Allegion (ALLE) Q1 2026 Earnings Transcript

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DATE

Tuesday, April 28, 2026 at 8 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — John Stone
• Senior Vice President and Chief Financial Officer — Michael Wagnes

TAKEAWAYS

• Total Revenue -- $1 billion, up 9.7%, with organic revenue increasing 2.6% driven by price realization despite volume declines.
• Americas Revenue -- $809.9 million, up 6.9% reported and 4.5% organic, led by mid-single-digit growth in nonresidential and stable residential results.
• International Revenue -- $223.7 million, up 21.5% reported but down 5.3% organically, with organic declines attributed to ERP disruptions in a legacy mechanical business.
• Adjusted Operating Margin (Total Company) -- 21.2%, down 150 basis points, with margin pressure from volume declines, mix, and ERP-related inefficiencies.
• Adjusted EPS -- $1.80, a 3.2% decrease, with EPS contributions from acquisitions offset by higher tax and interest costs.
• Available Cash Flow -- $80.3 million, consistent with the prior year, with an anticipated annual conversion of 85%-95% of adjusted net income.
• Shareholder Returns -- $47 million paid in dividends and $40 million in share repurchases; a new $500 million repurchase program authorized by the Board.
• Americas Segment Margins -- Adjusted operating income rose 2.9% to $227.4 million, but operating margins fell 110 basis points, primarily due to mix, foreign currency headwind, and acquisition impacts totaling a 70-basis-point margin headwind.
• International Margin and Mix -- Adjusted operating income declined by 4.8% to $17.9 million, with operating margin dropping 220 basis points due to ERP disruptions and volume declines offset in part by acquisitions.
• DCI Acquisition -- Closed in March; adds a West Coast manufacturing presence, with a low double-digit EBITDA margin and expected limited EPS accretion this year.
• 2026 Outlook Changes -- Raised reported revenue outlook to 6%-8% (from prior guidance), affirming organic revenue outlook at 2%-4% and adjusted EPS guidance at $8.70-$8.90.
• Inflationary Headwinds -- Management identifies a ~1% of COGS headwind from tariffs and inflation, expecting to offset with price actions and cost controls; incremental organic price is not yet in the outlook.
• Electronics Revenue -- Electronics sales grew mid-single digits, with company positioning electronics as “a long-term growth driver.”
• ERP Implementation Impact -- ERP transition in International mechanical business cited as primary drag on organic revenue and margins; leadership expects to recover lost production and revenue over the course of the year.
• Balance Sheet -- Net debt to adjusted EBITDA stands at 1.7x, which management says supports continued capital deployment.

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RISKS

• The International segment faced negative organic revenue growth and a 220-basis-point margin decline, explicitly attributed to ERP system disruptions and resulting production inefficiencies.
• Americas adjusted operating margin fell 110 basis points, with management highlighting that mix, acquisitions, and a $3 million foreign currency benefit reversal together generated a 70-basis-point headwind.
• Management cites an expected incremental 1% COGS headwind from tariffs and inflation, acknowledging ongoing price adjustments have not yet flowed through guidance.
• ERP difficulties prompted delays and inefficiencies in the legacy European mechanical business, with leadership conceding, "this one we've just had a lot of struggles with."

SUMMARY

Management raised the reported revenue outlook by 1 percentage point to a range of 6%-8%, driven by the addition of the DCI acquisition. Adjusted EPS guidance remains unchanged at $8.70-$8.90, and organic revenue guidance is affirmed at 2%-4%. Capital deployment was balanced, featuring both dividends and share repurchases, with a new $500 million buyback authorization secured. The DCI acquisition broadens the company's West Coast footprint and optimizes delivery costs, contributing limited immediate earnings but enhancing competitive positioning. The International segment lacked organic growth due to an ERP implementation setback but expects recovery as production stabilizes and backlog supports regained momentum.

