Conference Transcript - ALLE 2026-11-12

Tim Weiss, Analyst — Baird

Great. Good afternoon. Thanks for joining us. I'm Tim Weiss. I cover building products here at Baird, and we're delighted to have Allegiant join us again this year at our Global Industrial Conference. Allegiant is a global provider of security and access control solutions. They offer mechanical and electronic products that keep people safe and assets safe. Their key brands include Schlage, LCN, and Von Dupren. From the company, we have President and CEO John Stone, and we have CFO Mike Wagness up on stage here with me. Maybe, John, if you could just start off with a few prepared remarks, just state of the union, and then we'll hop into Q&A.

John Stone, CEO

Yeah, you bet. I appreciate it, Tim. It's been a great conference so far. Thanks for everybody attending. I think those of you who have followed us, you know who we are and what we are. As Tim said, pure play and security and access. We're overweight North American non-res. We have highest margins, great brands, and a good industry structure. I think, notably, we've seen North American non-res inflect positively lately, which has been good to see after a couple of tough years post-pandemic. And I'd say the electronics tailwind that we've talked about for some time is very much intact. So as our industry continues to digitize and electrify, we feel we're an innovation leader in that space and continue to see electronics being a high single-digit growth driver for the business.

Tim Weiss, Analyst — Baird

Okay. Okay, great. Thanks. If anybody has any questions, you can just kind of raise your hand here. Maybe just, you know, John, like, you don't have specific, you know, guidance for 2027, but just as you kind of think about next year, what are some kind of the big picture kind of swing factors, either positive or negative, to keep in mind when you're thinking about, you know, kind of the top line and the bottom line?

John Stone, CEO

Yeah, great, great question, and certainly top of mind for a lot of folks here at the conference. And as is typical with our third quarter earnings, we did provide a slide and some commentary, at least as an early view into 2027. I think the overarching headline is we feel good about the non-res environment. The spec activity we've been talking about for the last several quarters now continues to be strong. That strength is broad-based. And, you know, I'd say non-res could look a lot next year like it looks this year in terms of overall growth. Some price realization, some volume, so what that exact mix is isn't that important right now, but I'd say we feel good about non-res. On international and resi, we've told you, you know, we're not calling market bottoms or anything like that, but I'd say continue to be soft markets. Really, when we think about swing factor going into the year 10, I would just probably just look at resi. You know, we're not contemplating a resi recovery, but if. If conditions changed, and there was some, I think that would certainly be upside to the way we're looking at 2027 right now.

Tim Weiss, Analyst — Baird

Okay, okay. Maybe just on non-res, I mean, there's been a lot of, I don't know, kind of conflicting messages from different companies on kind of the non-res market in 27. You know, I think over the course of this year, you've kind of been talking about the spec backlog, you know, kind of building as you've kind of gone through the years. So maybe just talk about the composition of what you're seeing and kind of the backlog. And are there any specific end markets that you've got better visibility to or might differentiate you guys versus some other people?

John Stone, CEO

Yeah, it's a fair question. I'd say just a point of clarification around the specifications that we write, that's very early in the design phase, consulting with an end user, consulting with an architect or a general contractor or all of the above. And it's related to establishing end user standards for doors and door hardware. That specification typically is a rule of thumb would be we see that turning into revenue 12 to 24 months later. So it's not like a backlog like you might have in some other. Industry spaces, but our spec activity has been very strong, both in the number of specifications we're writing, as well as the dollar value. I'd say some verticals obviously stand out. Certainly data centers are growing very, very fast. We've carved out what I feel is a very strong competitive position there with doors and door hardware, and I think have established strong end user standards and specifications with the who's who of hyperscalers. So as those designs go more modular, I think that also plays to our strengths, as that's a bit of a trend you might pick up on from time to time. But the specification data would show us broad-based strength. And data center, we quantified for you at about 5% of our non-res revenue. So that's quite a bit smaller than the large institutional verticals that would be more on the range of 50 to 60% of our non-res business. And those verticals are showing growth. What's different in recent months than the past couple of years would be the The commercial verticals like office and multi-family are no longer the headwinds they were back in 22 through 24. So some bits of green shoots here and there in different places, but overall, good. I think healthcare has been another area, just a bright spot when you look at the institutional verticals of strength.

