Conference Transcript - ALLE 2026-06-09

Joe O’day, Analyst — Wells Fargo

Good morning, everyone. We are excited to kick off day one of the Wells Fargo industrials conference and to start the day with CEO John Stone from Allegiant. So, John, thank you very much for being with us.

John Stone, CEO

Thanks, Jill.

Joe O’day, Analyst — Wells Fargo

My name is Joe O'Day. I lead the Maltese group here at at Wells. Over the course of this, if you have a question, please just raise your hand. And so that way we won't interrupt in the middle of it. We'll just we'll just get to you during the during the questions. um kick things off john i think one of the things that that i i find really special about the business is the different elements of the model itself and so you serve long cycle demand patterns you do that with a short cycle book and ship lots and lots of skews expertise around the spec side and so maybe just set the stage for us in terms of a legion and talk about the business model a little bit yeah absolutely appreciate it and it's uh obviously in my opinion it's a very special company and got long-term uh durable and very distinct competitive advantages as you mentioned we do manage millions of skews in the door and door hardware space so everything

John Stone, CEO

that it takes to uh hang seal secure a door and keep people safe in the building and manage the access managing those millions of skews is quite a capital intensive effort it's it's a barrier to entry and i think that's why you see only a couple of companies in the world that do what we do that does a lot in terms of our pricing power we've got category leading brands we've got category creating brands in fact that enjoy strong market positions industries highest margins and the way the model works is we do consult very early on in the project phase with both the end user, the ultimate customer, as well as the architect, the general contractor. We serve as the subject matter experts to create the specifications for all the doors and the door hardware. That turns into hardware schedules and takeoff drawings that our distribution channel then uses to fulfill the last mile typically in a made-to-order fashion in about two weeks lead time managing all that is is difficult and i i'd say again a legion has carved out a leading position there and that's why you see such long-term durable earnings growth from from our company and you will continue to see that in the future can you elaborate on that last part a little bit in terms of the complexity around millions of skews but being able to ship in in such a short period of time to understand a little bit more around is there standardization of the product suite and then the different skews are a function of configurations around that standardization but what what enables you to to ship to that so quickly yeah yeah so material from both 2023 and 2025 uh investor day we talked about uh platforming we called it so a modular design focus we've made a lot of progress there on on the mechanical and on the electronics side and that certainly helps that keeps us in a leading position and that helps us innovate new products even faster on the manufacturing side yeah absolutely it uh it generates economies of scale in the plant and on the assembly line it generates economies of scale in your supply chain and, again, I think keeps us out in front of short-line competition.

Joe O’day, Analyst — Wells Fargo

And then on the customer side of things, how fragmented is that customer base, and particularly when we think about some of the strong positions you have in institutional, whether there's some concentration there, as well as the stickiness of those customers? Do you tend to find that certain customers will be a leasing customers and certain customers won't, or are they mixing and matching over time?

