Good morning. And welcome to the Allegion First Quarter 2025 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Josh Pokrzywinski, Vice President of Investor Relations. Please go ahead.

Thank you, Jason. Good morning, everyone. Thank you for joining us for Allegion's first 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..com. This call will be recorded and archived on our website. Please go to slide two. 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. I'll turn the call over to John.

Thanks, Josh. Good morning, everyone, and thanks for joining us. Q1 was a strong start to our year and I am proud of the execution of the Allegion team and grateful for the long-standing partnership with the finest distribution channel partners in the industry. This was another demonstration of the resilience of our business model as we expanded our industry-leading margins and continued to invest in our business while returning capital to shareholders. I'm pleased with the top-line growth in Q1, especially in The Americas driven by the nonresidential business. Over the past year, the Americas team produced mid-single-digit growth and solid margin expansion which we believe speaks to the resiliency of the 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 through accretive acquisitions. Our consistent cash flow and pipeline of opportunities positions us well for additional capital deployment that creates long-term value for our shareholders and drives performance through the cycle. We're exiting Q1 with solid momentum and we're executing our long-term growth strategy while remaining agile. We are affirming our 2025 full-year outlook for adjusted earnings per share of $7.65 to $7.85 and I'll be back later to provide more color on our markets and outlook. Please go to Slide four. Let's take a look at capital allocation for the first quarter starting with investments for organic growth. You may have seen from our Consumer Electronics Show announcements earlier this year, Schlage recently unveiled its first ultra-wideband solution. The Schlage Sense Pro smart deadbolt is set to transform home access, delivering a hands-free unlocking experience that combines ultimate convenience with trusted security for homeowners. Paired with a personal phone, its ultra-wideband technology…

Thanks, John, and good morning, everyone. You for joining today's call. Please go to slide number five. As John shared, our Q1 results reflect strong execution from the Allegion team. Delivering another quarter of margin expansion with mid-single-digit top-line growth. Revenue for the first quarter was $941.9 million, an increase of 5.4% compared to 2024. Organic revenue increased 4% in the quarter as a result of favorable price and volume led by our nonresidential business in The Americas. Q1 adjusted operating margin increased by 150 basis points. As volume leverage, favorable mix, and acquisitions were accretive to margins. Pricing productivity net of inflation and investments inclusive of transactional FX was a slight margin tailwind in the quarter. Adjusted earnings per share of $1.86 increased $0.31 or 20% versus the prior year. Operational performance, favorable tax, and accretive capital deployment more than offset a slight headwind from and other. Our Q1 tax rate benefited from discrete items that historically occur in the back half of the year. We still anticipate the full-year tax rate to be in the range of 17% to 18%. With the first half rate being similar to the second half rate. Finally, to date available cash flow was $83.4 million which was up nearly 250% versus last year. We continue to effectively manage working capital and generate strong cash flow. I will provide more details on our balance sheet and cash flow a little later in the presentation. Please go to Slide number six. This slide provides an overview of our quarterly revenue. I will review our enterprise results here before turning to our respective regions. Organic revenue grew 4% in the quarter which included volume growth of 2.9% and price realization of 1.1%. Acquisitions drove 2.2 points of growth in the quarter primarily related to businesses…