Tim Weiss, Analyst — Baird

Okay, and has the, I don't know if you guys, you may get this level of detail, you may not, but Like, are you seeing... Will new construction be a similar amount of the backlog and R&R be similar, or is there a mixed difference between those two in terms of what you're kind of seeing in the spec backlog?

John Stone, CEO

Yeah, very fair. At a high level, I would always encourage you to think of our business as a 50-50 split. Those aren't super precise numbers, but 50% aftermarket, 50% new build. Does it fluctuate from time to time in any given year? Yeah, maybe some, but 50-50 is a good way to think about it. And, you know, I'd say again, back to the data center comment, that's all new build right now, so it would skew that direction, but that's also... the next large installed base that we're building. Okay.

Tim Weiss, Analyst — Baird

I guess on that, I mean, what have you done in the data center business to kind of carve that out? I mean, is it your same competitive set? Is it somebody different? Do you feel like you're kind of taking share? Maybe just kind of talk a little bit about maybe what you're doing in the data center, you know, kind of what you purposely built out and how that compares to others.

John Stone, CEO

Yeah, it's a great question. I'm really proud of the team and proud of how we've tackled this one. It really plays to our strengths, and we run our playbook. So get in early with the end user. These are end users that we're looking for standard sets of construction plans and materials, if you will. So as they expand, they don't have to reinvent the wheel every time, right? They can take a standard set of, in our case, doors and door hardware, and then extrapolate that as they grow. That plays exactly to our strengths. That's the playbook we're running. I feel really good about that. Some recent acquisitions have played a role here, too. If you look back to 2024, we acquired a company called Krieger Specialty Products, and they make doors. These are different than our standard hollow metal doors and custom made to very high security environments and also a data center environment because you have needs to not only lock and secure for human traffic but also to provide RF interference resistance and sound mitigation transmission through the door. So, you know, a piece of wood with a hinge and a pole like Like over here, a cheap door, a data center door. This is a premium product in and of itself.

Tim Weiss, Analyst — Baird

Okay, so it's been a combination of kind of deliberate, kind of focus on your side, but then also some NM&A that's kind of opened up.

John Stone, CEO

Right, run the playbook, be that trusted advisor, be that partner of choice to help consult all of the entry and egress that they need in a very high security environment. And then help them standardize that playbook as they grow. So it played right to our strengths.

Tim Weiss, Analyst — Baird

How are you guys, I mean, you guys have a really big kind of spec-ing network, if you will. I guess, how does that compare to the competition, you know, here in the US? And how are you kind of implementing AI there, maybe improve just the content, the ability to serve, those types of things?

John Stone, CEO

Great question. And really, Tim, there's two of us. There's we and our largest competitor that have, I think, the capability, the expertise, and the human capital to write specifications and be that consultative advisor. Smaller shortliners with narrow product portfolios are not going to compete in the same way that the two large guys do. I do think that has meant over the last few years that the two largest competitors have probably gained share versus some of the smaller guys. That trend will probably continue because we are seeing project size gradually tick up. So the complexity gets a little more as well. With respect to AI, Allegiant has been all-in on AI since 2022. We've got a dedicated team, central-led. We've got private, behind-our-firewall instances of the leading models. We use it all across the company in different functions to include spec writing. On the specs themselves, think of it as being that automated workflow that speeds up response time to a request for quote or speeds up response time to a change request as the project is happening. The other thing to keep in mind... Is some folks want to ask about the risk of AI in spec writing? Like what if some kid in a garage with a startup writes a spec? They still have to pick a hardware set. Which one do you think they're going to pick?

Tim Weiss, Analyst — Baird

Hopefully yours.

John Stone, CEO

They're going to come to us, right? I mean, even alphabetically, we have an advantage over our largest competitor. But I think, again, we don't make money off of the specification. That's really just the end-user relationship and a value that we add to the architect, because architects don't want to deal with doors and door hardware anymore, so we do it for them. The money is made on the hardware itself. That's where we add the value. Okay.

Tim Weiss, Analyst — Baird

I mean, you've said a couple times that project size and complexity is increasing. Is that just surely the types of projects you're doing, or are you getting more content, electronics per square foot, and it's making those projects actually become larger for you?