John Stone, CEO

Yeah, that's a great question. and I think a couple of things to go through. One would be on the end user standard side. So if you think large institutions like hospital chains, like school districts, like universities, we've got Allegiant customers that have been our customers for decades. Relationships are very sticky. These products are very sticky. That's why our aftermarket business is so stable because you tend to replace, break, fix, like for like. So once you're specced in, it is extremely sticky, and that just adds to our already very large install base. I would say the other thing about our customers, it's a good saying from our field sales force, if you've seen one customer, you've seen one customer. So that's why this millions of SKUs is such an important aspect of our business model and such an important barrier to entry because customers have different needs, doors are different sizes, entry, egress, all those paths have their own little nuances. That's why it's so complex and that's why architects don't want to mess with it anymore. That's why they outsource it to a legion that our largest competitor. I think it's very rare that we would flip an Asa Abloi spec. It's very rare that they would flip one of ours. it does happen but very rare and I would say it's about a six Sigma event for someone else to flip either of ours yep so very sticky relationships but each customer is somewhat different and again I think that's that's why we've been able to carve out such an important space in the industry and then high level but but demand trends you know we will watch it through some of the higher frequency data points out there don't even know really how much value to put on on ABI anymore these days watching DMI but you know you see the spec activity and so that's a pretty good indicator for you and we'll get into it more in terms of some of the segment focus later on in the discussion but just high level you know what what you're monitoring out there and seeing in that spec activity yeah absolutely I think if we start with the earliest of the early leading indicators that is Dodge Momentum, it has been strongly positive for a long time. So there has been a lot of planning activity. That's what that index measures. And if you take it down a notch to the ABI, it's been contractionary for most of my tenure with the company. It's been challenging. And if you look back in history, you have to go all the way back to the aftermath of the great financial crisis to see a window of time this long that the ABI has been contractionary. And what happened after that was was a pretty nice period of non-res construction. History may not repeat itself, but sometimes it rhymes. I think the other things that we're seeing and we just heard in your analyst conversation there at the breakfast was some other other trends. Earth moving machinery demand is going up. Some of that's certainly supply side, but it also doesn't feel like it's all roads and bridges like it was a couple of years ago with the Infrastructure and Jobs Act. This this is this is something else we see company formation in some major metropolitan areas bringing back office demand, which had been really flat after the pandemic. We see multifamily and pockets of the country making a bit of a comeback. Starts have been turned positive on multifamily for the first time in a couple of years. So I'd say when I look at all of that, I think if I just zoom out, Joe has agreed you can't ever read too much into these leading indicators, but it does feel to us with the spec activity we're seeing and if you heard me on the Q1 call, I'd call it very strong and broad based very strong.

Joe O’day, Analyst — Wells Fargo

So we start to feel that the next five years are going to be better than these last five years it's a really interesting dynamic with with good DMI and and challenged API and so good planning activity yeah but not yet converting to the actual architectural billings out there how do you explain that because it's been persistent for a while and we can even look like you know to Dodger's credit they do pull out data centers so you can see commercial X data centers it'll vary but it's not bad right so like the planning activity planning activity is certainly there i think uh the culprits at this point are well known as to what maybe is is tempering that in terms of

John Stone, CEO

shovel ready um or shovel in the ground type projects that's uh persistently high interest rates and and that's even changed over the course of this year uh inflation has kind of ticked back back up to. So the two of those certainly aren't helpful to a construction boom. And so while we've got these good early leading indicators from momentum to slight uptick in starts and ABIs to our own spec visibility into the future, we've still got persistently high interest rates and inflation to just to monitor and deal with.

Joe O’day, Analyst — Wells Fargo

And I think just near term for the company we're still in a good position we're still growing earnings we're still doing the right things and so as the cycle turns I feel we're extremely well positioned and you would have just partially answered the the next one but when we think about the the growth algorithm that you that you put out at the investor day and so looking for kind of mid single digit you were there last year this year the guide is kind of low mid what are those obstacles to getting in to mid maybe beyond the macro which would be more the interest rate or the inflation anything else that you're watching out there yeah the key the key for us as we're primarily a non-res company is non-res

John Stone, CEO

volume as non-res volumes have essentially been flat for the last many years a slight uptick in non-res volume goes a long way for allegiance success and i think our business would grow at a the core mechanical at least would grow at about a gdp rate volumes have been flat for a few years and we don't think they they stay that way forever on top of that is our electronics portfolio which has been a continual source of outgrowth for us, typically around the high single digit over the cycle. And we've continued to innovate there. We've continued to add new products there. We've added complementary software products to that portfolio and see that still as a long-term driver of above market growth that keeps us in the mid-single, solid mid-single type organic growth. What about the labor availability side of things anything with with immigration policy and and labor availability in the market and you know we hear a little bit about like data center crowding out the degree to which that's attracting a lot of the labor do you observe that as a dynamic at all in the market that's that's also an obstacle i haven't come across that in channel checks as a particular hurdle i would say the immediate aftermath of the pandemic you definitely felt some some time of projects being way off schedule or project timelines extremely volatile because of labor availability that has subsided and i haven't heard a lot of evidence of it creeping back up on the data center side i would again say a legion has done a fantastic job on getting specification standards and end user standards with the who's who of data center builders and so it's a small part of our business growing very nicely and i think we've carved out a leading position there at least in our industry And then pivoting to the AI side of things, both in terms of opportunities for you and things that you keep an eye on, on disruption.