• Share repurchase and M&A remain key levers, with the board’s new $500 million authorization supporting capital allocation optionality.
• Americas nonresidential demand trends remain positive, with management reporting might go so far to even call it very strong in recent months and broad-based project specification activity.
• While ERP-induced underperformance affected international mechanical operations, the company retains the customer order backlog and anticipates recapturing the revenue gap during the year.
• Management does not expect the recent Middle East conflict to have a notable demand effect and considers the company’s exposure to that region negligible.

INDUSTRY GLOSSARY

• ERP (Enterprise Resource Planning): Integrated business management software system used to coordinate production, inventory, and operations across business units.
• Spec Activity: Project-stage architectural specifications for products, often used as a leading indicator of end-market demand.
• Nonres: Short for nonresidential, referring to commercial, institutional, and other non-household end-markets.
• DCI: West Coast-based manufacturer of hollow metal doors and frames specializing in custom design and rapid delivery, recently acquired by Allegion.

Full Conference Call Transcript

John Stone: Good morning, everyone. Thanks for joining us. The Allegion team has remained agile in a volatile environment and stayed focused on serving our customers alongside our strong channel partners. In Q1, we delivered high single-digit revenue growth, led by the Americas nonresidential business and contributions from acquisitions. In the Americas, performance was in line with our expectations we outlined back in February. In our International segment, top line growth was led by acquisitions, which are on track. However, our Q1 organic revenue growth and margins in International were negatively impacted by an ERP implementation in one of our legacy mechanical businesses.

Production rates there have started to improve, and we expect to recover the Q1 shortfall over the remainder of the year. As you'll see on the next slide, Allegion remains committed to balanced, disciplined and consistent capital deployment. And finally, with respect to our outlook for the year, we are raising our reported revenue outlook to 6% to 8% to include the DCI acquisition, and we are affirming our outlook for organic revenue growth of 2% to 4% and adjusted earnings per share of $8.70 to $8.90. Please go to Slide 4. Taking a look at capital allocation for the first quarter, starting with our investments for organic growth.

The latest example of this is our next-generation LCN Senior Swing series of auto operators for heavy-use doors across health care offices and other high-traffic environments. Easy to install and upkeep, these automatic door operators self-adjust in real-time to external pressures like wind, allowing smooth, safe and consistent operation while saving the building time, energy and maintenance calls. Turning to acquisitions. Earlier in March, we closed the acquisition of DCI, a West Coast-based manufacturer of holly metal doors and frames, specializing in custom design and quick ship capability. Historically, we've had to rely on our Cincinnati, Ohio, manufacturing facility to serve customers on the West Coast, which extended lead times and drove higher freight costs compared to local suppliers.

DCI makes us far more competitive on the West Coast, helping the totality of our Americas nonres business, not just our door offering as customers purchase complete door and hardware packages together. DCI today has a low double-digit EBITDA margin, resulting in limited EPS accretion in the current fiscal year. But the strategic nature of this acquisition gives us significant improvement in serving our customers at a better cost position. I'm confident our execution and pricing discipline will drive higher profitability over time and expect performance to improve moving forward. Moving to dividends. Allegion paid $47 million in dividends in the quarter, consistent with the long-term framework we outlined at our Investor Day last year.

We repurchased $40 million of Allegion shares in the first quarter. Our Board also recently approved a new $500 million repurchase program. As we've said in the past, you can expect Allegion to be balanced, disciplined and consistent with capital deployment oriented towards profitable growth and driving long-term returns for shareholders, including share repurchase as appropriate. Mike will now walk you through the first quarter results.

Michael Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. Revenue for the first quarter was over $1 billion, an increase of 9.7% compared to 2025. Organic revenue increased 2.6% in the quarter, led by our Americas nonresidential business. The enterprise organic revenue increase was driven by price realization, partially offset by volume declines. Q1 adjusted operating margin was 21.2%, down 150 basis points compared to last year, partially driven by a combination of volume declines and mix. Price and productivity net of inflation and investment and inclusive of transactional FX were favorable by $5.3 million. However, this resulted in a 40-basis-point headwind to margin rate in the quarter.

