price. The end market volume has been kind of flattish. Price realization has driven that. As we said, looking forward, it's tough given high inflation and high interest rates to expect any kind of strong recovery in the residential sector, but we also don't see it getting a lot worse. I think that informs our look into 2027, that growth in the residential space will primarily be driven by price.

[Aanvi Patodia, Analyst at Goldman Sachs]

Okay. Got it. That makes sense. I guess switching gears, more holistically, I wanted to touch upon your data center opportunity. Where does Allegion participate today? Is it more like the door hardware, perimeter security? Is it other solutions? How large is this opportunity for you? What portion of your non-res growth is more data center linked?

[John Stone, President and CEO at Allegion]

Yeah, it's a good question. I'd say we are active in the data center space. I think our specification writers, our end user consultants have done a great job in terms of getting Allegion a leading position in terms of doors and door hardware, with the large data center builders. As we mentioned in second quarter, data centers were approaching 5% of our non-res business. I'd say it's there now, growing rapidly, and has been a source of volume growth this year, and we look for that to continue.

[John Stone, President and CEO at Allegion]

I would just keep in mind, whatever you believe about data center construction and build out, doors and door hardware are some of the last things to go into the building on the construction project. We are late cycle on each project. We do feel good about the trends there and about our market position with respect to our core products.

[Aanvi Patodia, Analyst at Goldman Sachs]

Got it. Thanks, John. I'll get back in queue.

[John Stone, President and CEO at Allegion]

Thanks.

[Operator]

Thank you. As a gentle reminder, if you would like to ask a question, please use the raise hand button at the bottom of your Zoom screen. Our next question is from David MacGregor from Longbow Research. Please unmute your line and ask your question.

[David MacGregor, Analyst at Longbow Research]

Yes, good morning, everyone. Congratulations on a great quarter, John.

[John Stone, President and CEO at Allegion]

Thanks, David.

[David MacGregor, Analyst at Longbow Research]

I wanted to. I appreciate the early preliminary thoughts on 2027. I guess I wanted to ask about your acquisition program, and 2025 was obviously a more M&A active year than 2026. I am just wondering how much of that slower pace in 2026 related to the need to make progress on integrating the 2025 transactions versus maybe valuations or funnel development issues. How are you thinking about 2027? Could it be a more active year? What would need to change to make it a more active year?

[John Stone, President and CEO at Allegion]

That is a really good question, David. I would say, first off, if you look at 2025 just from a deal count perspective, we would say that was, let us just say very high. M&A of any sort is rather episodic in its timing. It is not something that I think anyone can do on this perfectly linear basis. So I do not think 2025 as a deal count is any kind of benchmark or goal or any of that. What we are after on acquisitions is what we talked about at our 2025 Investor Day, looking to complement and continue to build out our mechanical portfolio like we just did with the acquisition of Overly Door Company.

[John Stone, President and CEO at Allegion]

Very excited about that one. Add electronics, add electromechanical acquisitions and complementary software for those faster growth verticals in our segment. I think the point on the pace is really while we are oriented towards profitable growth, we do see acquisitions continuing to be a part of our growth story for the future.

[John Stone, President and CEO at Allegion]

We are going to be very disciplined on what we buy strategically and what we buy from a valuation perspective. So, those acquisitions that come in are going to drive good value for our shareholders and not just growth for growth's sake. I think that is going to throttle the pace of deal flow more so than anything else, just being disciplined around our strategy and around what we pay.

[David MacGregor, Analyst at Longbow Research]

Thanks for that. Just secondly, for the cash flow model here, I am just wondering how higher freight logistics costs influence how you think about your inventory levels going forward.

[Mike Wagnes, SVP and CFO at Allegion]

Yeah, David, obviously, if you think about cash conversion, we have thrown out that 85%-95% cash conversion. I would not expect to see any change to that percentage based on something like freight. That is a pretty big range for us. With inventory, we will always be smart to make sure that we have the necessary parts to ship product. But if there is inflationary pressure, which there is, it will impact inventory on the balance sheet, right? Because inventory costs more.

[Mike Wagnes, SVP and CFO at Allegion]

The key thing for us, and as I think about it, are we driving the necessary pricing, which I talked about earlier in the call. So I would say if you think about the framework, 85%-95% ACF conversion, I think that is a decent framework to think of us long term at. Inventory levels, I think they will not move enough to where it impacts that framework we provided.

[David MacGregor, Analyst at Longbow Research]

Got it. Thanks a lot.

[Operator]

Thank you. Our next question is from Brandon Knutson from Morgan Stanley. Please unmute your line and ask your question.

[Brandon Knutson, Analyst at Morgan Stanley]

Hi. Good morning. Can you hear me okay?

[John Stone, President and CEO at Allegion]

Yep.

[Brandon Knutson, Analyst at Morgan Stanley]

Great. I wanted to start out on electronics. So you've seen strong growth there after the year started, mid-single digits accelerating on a two-year stack essentially as you go throughout the year. Are you seeing an acceleration in electronics adoption? And are there any actions that you're taking currently to drive that acceleration that we're seeing this year?

[John Stone, President and CEO at Allegion]

Yeah, I think we're always driving for growth in electronics, and that comes from everything you can think of, from demand generation engine with our specs. Introducing new products. We have introduced a new family of connected locks in the commercial space. Very proud of that. Very excited about the launch. It's going well. So steady stream of new products driving organic growth, excellence in our demand generation engine and our end user consulting. I'd say, the way we continue to think about it is, high single digit growth driver for the business over the cycle.