Thanks, Mike. Please go to slide 10. We are reiterating the 2025 outlook we introduced last quarter as we still see the same fundamental outlook led by our nonresidential business in The Americas region. Nonresidential markets, particularly the institutional verticals, remain resilient. The late cycle nature of our business along with our backlog and specification activity continue to support our outlook. As Mike noted, we did expect some residential softness following the stronger Q4 and C markets remaining soft given uncertainty on tariffs and interest rates. As we said in the past, our Americas sourcing practices are largely in region while our Americas residential business primarily produces and sources in Mexico, the vast majority of these products are USMCA Compliant. America's sourcing from outside North America is relatively small with China at less than 5% of COGS a collection of smaller exposures from all other countries cumulatively at 5% to 10% of enterprise COGS. Our company estimates tariff costs of approximately $80 million in 2025 and we expect to offset tariffs at the operating profit and EPS level on a full-year basis primarily through pricing actions. Accordingly, our 2025 full-year EPS outlook includes the impact from tariffs enacted as of the twenty-second of April of this year. Given recent volatility in tariffs and foreign exchange rates, we're not updating our revenue outlook for those assumptions. However, we see potential upside to our revenue outlook if current tariff-related pricing actions and foreign exchange rates persist. Please go to slide eleven. In summary, Allegion is off to a strong start in 2025. I'm proud of our team's execution as we remain agile in a very dynamic environment. Notably, we were honored in the quarter with the Gallup Exceptional Workplace Award for the second consecutive year. Our leaders and our team of highly engaged experts drive our culture forward creating a solid foundation to deliver exceptional results for our customers and our shareholders. Our people are a key differentiator for this company. As we move into Q2, we see positive internal indicators in The Americas nonresidential business and we will remain agile should conditions change. One final note, Allegion has an upcoming Investor and Analyst Day in New York to share more on our growth strategy. If you're interested in attending our May 6 event please contact Josh or Joby to register as soon as possible. With that, we'll take your questions.

We will now begin the question and answer session. And our first question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Hey, good morning guys.

Good morning, Joe. Hey, Joe.

So I guess I'll start with the tariff question. So thank you for giving all the details. Great that it's included in your guidance for the year. I was just wondering, as you kind of think about the progression of those tariffs and the surcharges that you mentioned, is there any kind of mismatch we should be thinking about where you know, either putting through pricing ahead of some of the tariff impact or vice versa? Just anything around those dynamics would be very helpful.

Yes. Thanks for the question, Joe. As you know, the tariffs went into effect the largest ones, early April. And they were effective immediately. We took actions, in the month of April. Those were announced and in the marketplace. We announced them earlier this week. And they're effective, here in April. At the April. You can consider if you think about a lag, you could see a month month ish of a lag between the tariff impacts were which were immediate and our pricing actions. We still expect for the full year, and this is the important thing, for a full year, we'll cover those costs of the tariffs. But as you think about the second quarter, there could be a little headwind. We talked about that month ish of that lag. So as you think about this for the year, think of it as neutral, but think the second quarter could have that month impact.

Okay. Great. That's helpful, Mike. And I guess just that that the follow on to just just the tariff discussion. If in fact something changes and I think are changing by the day, how do we then think about the pricing actions that you're taking? And then do they just immediately come off? Like, how are you guys been thinking about you know, that dynamic as well?

Joe, this is John. I think that's everyone's mind. And given the volatility, just like Mike, mentioned we take our time to analyze each one of these enacted tariffs. It's a lot of detail and a lot of information to sift through. And so we'll remain agile and we stay committed to a affirming the full year guide that we just shared with you. That's the best way to think about it. It's anybody's guess on which way things go from here, but we'll remain agile as we have so far and remain committed to covering any cost at the OI and the EPS level.

That's great, John. If I could just sneak one more in just on just non res, great to see the growth this quarter. You did call out that there was yeah, potentially a pull ahead in the fourth quarter. I I just I'm wondering, like, was was there could you guys determine whether there was any kind of, like, pull ahead in one queue as well? Just from, like, the fact that these tariffs were going into place, and so maybe there were some orders that were placed. I'm just trying to understand, like, how you felt about know, the growth that you saw this quarter and then and then the outlook going forward.

Yes. Joe, let me wind the clock back. Q4 comment was specific to residential. Not non res. And the dynamics there with the customer concentration on the residential side and we watch their ordering behavior very closely. It was our own speculation that there was probably a mid-single-digit million pull ahead in Q4 on the resi side. Non res is a book and ship business with pretty short lead times. We've been watching like hawks to see evidence of pull ahead. The whole industry does typically an annual price increase right around the March 1. So do some people get some orders in before the price increase? Yeah, of course, that happens single year. But we're watching very carefully on the nonres side, and, we just don't see a lot of evidence for any large pull ahead at this point.