I'll provide more details on revenue and margins within each of the regions. Adjusted earnings per share of $1.80 decreased $0.06 or 3.2% versus the prior year. EPS from acquisitions was more than offset by higher tax and interest and other in the quarter. Finally, year-to-date available cash flow was $80.3 million, consistent with the prior year. Please go to Slide #6. Our Americas segment delivered revenue of $809.9 million, which was up 6.9% on a reported basis and up 4.5% on an organic basis. Our nonresidential business increased mid-single digits organically, driven by price realization. Demand for our nonres products remains healthy and spec activity continues to be strong.

Our residential business was flat in the quarter, with price realization offset by volume declines as residential markets remain soft. Electronics revenue was up mid-single digits for the quarter, and we continue to see electronics as a long-term growth driver of the business. In addition, reported revenues increased 2.1 points of growth from acquisitions and a slight tailwind from foreign currency. Americas adjusted operating income of $227.4 million increased 2.9% versus the prior year. Adjusted operating margins were down 110 basis points in the quarter. Price and productivity net of inflation and investment and inclusive of transactional foreign currency was favorable by $9.9 million. However, this was a 30-basis-point headwind to margin rate.

The transactional foreign currency headwind relates to the prior year benefit of $3 million that we disclosed in Q1 last year, driven by the Mexican peso. Operating margins were also impacted by acquisitions, which were a 40-basis-point headwind. Additionally, volume declines and unfavorable mix were a headwind to margin rates. Please go to Slide #7. Our International segment delivered revenue of $223.7 million, which was up 21.5% on a reported basis and down 5.3% organically. Organic revenue declines were the result of volume weaknesses in our mechanical business, primarily related to the ERP disruptions John discussed earlier. This was partially offset by growth in electronics and price realization. Net acquisitions contributed 15.9% to segment revenue.

Currency was also a tailwind, positively impacted reported revenues by 10.9%. International adjusted operating income of $17.9 million decreased 4.8% versus the prior year period. Adjusted operating margin for the quarter decreased 220 basis points. Price and productivity net of inflation and investment was a 210-basis-point headwind, inclusive of operational inefficiencies associated with the ERP mentioned earlier. Additionally, volume declines were a headwind to margin rates, which was mostly offset by acquisitions. Please go to Slide #8, and I will provide an overview of our cash flow and our balance sheet. Year-to-date available cash flow was $80.3 million, consistent with the prior year.

For 2026, we still anticipate our ACF conversion will be approximately 85% to 95% of adjusted net income. Next, working capital as a percent of revenue increased in the first quarter due to acquired working capital, which does not impact cash flow. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.7x, which supports continued capital deployment. I will now hand the call back over to John.

John Stone: Thanks, Mike. Please go to Slide 9. One quarter into the year, we are affirming our organic revenue growth outlook of 2% to 4% and adjusted earnings per share outlook of $8.70 to $8.90. We are raising our reported revenue outlook by 1 point to 6% to 8% to include the acquisition of DCI. You can find more details on our outlook in the appendix. While our core demand assumptions are unchanged from our February call, I'll provide some additional details on our view for the remainder of the year. In the Americas, our markets are largely as we expected to start the year, but we're experiencing higher inflation.

Based on current conditions, we anticipate an incremental headwind of approximately 1% of COGS from tariffs and other inflation. We expect to offset this on a dollar basis through a combination of price and cost actions. However, given current volatility, we are not updating our organic growth assumptions to include any incremental price at this time, similar to our approach in the first quarter of 2025. Most importantly, we expect this to be neutral to 2026 adjusted operating income dollars and earnings per share. For international, we expect to catch up on production impacts from the ERP implementation during the remainder of the year, supported by existing orders and backlog in that business.

Our core demand assumptions are similar to our prior outlook. And beyond the ERP catch-up, it's also important to note that our electronics businesses are a source of strength in the International segment, and we expect these to ramp seasonally through the year. We have not experienced a notable demand impact from the effects of the conflict in Iran and our exposure to the Middle East is negligible. For the organization, we're committed to serving our customers while remaining agile in the current macro and input cost environment. Please go to Slide 10. In summary, Allegion delivered nearly 10% revenue growth in Q1 and deployed capital effectively for the benefit of our shareholders.