John Stone, CEO

Yeah, that's a great question and great way to ask it. I think the overall trend we have seen is project size has just been trending up over time. Certainly with the bolt-on acquisitions we've done, we do have a higher share of wallet in a lot of projects. We do have a more robust portfolio at this point. In addition to the organic R&D, new product development we've been doing, we highlight both on our quarterly earnings calls, so you can see that progression over time. So, yeah, it's probably a bit of both. It probably is some share of wallet, and then also just a market phenomenon as well. Project size has been trending up. Okay.

Tim Weiss, Analyst — Baird

How do you think about kind of new technologies and R&D and kind of development of those? I mean, you know, electronics is a big kind of part of it. There's some stuff that... I guess an access control that could get kind of really cool in a couple years if you're just kind of walking around an office and it kind of knows your credential and you can just open a door. How close are we to like, you know, things like Bluetooth or phone credentials becoming kind of more broadly adopted?

John Stone, CEO

Great, great question. And I think look at higher ed as a good case study there. Higher ed university campuses were early adopters of electronic locks a decade ago. You see, and we talk about it, the cliche you'll hear in the industry space is an e-lock versus its mechanical counterpart. Twice the price, half the life. So that shorter life cycle is starting to come to roost, to be honest with you. We're seeing higher ed in particular upgrade old ELOX for new ELOX for just that kind of functionality to where my phone is my identity through the smartphone wallet. It's my credential. It's how I move around campus. And that security is personalized to me. So it's a more modern student experience that the universities are looking for, and it's also more secure. So, that upgrade cycle is happening. We've got the technology where it's in a Resi lock right now that has been released, and that's frequently a good engineering sandbox. You know, you can release new tech in Resi pretty quickly. The Megatechs like to work with us there to where it's just walking up to the door through ultra-wideband between the phone and the lock. Our lock understands your position. It understands your direction of travel and then infers your intent. And are you just walking by the door or are you walking to come through the door and it will display that intent to you and unlock as you approach if your intent is to come in. So that's there. We do see commercial potential for that and look forward to rolling that out.

Tim Weiss, Analyst — Baird

How do you guys think about software? Because, you know, you're a very big product company, but then there's a software kind of approach or kind of element to it. So just how are you kind of thinking about software and kind of making sure you're kind of getting your fair share there while still kind of being like a very good product company?

John Stone, CEO

Absolutely. It's a great question, and I think... AI has made that space even more interesting to a company like us. So for a long time we've been doing all of the embedded software in the lock itself or the other piece of hardware itself and then making sure that that embedded software interacts with the access control system of whatever building we're in. In recent years, we have introduced our own access control system targeted first at multifamily because we saw that as a really underserved vertical. That is a place where we've got great product reputation, but as your point, now we can wrap some access control software that differentiates our locks a little bit further. A very simple, easy to use, easy to set up tool, which is what that vertical needs. We do plan to expand that to other verticals as we go. The AI tools like Claude, in particular, have made software development a lot easier, so it gives a hardware company like us a quicker path and a more capable path to market with tools like that, whereas hardware is still hard and still capital-intensive, so I feel really good that the hardware guy's ability to move up stack into some of that software just got a lot easier. Yep. Okay. Okay.

Tim Weiss, Analyst — Baird

And I guess on, how would you kind of think about the electromechanical businesses if you had to delineate between kind of residential and kind of non-residential? What are, it sounds like there's an upgrade cycle in some of the early adopters of higher ed. What else are you seeing in electromechanical and kind of the non-res space, and then what about the res space?