Okay, great. Thanks, guys.

The next question comes from Tim Wojs from Baird. Please go ahead.

Yes, everybody. Good morning. Thanks for the time and details. Maybe just kind of the first question, just on the institutional side. Have you seen any sort of changes in how you know, certain verticals of an institutional, you know, call it health care, government, those types of areas have kind of changed CapEx priorities or kind of thought about kind of funding just given some of the you know, commentary coming out of of Washington in in those areas?

Yes. I think Tim it's important. It's a good question and I it's important to remember doors, frames, locks, door hardware this is late cycle business. Once a project starts it tends to finish. And you know so I'd say that those verticals healthcare and education have still been growing, they've been resilient. We still see that and again I think the late cycle nature of our business continues to support our outlook. If you look back to 2024 particularly for the education vertical new issuances of municipal bonds was at a record high, very strong growth. Those bonds now take a couple of years honestly to work their way through shovel-ready projects things. So I think that those bonds tend to have a pretty long tail. And again, I think we can't just react to every single headline that pops up day to day. And again, I would highlight what we see in the non res space right now. Again, the institutional verticals are resilient. The aftermarket is very resilient and I'm proud of our performance in the aftermarket. I think we have been gaining some share there just with better performance and a better product portfolio. So that's what's all coming together from our view to reinforce the guide this year.

Okay. That's helpful. Thanks a lot for that. And then just on on the tariffs, you know, if you if you would kinda look at your your kinda China and and, I guess, other country kinda sourcing, how would you think you frame up relative to your competitors? I'm just curious if you're kind of on the lower end relative to your peers, if you're of on the higher end in the middle, kinda how would you kinda assess your relative kind of supply chain versus your competitors here in The US?

Yes. For sure I don't know. I'm not the guy to speak to their supply chains. But I would say in general what we see on the residential side is by and large the industry imports. That's from a range of countries. We import from Mexico vast majority under U. S. M. Compliant. Products. We have been reducing our China exposure with the investment of the new plant in Corretera, Mexico that we've talked about probably for the last two years now. And so that's kind of automatically continuing reduce China and build up a better supply chain there in Corretera. On the non res side, I say our impression is our largest competitor probably has a footprint pretty close to ours and generally you make and source in region. Some of the smaller competitors on the non res side, I I could surmise they're a bit more import heavy than we are. But that's just a guess. I don't know for sure.

Okay. Great. Sounds good. You guys for the time.

The next question comes from Jeff Sprague from Vertical Research. Please go ahead.

Hey, thank you. Good morning, everyone. Hey, John.

Hey. Good morning, Sean. Hey. Not to make you reiterate what you said on the institutional markets, but just the comment about specifications, How good of a leading indicator have you seen that over time? You're seeing strong specifications, for example, might seem at odds to kind of the, you know, the ABI and things of that nature. So maybe just a little bit more color on how you try to sort out what the market signals really are here?

Yes, it's a fair question and there's a reason why we don't publicly disclose a KPI or anything around specifications because it's quite varied. Specifications on a large mega project could be a couple of years before realized revenue. Specifications on a small project renovation something like that could be months. And so it's always a little bit different but for us internally, it is a good indicator of capturing project business. And it is something that we do use to drive our own activity within the company. So it's helpful. Is it a linear relationship that you can count on quarter to quarter? No, not the right way to look at it. For us it's just a general gauge of activity.

Appreciate that. And then also understand you don't want to move the revenue target around with everything so fluid every day. But would it be reasonable to assume that 're really looking at sort of an upside revenue case, but maybe some pressure on margins, right? Don't know if your goal on tariffs is to offset dollar for dollar or at the margin rate right? But if it's dollar neutral, it's margin negative. Again, maybe we're splitting hairs. But just wondering how you think about how the year might progress from revenue versus margin standpoint?