Before turning to Q&A, there's one more highlight from Q1 that I'm proud to share with you today. Allegion was honored for the third consecutive year with the Gallup Exceptional Workplace Award. This recognizes our team for fostering one of the most engaged workplace cultures in the world. And we are 1 of only 5 companies to earn this award with distinction in 2026. We know highly engaged teams deliver stronger results for our customers, our shareholders and our partners. With that, we'll take your questions.

Operator: [Operator Instructions] Our first question will come from Joe O'Dea with Wells Fargo Securities.

Joseph O'Dea: Can you hear me?

Operator: Joe, please go ahead.

Joseph O'Dea: Sorry about that. Getting used to this new format. Starting on the demand side in Americas, it sounds like spec activity largely pacing as expected. But just interested in any color on the time from spec to order, if you're seeing any elongation in that with respect to what you would normally see on spec to order and what you're currently seeing the degree to which tariffs and other inflationary pressure is behind that? And then just related, we have heard some comments around kind of data center crowding out and inability to service other projects because of data centers growing more activity and the degree to which you're seeing any that?

John Stone: Yes, Joe, this is John. I'll get started there. And I'd say, like we said in the prepared remarks, spec activity is strong in nonres, might go so far to even call it very strong in recent months. And I'd say it's broad-based. We've got a portfolio and a channel reach that affords us broad end market exposure. So we're seeing broad-based growth on the spec side. Channel checks with our largest customers support that view. To the more detailed points of are we seeing elongation from spec to shovel ready or doors being hung, not really. I don't think that environment hasn't meaningfully changed.

But that is the reason why we don't disclose a whole bunch of detail because the line of sight from a spec to revenue for us really depends on the vertical and the project. You could imagine smaller projects or maybe multifamily office renovations for tenant improvements could be pretty quick, something like a very large hospital complex could take a couple of years. But suffice it to say, spec activity has been strong. Channel checks also, we feel, support our outlook. On the question about data centers crowding out other projects, I would feel like not in our space do I see that really as an impact.

That being said, I feel good about the position -- the competitive position we've carved out for doors and door hardware in data centers, and that it's a small part of our business, but it has been growing nicely.

Joseph O'Dea: That's helpful detail. And then on the tariff side and the 1% of COGS headwind that you talked about, just in terms of how you're addressing that? Are surcharges already in the market? How much of this is price? How much of this is more kind of cost mitigation on your side? And is it primarily tied to the latest kind of tariff changes and the impact that it has from Mexico?

John Stone: Yes. I think -- so there's been -- like the last many months, there's been a flurry of changes with respect to trade and tariff policy. IEEPA was declared on constitutional, right on the heels of that Section 122 was implemented. Soon after that, there was a wide range of Section 232 changes. And when you net all of that out, along with some inflationary pressures on fuel in particular, we see an impact -- a net impact of around 1 point of COGS. And think of the playbook we used a year ago.

Some pricing actions, it could be surcharges, it could be list price increases, they are not yet in the market and that's why we're not yet updating any organic revenue guide as a result. We'll certainly announce that to the market to our customers first as we work through all of the details there. And as always, there's an enormous amount of details to work through on all the different trade policies. There are some cost actions that we're taking, I think, just normal hygiene for a company our size, and that will contribute.

So when you add it all up, we expect to mitigate this on a dollar basis at the adjusted operating income line and net earnings per share.

Michael Wagnes: Joe, maybe I'll just jump in and add. If you think about the mix between price and cost, obviously, it's going to come from more pricing than cost actions due to the size we discussed. But similar to last year, look for us to make sure that we're driving that price and productivity to cover that inflation and investment. That's something we've been talking to you for a number of years about.

Operator: Our next question will come from Tim Wojs with Robert W. Baird & Company.

Timothy Wojs: Maybe just the first question. I guess if I look at North America margins, I was wondering if you can maybe just add a little bit of color on some of the mix puts and takes this quarter. I think it's been a while since we've had kind of a negative mix impact in the bridge there. So maybe just add some color there as to what the drivers were, and how you see that kind of playing out for the rest of the year?