[John Stone, President and CEO at Allegion]

Quarter-to-quarter, is there some lumpiness here and there? Does a comp make things look a little lumpy from time to time? Always. But over the cycle, high single digit growth driver for the business, and we see continued trends of both new adoption of electronics and conversion from mechanical to electronics, and now even upgrades of old e-locks to new electronic locks. All those factors are coming into play, and I think we're well positioned to take advantage.

[Brandon Knutson, Analyst at Morgan Stanley]

Great, thank you. On the residential side, you highlighted that the growth there is primarily going to be driven by price. As you see continued sort of macro headwinds from higher interest rates, is it getting harder to get price? Are you seeing any pushback from your customers on the pricing front? Any color there?

[John Stone, President and CEO at Allegion]

Yeah, I think that's fair to always expect some pushback and some negotiation. That's how those things go. But inflation is real. Inflation is high. We are pushing price to cover for that, as Mike has said a couple of times on the call and in the Q&A, and we'll continue to do that. We just feel that given the current environment, we don't see reason to expect a strong recovery in the residential space in the medium term.

[Brandon Knutson, Analyst at Morgan Stanley]

Great, thank you. I will pass it on.

[Operator]

Thank you. Our next question is from Julian Mitchell from JPMorgan. Please unmute your line and ask your question.

[Julian Mitchell, Analyst at JPMorgan]

Hi. Good morning. Just wanted to start off with a question around the end markets into next year. When you look back historically at Allegion and the relationship of non-residential orders and sales to changes in the interest rate environment, I suppose anything you could share with us on how recent rate moves have affected your commentary. I think you talked about high single-digit organic growth again in America's non-res into 2027. Are you assuming anything changes in terms of the composition of end markets driving that because of what has happened recently in rates? When would you think rates would show up in terms of slowing any commercial new construction activity?

[John Stone, President and CEO at Allegion]

Yeah. I appreciate the question, Julian. I would say a couple of things. One would be the growth in data centers. This is all new build. This is the next add to our large installed base. That new build kind of has its own dynamics. Again, it is whatever you believe about that build-out and that continued strength. We are participating, we are participating well, and we are late cycle in each of those projects. I do feel good about our position there and the rather long tail that we would expect to see.

[John Stone, President and CEO at Allegion]

Elsewhere, as we have mentioned, past couple of quarters, and you can see it in the news as well, recent JLL reports have even said commercial office demand has five straight quarters of growth, kind of coming back from the dead after the pandemic and the work from home dynamics. You see that in major metro areas, New York and San Fran really leading the way. Some tower work has come back that hasn't been there in a while.

[John Stone, President and CEO at Allegion]

Multifamily is some places contracting, other places growing. I think when you look at Allegion, never forget that our portfolio, our sales force, our demand generation engine is broad-based. That's also where we feel justified in our optimism that our spec writing shows strength broad-based. It's across all the institutional verticals, and the commercial verticals have started to show some signs of life. Data centers just being its own dynamic right now that's very strong.

[Julian Mitchell, Analyst at JPMorgan]

That's helpful. Thank you. Just on the margins and the aspects around that 50 basis points tailwind from PPII that you've seen, is that a good kind of placeholder, assuming no major changes in the cost inputs from here? Just wanted to check on that. It looks like your guidance embeds a step up in margin improvement year-on-year in Q4 from what we've seen in the last few quarters. Anything specific to call out there? Thank you.

[Mike Wagnes, SVP and CFO at Allegion]

Yeah, Julian, if you think about for this year, 2026, we would expect to see flat to slightly up margins for the full year. Obviously, that means Q4 has that step up, as you just mentioned. A part of that is comp related. If you think about, especially in the Americas last year, that rate was a little lower. So we have some favorability. As you think about next year, we expect to see margin expansion. The magnitude of that is similar to my comments earlier. When we get to February, we'll give an outlook. A couple of things we did put on the slide, though, as you think about next year. Expect us to drive that PPII, right, to combat the inflationary pressure.

[Mike Wagnes, SVP and CFO at Allegion]

In the Americas, that core incrementals that we highlighted at our Investor Day, think of next year within the parameters of that framework we laid out so you have an idea. As to the amount of margin expansion next year, we'll come back in February and we'll give you that when we give you EPS. At least we wanted to provide you some framework for you to think about next year as part of this earnings call.

[Julian Mitchell, Analyst at JPMorgan]

That is great. Thank you.

[Operator]

Thank you. At this time, I see no more callers in the queue, so I will hand the call back to John Stone for closing remarks.

[John Stone, President and CEO at Allegion]

Well, thank you all for joining the call, and thanks for a great Q&A. We look forward to connecting with you on our full year earnings call in February. Be safe, be healthy.

[Operator]

Thank you for joining the call. You may now disconnect.

Participants

Executives

• Josh Pokrzywinski, VP of Investor Relations
• John Stone, President and CEO
• Mike Wagnes, SVP and CFO

Analysts

• Joe O'Dea, Analyst at Vertical Research
• Rafe Jadrosich, Analyst at Bank of America
• Alexander Virgo, Analyst at Evercore ISI
• Tim Wojs, Analyst at Baird
• Aanvi Patodia, Analyst at Goldman Sachs
• David MacGregor, Analyst at Longbow Research
• Brandon Knutson, Analyst at Morgan Stanley
• Julian Mitchell, Analyst at JPMorgan