Yes, Jeff, thanks for that question. As we think about it, we offset it at the dollar basis. So at the OI and EPS level, So if there's substantial tariffs that would be margin rate potentially margin rate impact negative. But it's the dollars that we're going to offset. That's consistent with what we said at year-end and we still feel that way. So your question was spot on. That's how we're thinking about it from a margin rate.

You can do the tyranny of the math. To to kinda Yeah. No. Yeah. No. I I get it. I think a lot of people forget that math. The numerators and denominators. So I just wanted to be clear on that. And just one other quick one, speaking of margin rate, even taking out the $3 million from Mexico, I think that America's margin in Q1 is the best Q1 margin you've ever printed. I guess the mix is positive with resi week in electronics strong. But anything else you would say about the margin rate in the quarter mix within mix or something else going on there? That supported that level of margin.

Yes. Really pleased with the margin performance in Q1. And frankly, over the last couple of years, we've done a a really good job of driving productivity in the business as well, which helps that the margin performance. One item I will highlight for you is our nonresidential business, as you know, is a more profitable product line than the than the non res is more profitable than res. So you have to consider that when you look at margin rates. Obviously, non res growing residential declining. So that's the one item I'll call out for you.

Right. All right. Thank you.

The next question comes from Joe O'Dea from Wells Fargo. Please go ahead.

Hi, good morning. Clearly, a really good start to the year. I just want to understand kind of what the framework is as you think about Q2? And expectation setting? I think you talked about maybe there's a little bit of a price cost timing impact, but just from the demand side also, sounds like no real pull forward, really strong volumes in Americas. In Q1. And so is it really just a margin sensitivity just given strong beat in Q1, no raise at this point in the guide. Any first half, second half framework would be helpful, like is it sort of roughly forty-eight percent first half of the year? On EPS and anything there just to kind of help level set on how things are pacing in the first half?

Yeah. Thanks for the question, Joe. I would say, obviously, when you model us you've heard me say this before, get the full year first and then work on the quarters. I did call out earlier the concept of that month ish lag price cost. I think it's important for you to consider that. Absent that, I you know, we're not calling any pull ahead from Q2 into the first quarter. So think the key thing for you to consider is that item I mentioned earlier, get the full year and then consider that in your model. Then also the tax rate, we did have an unusual tax rate in Q1. So in my prepared remarks, I mentioned about first half is similar to second half. That is different than normal for us. So when you model that, just kind of take that into consideration.

Got it. That's helpful. And then can you just spend a little bit of time on the go to market and distribution and what might be a little bit unique about kind of locks and contract hardware dealers, because I think there's some attention on the degree to which there's pull forward or whether there's just stocking ahead of price increases. But how much of the business would generally be stock and flow nature versus this is this is spec in, and the short cycle nature of it is just dependent on the timing of when the project meets the products, but it's not exactly you know, stock and flow.

Yes. Joe, it's a good question. And I think it's part of the secret sauce of Allegion. This if you look at our and in my opinion the industry's finest field sales and marketing team. You split those folks three to one, three folks working on end user demand generation through architectural design, through end user consulting on complex spaces etcetera. And then that demand generation helps pull our products through the channel. We and generally as an industry we operate on short lead times. This is a book and ship business. I would say that pull strategy makes it quite similar for the majority of our distribution partners. Like I mentioned in the earlier in the Q and A, watching very closely to see evidence of any pull ahead or or any like inventory builds and on the non res side, we're just not seeing that at this point. I'd say with our largest distribution partners on the non res side, we do watch sell through. Sell through has been very healthy. And so at this point, just not seeing evidence of any large inventory build. But again, very volatile time, so premature to do anything different than we did on the outlook. And that's how we would see it. Book and ship business.

Got it. Thank you.

The next question comes from Brett Linzey from Mizuho. Please go ahead.