Michael Wagnes: Yes, Tim. So if I bring you back to Q1 of last year, we had really strong volume leverage and positive mix. And what that was, it included mix within nonres. And specifically, our nonres business is so much more than just a lock. It's the mix between the different businesses within nonres. This quarter was a little different than Q1 of last year. So it was some negative mix. If you think of the Americas and you take a step back and think of the full year, don't look at -- don't expect to see a headwind for mix for the full year for the Americas.

You did have a headwind in Q1, but full year, think of it like most years mix kind of evens out over the course of the year for the Americas.

Timothy Wojs: Okay. Okay. So it's mostly product mix on -- within nonres. Okay.

Michael Wagnes: It's product mix, yes.

Timothy Wojs: Okay. I got you. I understand. Okay. And then I guess how -- to that, like how would you kind of expect margins in North America to kind of sequence through the year? I guess, that mix impact kind of drove it, I guess, a little kind of weaker Q2 than we -- Q1 than what we thought. So just trying to understand kind of how we should expect margins in North America to kind of pace this year? Like would you expect kind of a negative variance in Q2 as well? Just trying to think through those pieces.

Michael Wagnes: Yes. As you think about -- let's talk just margin rate for the Americas. As you progress throughout the year -- obviously, in Q2, we do have the peso impact from Q2 of last year. I'll call that to your attention. We put that on the earnings deck of Q2 in '25. But throughout the rest of the year, expect most of the expansion to come in the back half of the year. We'll get better sequentially. You could think of the second quarter as improving from where it was in Q1 versus the prior year, but the Q3 and Q4 is where you really start to see the margin expansion.

And then for full year, I'll just add, don't forget, obviously, for each of the quarters, we got to now put in DCI. DCI is going to be a margin rate impact. You could think of it as 30 basis points for a full year. Q1 obviously only had 1 month of activity. The last 3 quarters, obviously, will have 3 months. So those are the 2 items I would call out. But if you think about margin expansion, think of it more in the back half, and part of that is the comp that you're going up against vis-a-vis 2025.

Operator: Our next question will come from Tomo Sano with JPMorgan.

Tomohiko Sano: Can you hear me?

John Stone: Yes.

Tomohiko Sano: Okay. In first quarter, the Americas electronics business was up mid-single digits, which is a little step down from the double-digit growth seen in Q4. Could you provide more breakdown of volume versus price contributions for Q1? And any color on what drove the decelerations? And do you anticipate any changes in the growth perspectives after 2Q, please?

Michael Wagnes: Yes. Tomo, if you think about nonres, we said in the prepared remarks, nonres was driven by price realization. Just to remind you, Q1 of last year, really strong volume growth in nonresidential. You could think of that at the higher end of mid-single-digit volume growth for nonres last year. So this year, obviously, a little less when you think of volumes. Full year for nonres, expect to see volume growth for the full year in nonresidential. I think that remains a strong market for us like we talked about. And so I think Q1 in nonres, if you think about volumes, part of that is just the comp in the prior year.

John Stone: And Tomo, this is John. On the electronics side, yes, mid-single growth this quarter. Look, a year ago, it was double digit, very strong. I think when we still -- when we look over the cycle, if you will, we still see electronics being a long-term growth driver for Allegion. The adoption rates are still increasing and growing. And I think that is providing that point of outgrowth that we expect to achieve. So I still feel good about our position in electronics. We're still rolling out new products, and I think still stand firm that, that's a long-term growth driver for the company.

Tomohiko Sano: Just 1 follow-up. There was a commentary that ERP implementation and legacy mechanical business were key headwinds for the International segment in Q1. Were there any execution challenges associated with these factors? How do you view the prospects for recovery in International operations from second quarter, please?

John Stone: Yes. It's a very timely question, Tomo. And yes, the ERP implementation was limited to one of our legacy mechanical businesses in Europe. And so while we haven't sized that exact amount, it does explain most of the organic revenue and margin decline in the quarter. I would say, since I've been here in Allegion, we've done a lot of ERP implementations. It's a core part of just investing in the core business. And we've had a lot of very old systems to update. This was one of them. We've never had to talk about this before. Every other ERP implementation has gone very well, this one we've just had a lot of struggles with.