John Stone, CEO

Yeah, non-res is, I think. Doing well. When I look at specifications we're writing in different verticals, the uptake of electronic content is much higher than it was in years past. So as new build comes online, there'll be more electronic content in each one of those new builds. In the products themselves, electronic locks have been on this evolutionary journey of... Wired or offline to now connected, real-time connected. We've released a family of connected commercial e-locks in the last year. We've got successful deployments with a number of access control system providers. And those locks, you know, they're connected real-time. You get data off of those locks. You get visibility into those locks at any given time. Audit trails and things that are very important in a commercial setting. And that's new to the space. So I feel like we've carved out a good first mover advantage into that on the commercial side of things. And a lot of that technology was first developed in the Resi space. So that kind of synergy with our Resi business to the commercial business is helpful. On the Resi side, I think we've got a great brand, great family of products that have been in the market for a long time. New products are coming out every single year. You've seen... Apple and LG announced, hey, we're going to make a lock, we're going to make a video camera, we're going to make a thermostat for your overall smart home thing, and Amazon and Ring announced something similar. I would say that product category in the resi space that they're targeting represents a low single-digit part of America's revenue. And you know, Resi is somewhat less margin than non-Resi, so a lower portion even of our operating profit. But Schlage is America's most trusted lock brand for the last seven years, and that's not a title we plan on giving up to LG. Any questions from the audience?

Tim Weiss, Analyst — Baird

Maybe just on M&A, John, just maybe talk a little bit about how your capital allocation philosophy has kind of evolved as you've become CEO.

John Stone, CEO

I think from a capital allocation standpoint, if I just walk down the use of cash priorities, first and foremost, Allegiant is fully committed to an investment-grade credit rating. That would be a red line we're not going to touch. Investing for organic growth, you see in our capex and R&D. Then after that, we've, and these are rough numbers, not super precise, but think 50% M&A, 50% shareholder distribution. Over a long cycle. So if you condense it down to the, you know, certain number of months, it might, you know, have some volatility in that. But generally speaking, we do want to keep growing earnings. We do see acquisitions playing an important role there. When we talk about acquisitions and capital allocation. Bolt-ons, North American non-res, electronics. That's what we're after. Far-flung adjacency, super-extra-large, transformational is not being contemplated. And then share repurchase. You've seen us be active lately, and I think you can continue to expect us to be active with share repurchase. And so I think just... The way my philosophy has evolved is just balanced, consistent, and disciplined. So as you've seen on the acquisitions we make, we are disciplined in what we select and disciplined on what we pay. We're going to continue to do that. And then we always have the option to repurchase our own shares, and we're very proud of our own company. So, of course, that's going to be an option.

Tim Weiss, Analyst — Baird

How? Where are you kind of in building out kind of your doors business? Because I know, I mean, historically, you guys haven't had as much focus on that. But now you're telling us that you're, you know, getting into data centers because of specialty, you know, doors and not every door is made equal. So like, where do you feel like you are in kind of that kind of kind of door space?

John Stone, CEO

That's fair. I'd say it's been organic investment to modernize and automate the factories that make our more standard doors. That journey is, I wouldn't say early innings. I'd say we're probably fifth or sixth inning, if you would, doing well there. On the acquisition side, if you remember our investor day material from 2025, we did flag that category, the door and window category. It's still rather fragmented space, so there is both product Portfolio ads that we've been excited to add with Krieger and most recently with Overly. Then there was some geographic play because you don't want to ship a door across the country. The logistics cost is terrible. So DCI earlier this year was just more of a geographic play for North America. But there's still quite a bit of fragmentation in that space. I think there's still some more to do there. So not done and excited about just the overall business improvement. Share a wallet on the projects, margin expansion in that segment of our business, more to do.

Tim Weiss, Analyst — Baird

And is it just having that be part of the spec? Is that really just the synergy of having it? Is that you get to, you know, the entire opening now is spec'd by Elysian versus maybe using a third-party supplier?

John Stone, CEO

Right, right. Sometimes it can almost double your share of wallet on the job site. It's a substantial amount of the project.

Tim Weiss, Analyst — Baird

Okay. How do you feel about the pipeline? I mean, at least since you've kind of come in, I mean, it seems like the M&A activities just become a little bit more regular. I guess that seems intentional, but how is the pipeline kind of –

John Stone, CEO

Pipeline's good. And, you know, I think, again, think North American non-res, think electronics as our priority. Think bolt-ons when you want to kind of scale and size it. And, yeah, pipeline's active. Pipeline's good. We've got biz dev resources out in our business segments building those relationships and just – As you know, M&A just inherently can be episodic, so we won't have a linear progression, nor do we have any kind of expectation of deal count as a KPI we're really interested in. It's much more about fulfilling the strategy and shareholder returns.