Hey, good morning all. Good morning, Brett. Yes, I wanted to come back just to pricing and trying to understand the timing and the magnitude here. Has all the price you need to offset the $80 million now been announced with this this second April round of price? Or should we expect more actions to to ramp and feather through the balance of the year?

I would answer it this way. Brett. We will always announce to the channel first, and we made that announcement based on the tariffs that are in place today. I think that's the key clarifier. So anything that the president announced or the administration announced already in April, we've taken the actions and that's in the marketplace now.

Got it. And then I guess just maybe the mechanics between list price and surcharge, you did flag the surcharge path as well. I guess, what does the composition between those two pricing levers look like? And then I guess at what point do you just assume the tariffs are maybe structural and you you begin to convert some of the surcharge to list over time? Just try to understand the mix there.

Yeah. That's that's that's fair. We did opt for surcharge rather than list price changes at this point. To your second question on when do we assume, well we're not assuming, we're watching and monitoring the tariff environment. I think the amplitude of the volatility and the continual nature of the volatility just has us focused on remain agile, do our analysis, make sure we understand our exposures and our impact, then work with our channel partners to mitigate that impact. That's what we've done so far that's why we're confident to reiterate the guide today. And looking forward, I think that's the best way to think about us. We will remain agile and resilient.

All right. Appreciate the insight.

The next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. Maybe wanted to focus first of all on the residential market in The Americas. And I guess two parts to that. One is, what are you seeing in the replacement market demand right now, leaving aside the pre buy and hangover that had happened and leaving aside green field, which is weak. What are you seeing kind of on fundamentals and and sellout in the replacement market? And also on market share residential, I would think there's quite a good opportunity to take domestic share because of the struggles that a lot of the importing rivals will have. Is that something you're pushing your sales force to do? Or it's more around the margins are lower so you're kind of just happy with your share as is?

Okay. Yes. Thanks for the question Julien. I would say a year ago or nine months ago we were very hopeful for a better outlook on U. S. Residential, but with persistently high mortgage rates, affordability is still a challenge in country even though we know there is a housing shortage. There is that dynamic still there. But mortgage rates are still high, tariff uncertainty and construction costs are a wildcard right now. So resi as we mentioned earlier in the prepared remarks, we expect to just kind of continue to remain soft. I'd say maybe bouncing along the bottom until there is a notable catalyst to change that. Our residential business probably 70% aftermarket 30% new build. I think that's round numbers we've shared for a while. And that I think still holds. In terms of other imports and cost advantages or disadvantages, I think it's really premature to put too much stock into that right now just because of the very volatile nature of the tariff environment we've been. So time will tell on that. Where we've been focused as saw in the presentation is on the electronic side where we feel we're an innovation leader. We are differentiated. We continue to bring differentiated product to market. And drive growth in electronics. And these recent two new products, new front door locks, I think think you might even be a customer for one of them because they're very, very exciting good innovation, good technology, premium products.

That's helpful. Thanks very much. And then as we think about the profit outlook, I think price productivity net of inflation and investment that sort of aggregate line in your profit bridge was around zero in the first quarter. And I think there was some consternation in Q4 when it was a headwind. So I understand it's a a lot of moving pieces there, particularly now with tariffs coming in. But should we assume that you can kind of keep that line sort of around zero for the balance of the year? Is that sort of the aspiration with the surcharges and all the rest of it?

Yes. Thanks for the question, Julien. That's exactly how we think about it, right? Price and productivity covering that inflation and investment, right? So think of it as neutral for the year. We had a challenge Q4. I addressed that on that call. But felt confident in the ability to get it back to the normal, you know, neutral that we I just mentioned. You saw that in Q1, expect that to be that for the full year. Quarter to quarter, it could ebb and flow like you saw Q4 last year. I also mentioned in Q2 the timing lag. But for the full year, think of it as a neutral number like you mentioned?

That's great. Thanks very much.

The next question comes from Chris Snyder from Morgan Stanley. Please go ahead.