As I said in the prepared remarks, very recently, our production rates are getting back on track. And so it's not a demand issue either. The customer orders are there, the backlog is there, it's our execution that needs to improve. And I think it is improving. I do have confidence we will recover the Q1 shortfall over the course of the year.

Operator: Our next question will come from Jeffrey Sprague with Vertical Research Partners, LLC.

Jeffrey Sprague: John, just picking up on the ERP. So are there any other implementations that you're planning for this year? Have you -- are you done upgrading what you want to do in Europe? And also, just to comment on catching up. I've seen companies before have these snafus and they don't catch it up, right, because you fail to deliver so somebody else fill that void so you can get back to run rate, but maybe not lose -- regain what you lost. So maybe just a little bit more context on that.

John Stone: Yes. Jeff, those are very salient points and something we're watching very, very carefully. I would say we have been holding on to the customer orders. We still have more inbound customer orders. We do have a backlog that supports our commentary, and our execution is improving. And so I do feel confident that we'll recover this Q1 shortfall over the balance of the year. It won't all happen like immediately, but it will happen over the balance of the year. I think as I mentioned, we've done a bunch of these implementations over my tenure here at Allegion. We do have more in the works. There are more businesses that do need these system upgrades.

And I don't anticipate we're going to have a problem like this again.

Jeffrey Sprague: And could you just maybe address also Europe in a little more detail, right? Not a lot of direct Middle East exposure, but Europe is probably most prone to seeing collateral economic damage first from what's going on. Is there any visible change in tone there, business trajectory, orders, just kind of year to the ground, what you're seeing real time in those markets?

John Stone: It's a good question. And I'd say, consistent with our prepared remarks, the demand has shaped up about the way we saw it shaping up when we introduced the guide back in February. The big miss was, again, our own challenge with that ERP. So our electronics businesses in Europe still performing well. Our acquisitions in Europe are basically right on track, so feel good about those elements. Like in general, markets are still not super strong and agree they are more directly impacted by the 2 active conflicts, but I think market demand is about how we saw it at the February guide.

Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joe, please unmute your line and ask your question. Okay. We'll circle back to Joe. Our next question will come from Julian Mitchell with Barclays Equity Research.

Julian Mitchell: Maybe just based of the commentary around the Americas margins being down year-on-year in Q2 and also the fact that the International catch-up on ERP isn't all coming in the quarter of Q2, should we expect that this year is a bit more back-end loaded than normal in terms of kind of first half, second half EPS contribution? I think in recent years, you have been sort of 47%, 48% of EPS in the first half. Should we think this year is maybe more like mid-40s because of that Americas margin pressure and ERP headwind?

Michael Wagnes: Yes, Julian, as you know, we don't really give quarterly guidance, right? So if I give first half, second half, I'm giving an EPS for Q2. I'll just share just a little more from what I said earlier. In the Americas, I wouldn't expect big headwinds on margin rates year-on-year in the second quarter. I just don't expect to see much expansion there, right? So you can think of it as not expansionary. For International, International, I think it's fair to say, second quarter, a little softer versus last year on margin rates. Similar to Q1, we talked about the sequential improvement versus Q1 of '26 will be similar to the sequential improvement you saw in '25.

And then you start to see it recover some. If you think of the Americas, though, think of it more, a little more margin expansion in the back half of the year. This is not a massive margin expansion delta, it's more margin expansion in the back half and you know what Q1 was.

Julian Mitchell: That's helpful. And then just on the kind of PPII, you had that 40 bps margin headwind in the first quarter kind of total company. How are you thinking about that sort of play out over the balance of the year? I think when I'm thinking about sort of total margins, you've got a volume improvement to margin rate in the back half from easier sort of volume comps so that helps with that margin step up in the second half. But just wondering kind of any puts and takes on PPII, how is kind of pricing playing out and competition and that type of thing, please?