Joe O’day, Analyst — Wells Fargo

And so how are you using it today? What benefits are you seeing? And then at the same time, is there anything that you observe as this is a disruptor potentially and we want to make sure we're paying close attention to it?

John Stone, CEO

So I think a huge opportunity, AI will be additive and helpful to a company like Allegiant because, again, we make hardware. AI is not going to replace hardware. It's not going to replace a deadbolt or the exit device on the door, but it will make us faster and better at what we do to get that spec delivered and installed on the job. We also, as you've seen, do have a small but rapidly growing complementary software business that goes to market with our electronic locks. We're already experiencing within our development teams the 5x impact of each developers getting five times more productive there, which is interesting for a hardware company to be able to add software to their portfolio has become a lot easier as a result. So as we talk about this electronics growth driver really having legs, this gives me even more confidence that we've got more value to add, more value to create around the electronic lock with complementary software, and we can do it faster than ever before. broadly speaking in a legion think of ai like a clod or a chat gpt as i tell my employees think about it as your own personal intern it should just do a lot of work for you automate workflows for you and make you more productive definitely seeing results across the company we summarize wins every month and share them it's pretty fun and engaging just to drive advocacy On the threat side, I think it would be easy to think, oh, AI might write a spec for a building. You still have to make the hardware, even if AI writes the spec. And the only two companies that have the data to make an AI-driven spec work is us and our largest competitor. We're investing in it. I would have to assume they are, too, so we'll get there first. And it will just make our spec writers more efficient like it would a software programmer or engineer. So I think that's also additive. We are plugged in very acutely on all things cyber security that comes up with AI and I think are investing heavily to make sure all of our tools, all of our processes and our enterprise itself is as protected as it can be.

Joe O’day, Analyst — Wells Fargo

And you can't really have hallucinations as part of the spec. What do you think about in terms of the timeline to where you could have a product that can reliably facilitate that spec process?

John Stone, CEO

Long time, but you'll always need human oversight for that exact reason. AI can produce things that's wrong. So, you know, we've invested to continue to bring in new just civil engineers into the company and train them on specs. it's a great way to learn the business so that pipeline of talent continues to come in and again just think of ai as your intern if i'm the spec writer i have an intern to do a lot of the grunt work but then i'm still the quality control i still manage the changes with the end customer i still provide that level of expertise to supervise that intern um on on the innovation side of things um first of all just how do you measure it internally um how do you think about the right amount to spend on r d we've seen that amount go up actually over time um and what what are some of the primary areas of innovation outside of ai that you're focused on so we're we're pretty proud of that joe i think you know over the last few years um very nice margin expansion on the operating income line at the same time as stepping up our r d span we measure product vitality really by brand and that means you know in the last few years how much of your revenue was derived from new product launches and that's that's how we we govern that i think that is how we're going to pace our organic growth the better that we can get there and it's not just about how much you spend but it's how efficient do you spend each dollar i think allegion does that very very well leveraging these ai tools will continue to get faster and more productive there on the new product development side the primary area while we do have of various R&D efforts going on across all of our brands, primary area of focus would still be in the electronics and complementary software area. We do see that as the long-term growth driver for our business. That's where we'll invest the most.

Joe O’day, Analyst — Wells Fargo

Can you touch on the mid-price products a little bit? Because you've talked about that recently, I think primarily with a focus on accelerating aftermarket growth. But just, you know, are these products that are really designed to replace Allegiant equipment in the field? Would they replace competitor equipment? And really, it's an aftermarket product, not so much an OE product?