Thank you. I wanted to just follow-up start with a quick one the mechanics of the guide. So if I'm understanding right, the revenue guide does not assume any uplift for incremental or for price action or surcharges, I guess, related to the tariffs. But the operating profit guide does reflect. Those price actions.

Yeah. If you if you read the press release, that's, you know, explicitly stated in the release, Chris. So you have it correct.

Thank you. I guess, when we've talked to people in the channel lately, we've heard about like project paralysis on a lot of, I guess, be a new greenfield, with, you know, just uncertainty around price and cost, hard to do quoting and bidding and and things that flowed. I guess, do you not think that that will impact your volumes this year? Or is it like you were saying earlier, we're so late cycle that that would hit us or any maybe slowdown in new projects would would hit us in the out years? Any color on that would be helpful. Thank you.

Yeah. Very fair question. And certainly, I'd say as interest rates rose in recent times. You did see some of that on the private finance market, private projects. Might have gone through planning phase, might have gone through design with the architect and then just press pause to wait for a bit more favorable financing environment. Late last year, we did talk about interest rates as key swing factor. I think as you mentioned, we hear evidence of a similar dynamic. So I'd say as interest rates do come down as a more favorable investment environment comes about it does feel like there's a lot of already designed, already planned projects that could go forward. We'll just have to wait and see what's catalyst to get that environment a bit more favorable.

Thank you. I appreciate that.

And our last question comes from Andrew Obin from Bank of America. Please go ahead.

Yes, good morning. Can you hear me? Yes. Yes. Oh, Good morning. Yes. Just a follow-up on Chris' question, lots of consternation about potential recession a couple of weeks ago. These concerns seemingly have gone away. What are you guys seeing in terms of momentum in the channel and so far, clearly, you guys not calling for a recession. What makes you confident in your outlook? What are we seeing in April? If you could give us some color there. Thank you.

Appreciate the question Andrew and I'd say we guide quarters. We're certainly not going to guide a month. But if you looked at the progression of positive volume growth in the last few quarters of 2024. We exited 2024 with good momentum in non res. That momentum has continued thus far this year. In non res. And I think again it's a healthy aftermarket it's a resilient institutional verticals. New products that Allegion has brought to market contributing to the internal indicators that give us confidence in the full year guide.

And maybe just to flip it a little bit, we were in Europe and it seems a lot of optimism in Italy actually of all places. People talking about maybe potential German recovery sometime in the Second Half. What Are You Seeing In Europe What are you seeing in CISA? You know, what what's the messaging? From your German channel into the second half of the year? Thank you.

Yes. Great question Andrew. Love talking about international because again that business unit is is continues to perform well in the face of kind of flattish markets. In Europe, I would say Germany with the political upheaval they had at the end of twenty twenty four, slowed down pretty dramatically. I do feel there is more optimism now as the new coalition gets gets built a little bit more conversation about investment. Country. We'll see how that plays out, but it does feel better than it did in in Q4. But I think still premature for us to change anything. We're just going to reiterate the guide. Italy, Cesar you specifically asked, I'm really proud of that team. They've done a lot of self help work on their portfolio and their factories. Have been gaining market share as a result. So new products hitting the market very proud of them. Cheez is performing well. So thanks for the call out.

But no near term improvement in terms of macro in Italy.

I think the best we can say Andrew is again just reiterating the full year guide. Is just how you ought to think about us.

This concludes our question and answer session. I would like to turn the conference back over to John Stone for any closing remarks.

Well, thanks everyone for the great Q and A. We look forward to connecting with you in New York at our Investor Day where you will hear a little bit more about our long-term growth strategy and I would just leave you with I'm very confident that Allegion is a high-quality industrial company. We have an important mission served by great people. And in my opinion, there are few secular trends more important particularly in times like today and that's personal safety and security and that's what we do. So come see us in May in New York or join us for our Q2 earnings call in July. Safe, be healthy everyone. Thanks for the time.

The conference has now concluded. Thank you for attending today's presentation. May now disconnect.