Tim Weiss, Analyst — Baird

Okay. Maybe just on Europe, just maybe kind of like two questions there. So first, kind of just bigger picture, could you just talk about... Kind of the relative kind of strengths and weaknesses of the international business, you know, today?

John Stone, CEO

Yep, yep. So international set a tough year. I think Germany coming in with some optimism has deteriorated as the year went on. So the market conditions are not great. We don't see that meaningfully improving in the near term and tried to indicate that on our look into 2027. That being said, our electronics businesses, this would be our Simons Voss electronic locking, our Interflex access control business, our Elatec readers. These are really good businesses. The margins are very strong. They've been growing, and so I think that's where our organic investment will continue to go on the international side. I would say if you look at my tenure, you can see certain portfolio prunings that we've done over time with winding down China, divesting a business in South Korea, divesting a locksmith business in Australia. Those little things, I would say that's still a work in progress. That's not done. And as we have something relevant to announce, we will, but still a work in progress on that front. The electronics businesses are really good, though, and we want to keep investing there.

Tim Weiss, Analyst — Baird

And then Tim is going to retire at kind of year-end. Just talk through kind of the succession process.

John Stone, CEO

Yeah, so that succession process has been... Worked on for about the last two and a half years now, so I think pretty carefully scripted, and there's been Serge Zapponi, the gentleman who will take over, has seen his own role expand over the last two years, just more or less in seat, and I think very well received by the international team. They're excited to see Serge come in, and I'm confident he's the right guy for the job.

Tim Weiss, Analyst — Baird

And then maybe we'll kind of end it here with pricing. So you guys have a really great business, and it's really a safety business. It's specced in. It's low dollar content, high value type stuff. So maybe just talk about how you're thinking about pricing as you go into 27, just with all of the random tariffs and cost inflation and those types of things.

Michael Wagnes, CFO

Yeah, we're definitely in a place, Tim, where we have high inflationary environment. And look for us to take the necessary pricing actions to combat inflation. As we've demonstrated this year, right, a key metric for us is we drive pricing and productivity to cover inflation and investments. For this year, we're going to do that. As I think about 27, look for us to do the same type of actions. Historically, in our industry, we used to just do one price increase in the beginning of the year. Last few years, it's been more dynamic, right? And we've gotten much better at being quicker to adjusting to inflationary pressures and putting pricing actions into the market. Expect that to continue. As I think about next year, we're planning for a high Inflationary environment and expect to drive pricing necessary to cover that inflationary pressures.

Tim Weiss, Analyst — Baird

And when you say you've gotten better at just kind of being maybe more surgical or dynamic with price, is that just better data and, you know, your ability to respond versus kind of just peanut buttering, peanut butter, everything kind of over it?

Michael Wagnes, CFO

Yeah, I would say it's two things. Number one, if, you know, humbly going back to 21, 22, we were a little late. You learn from some of those learning opportunities. And as you think about where we are today, there's also some, we're more surgical. If we have high steel inflation, right, if coal roll goes up, we're going to go out in that metal business John talked about immediate and not wait six months for the next February to come around. So we've gotten much better at being adaptable as a corporation and dealing with this and just going to the market quicker. So it's something we've gotten better at over time.

Tim Weiss, Analyst — Baird

Okay. And is it reasonable to think to that same point, you're not waiting around for like an annualized price increase. So sometimes in the past, you've had kind of like a lag in terms of price realization versus when you've seen the inflation. It sounds like you can better line that up.

Michael Wagnes, CFO

We are. If you remember the first time we talked about this with the tariffs, I made a comment that, hey, we would have a lag. And what we've been able to do over the last, I'd say, 24 months is really minimize that lag to where if there's inflation, by the time that gets sold in cost of sales, we should have enough pricing to where there's not a big impact and you don't have a mismatch. Always think of it over the course of a year, so that PPII, we think of it over the course of a year. But we shouldn't have periods where we're underwater by significant amounts. We really have gotten much better at matching the inflation with the pricing actions.

Tim Weiss, Analyst — Baird

Great. Well, I think we're out of time, so please join me in thanking the Allegiant team for being here. Thanks, everybody.