John Stone, CEO

Yeah, it's a great question. And I think a couple of points. One is our engineers have done a great job across the three big brands, the LCN Closers, Von Dupren Exits, and Schlage Locks, in terms of designing to value and designing to cost so those mid price point products serve a particular customer need at essentially the same gross margin as the the premium products that being said this was primarily in response to aftermarket business that we simply weren't very competitive for and And then also if there was ever a VA, VE exercise that might happen on a particular project, past years Allegiant would just lose that business to a competitor. Now we have our own portfolio that should there be a need to step down to that and again step down at the same gross margin as our premium product, you still have an Allegiant suite that can go in there and take care for that job. so it's it's primarily a competitive play gaining market share in the aftermarket and having an allegiance suite there should you need it in a VA VE exercise and and the start like the OE sale would be at a premium product level that's always the start and then then the mid-tier can come in after that as a replacement product if need be yeah typically the replacement would be like for like but i would say there will be certain customers there will be certain verticals that do gravitate more towards this mid price point segment now legion has a full offering to compete there too where previously it was uh business we just didn't win um can you just elaborate on on the timeline around this product suite when you say you have a full product suite today how long it took to get there and and really the heart of the question is the growth opportunity that that this presents yeah moving forward so i think and and this would date uh to well before my arrival in the company but the idea of having a mid-price point uh family of exit devices from von dupren a mid-price point uh commercial lock family from schlage thought about for decade plus

Joe O’day, Analyst — Wells Fargo

von dupren delivered in 24 schlage delivered in 25 so this is very recent i think we're just starting to see the benefits from that portfolio to the degree that you can there's there's growth contribution right but that that can accelerate right moving moving forward okay on on tariffs and and the price cost dynamic I am I think normal price timing for you generally we would start to see new year pricing hit the P&L toward the end of Q1 since then there were also tariff announcements and so some additional pricing that could be required as a response just explain to us the the pricing you've done magnitude of it timing of when it's hit you know is everything

John Stone, CEO

you need to get in the market today yeah so i think if you zoom it out and and just include all inflationary pressures typically our industry does have an annual price increase in the spring time early spring think end of february first of march that did go to to market this year was probably a little different for our industry because many of us allegiant included had some surcharges in place to deal with 2025 tariffs as we went through that a lot of those were then rolled into list price in in the springtime price increase subsequent to that there have been more inflationary pressures. We do have a series of pricing actions that have been announced to the market. We do have a series of cost actions we've been taking internally to compensate for that. And I think our commitment, same as it was in 2025, we do expect to be able to cover this for 2026 on a dollar basis at operating income and earnings line. Margin rate though we'll face some pressure because of this yep what about the manufacturing footprint sometimes there's focus on you know where where the tariffs are applied what kind of an impact that could have to the competitive dynamic just anything that you've seen in the in the market as a result of of tariff policy yeah so i i think if you go back to 2025 we disclose pretty clearly like here's our footprint primarily on the non-res side at least just think manufactured in the country that you sell so very heavy North American factory footprint for our non-res business our residential business is primarily sourced from Mexico but essentially all of it is USMCA qualified then as as tariffs have changed and evolved we do look through the supply base very carefully, we do look through the various material content on different products very carefully, as there are just call it value engineering changes to make or supplier changes to make I think we've been pretty nimble in that regard. In terms of has it really hurt this competitor really hurt that I obviously don't know their supply chain or their impact. And just have focused on managing this for our company. I think the shortliners who are purely trading houses probably have been hit harder, if I had to guess, because they're bringing in all typically Asian imports and then distributing those. So that's probably taken a harder hit than those of us with U.S. manufacturing footprints.

Joe O’day, Analyst — Wells Fargo

But stepping back, kind of the same message as what we've heard in recent time where there are these iterations of inflationary pressure, price for it, there might be a margin impact.

John Stone, CEO

It's not an EPS impact. Right, right.

Joe O’day, Analyst — Wells Fargo

Okay, shifting to America's kind of the demand and margin side there. Non-res volume was flattish in Q1. The spec activity is good. How are you seeing those volume trends? How do you expect to see them unfold over the balance of the year?

John Stone, CEO

Yeah, I think just we would have to refer back to the opening guide for the year and then the Q1 call that we did raise the revenue outlook based on our DCI acquisition by a point. And, you know, I think just just consistent with the guide on the America side, the America's Q1 came in right about where we thought it would. I think the markets behaved right about where we thought they would. And I'd say nothing more than just affirm the guide based on the strength of the America's business.

Joe O’day, Analyst — Wells Fargo

If we think about the different verticals on the institutional side, how different are the growth rates that you're seeing between the educational markets and the health care hospital markets?

John Stone, CEO

So I think at any given time, based on this project or that project, maybe super large hospital one quarter to the next, the rates change. But broadly speaking, the institutional verticals have less volatility than you'd see in the commercial verticals. They don't necessarily move together, but for our business, we've got the portfolio, the spec writing expertise, and the channel reach that brought in market exposure is really how you have to think of us.

Joe O’day, Analyst — Wells Fargo

So as there's strength here, a little bit of softness here on balance, that's where our algorithm still comes back to that mid-single organic growth. um and and similar type of question on commercial i mean for a while it was appreciated you know things like office and multifamily under pressure it seemed like we were nearing the end of that um not sure where we are with interest rates and inflationary pressure if there's kind of another stage of pressure in those markets or or if you've seen you know continued stabilization in that kind of mature uh down yeah it's it's it's right it's the same as the uh the opening question i think joe is that there are encouraging signs out there you know little single data points

John Stone, CEO

like metro new york you know class a office demand is like all-time high company formation has been very active so you know tenant turnover and things like that is good work for a company like allegion we heard similar comments out in san francisco just last month so there are encouraging signs that being said headwinds are still present and so we need to watch how this moves forward and and for you know the balance of the year i think we would just say hey affirm our guide we feel confidence in that and then let's see how interest rates let's see how inflation and other you know geopolitical type headwinds evolve between the momentum index the abi our own specs our own channel checks with customers i do feel that again this this idea because we operate in long cycles you know that right we're not a short cycle company but this thought that the next five years should be better than these last five years for a legion we feel pretty good about that yep And then the Resi side of things, and maybe a little bit more exposed on the tariff piece as well, I think we did see maybe some channel impact as well in tough comps toward the end of last year.

Joe O’day, Analyst — Wells Fargo

Just where are you in Resi and seeing any response to an environment where rates aren't going down or where you have some of the inflationary pressure?

John Stone, CEO

Yeah. So small part of our business, number one. And then I'd say number two is, yeah, Resi has been under pressure for a few years now. And I think we indicated that when we released the guide, we felt it was still kind of flattish, still under some pressure. I think we and others have had some positive price realization to overcome the inflationary impacts. 70% of our resi business is aftermarket, so it's not a little bit underweight tied to new build. But I think we have released some new products in that space.

Joe O’day, Analyst — Wells Fargo

We're not here to call a market as to this is when resi will inflect but i would just remind everyone you know our overall business mix is much heavier tilted towards the non-res side yep um and then shifting to the international side um and just you know markets within that business and kind of a multi-year stretch of volume declines in those markets um just what what you're observing now kind of as you move into the back half of 26, do you see opportunities for volume growth in some of those markets?

John Stone, CEO

Yeah, I think what we see in international, and we really gave ourselves a black eye in Q1 with some of the difficulties we talked about on the call. Not happy about that at all. It was our first, I think, operational execution misstep since I've been CEO. So not happy there one bit, and we're going to we're going to fix that i would say what we see in international is a year of sequential improvements quarter to quarter a bit of a build through the year and work off some of those operational difficulties over the balance of the year from q1 and then our electronics businesses that are both hardware and complementary software always tend to ramp sequentially through the year and we see that playing out the same this year Our acquisitions in international have actually been performing very well. We noted that in the slide deck and on the call in Q1. Margin accretive, accretive growth. So happy with that. We do have some legacy mechanical issues. We've just got to work through and perform better. On that ERP side of things, how should we think about the impact in the remaining parts of the year? so there's still work to do in q2 for example not not the kind of impact that it had in q1 by the back half of the year is that resolved just how we how we should think yeah yeah that's that's that's right so um the easiest way to put it is we that that legacy mechanical business dug a hole in q1 first step is stop digging so we stop digging and then get back to producing at rate get back to selling at rate i think we're largely there then the recovery of the miss continues to happen uh over q3 q4 but we do expect to have it uh covered this year okay got it um

Joe O’day, Analyst — Wells Fargo

on the m a side of things so 2025 you did nine transactions included mechanical it included on the electronic product side um america's international so a lot of activity any any common denominators behind what you were doing on the mna side in in 2025 because it was fairly broad in terms of the deals we saw but but what you were targeting there yeah i think strategic acquisitions that are a part of our portfolio that help add to the portfolio and then further differentiate our competitive position so stick to what we do which is doors and door hardware

John Stone, CEO

and the complementary software that makes the electronic locks work stick to the geographies where we've got brand and distribution strength. So that means Americas, that means Western Europe, that means Australia, New Zealand. We are not looking for super extra large speculative acquisitions. We're not looking to acquire our way into a new geography, but we see a long runway of just industry consolidation and roll up in some spaces and then adding to our portfolio where we've had competitive gaps in the past yeah this year you've announced one deal just in terms of of the capital allocation side of things and priorities around capital allocation when you think about mna and you think about share repo and just in the context of what you see in the stock like how you're thinking about those priorities yeah certainly we are committed to balanced consistent disciplined capital allocation we are very much returns focused our priority is profitable growth but given where we're trading right now yeah repurchase is very attractive um you mentioned no large deals i wanted to ask a little bit about um access control as a market and and you have a product for multi-family a couple years ago there was speculation on what might happen with a larger asset that was out in the market just how you think about your access control offering today and where you want to go with it yeah a great way to think about that is think of it like uh you hear the the phrase technology stack so think of this stack you've got the base hardware which is really us and our our largest competitor two of us here then in that space and the access control layer that comes next there's probably 50 so it's a quite fragmented space sometimes very vertical specific and that's where we found multifamily is underserved market something that we could develop organically and go to market with and it's going pretty well and then growing pretty rapidly does there more that can happen there I think probably yes as you go up further you see the video surveillance companies I think a Motorola gen attack these type of guys they've been working their way down into some of the access control space and partnering with us as the hardware partner of choice. So I think that segment of our industry is ripe for a little bit of disruption. Some of it's going to come from the video guys. Some of it's going to come from the hardware guys. And like I mentioned earlier, it just became a lot easier to develop software products. And we intend to keep going in a pragmatic way.

Joe O’day, Analyst — Wells Fargo

We have time for one more. Just on electronics, saw really good growth in 2022, 2023. I think that led to some tough comps, maybe a little pause in 24, back to good growth in 25. Just where you think you are in that trajectory. And you talked about the growth algorithm. Is that really now set to operate at that kind of algo target?

John Stone, CEO

Yeah, I think so. And 2022, you almost have to throw away because 2021 was not great for our Allegiant's ability to ship electronics because of supply chain problems. But overall, you see this as adding about a point of outgrowth, of above market growth to Allegiant's business because of electronics. And that is where the majority of our R&D is going.

Joe O’day, Analyst — Wells Fargo

Yep. Terrific. Well, thank you very much. Thank you. Appreciate the time.

John Stone, CEO

Thanks for being here. All right. Thanks a lot.