Michael Wagnes: Yes. So obviously, you saw the headwinds in Q1. If I break it out between the 2 businesses, similar to what you would expect in margin rates, Americas, expect to see for the full year, right? Our full year PPII, expect to see some margin expansion there, dollar positive. International is going to be a little tougher this year. So at an enterprise level, I expect the total company to be roughly around the Americas for the full year, a little more in the back half than first half obviously. Q1 was poor, second quarter, certainly better than what you saw in the first quarter. And then think about the core business.

We expect this business to get back to that core incrementals we outlined at Investor Day, right, the core ex acquisitions and currency of that 35% plus as you think of our business for the remainder of the year.

Operator: Our next question will come from Joe Ritchie with Goldman Sachs.

Joseph Ritchie: Okay. Great. Moving around just the International segment, right? This is a segment that, historically, you've tried to scale via acquisition. I recognize that you had the issues with ERP this quarter and that impacted it. But I'm curious, like as you kind of think about like does it make sense for Allegion to have an international presence? The domestic business is doing so well. Is there -- does it ever make sense for it to be more of a domestic centric company and maybe it's just too difficult to scale the business internationally?

John Stone: Yes. I think probably Q1 earnings call is not the time to have such a conversation, Joe, but I would say one business with an ERP challenge that we haven't had before driving a miss. I don't think such a extreme conversations are necessary right now. I'd say we've been very pleased with the growth we've seen in International. We've been very pleased with the portfolio improvements we've seen in International. The market conditions have been rather soft, but our teams have performed well. And one what I consider a temporary blip on the legacy mechanical side with this ERP implementation, we're going to overcome that. I have confidence there. It's not a demand issue.

We've got some operating performance that needs to improve, and we'll improve it.

Joseph Ritchie: Fair enough. And then, I guess, just the follow-on is just around capital deployment. Just given kind of like the start to the year from a share perspective, I'm just wondering like how you're thinking about buyback versus M&A at this point?

John Stone: Yes, it's a great question, Joe. And I think as you saw in Q1, we did repurchase $40 million worth of shares. And you saw that our Board authorized a $500 million share repurchase program. So I think, that being said, our expectation and your expectation of us should be balanced, disciplined and consistent capital deployment for the benefit of our shareholders. And certainly, we understand where we're trading right now. And I'd say, on top of that, our M&A pipeline is active with good quality, bolt-on acquisitions. So I would say expect us to do both for the benefit of our shareholders.

Operator: [Operator Instructions] Our next question will come from [ Reef Judd Rose. ]

Unknown Analyst: I just wanted to follow up on the electronics growth in the quarter, just the mid-single digit. I think in the fourth quarter, it was low double, which is what you did through 2025, if I remember right. You're calling out like a tougher comp there. How should we think about that growth through 2026? And maybe just a little bit more color around the deceleration?

Michael Wagnes: Yes. I have to apologize. When I answered that previous question, I struggled to hear the question. I answered about the nonres business, so I apologize. With respect to electronics, electronics was really strong for us last year, right? And it was strong in each of the 4 quarters. I expect to see electronics to be a long-term driver of growth for us. We keep on talking about this, including Investor Day. Quarter-to-quarter, it can move around a little. But if you think about electronics for us, think of it as, hey, this is going to be the accelerated growth driver. And over the course of the year, it tends to outgrow the mechanical.

We expect that to be the case for 2026 as well.

Unknown Analyst: Okay. That's helpful. And then just on the 1% of incremental inflation on COGS, is there any way to parse out how much is tariffs or like incremental 232 versus just broader metals inflation and anything else? And then just the -- you've had a lot of success historically offsetting price. How do we think about the cadence of that through the year? How much of a lag is there between when you start to see the inflation versus when you can raise price?

Michael Wagnes: Yes. If you think of our business, we try to manage all cost inputs. So when we talk about it, we talk about pricing and productivity has to cover that inflation in those incremental investments. Tend not to give details by each subsection, just think of it as a total cost inflation number we provided. And then as far as lags, I would say, historically, there is a little lag between pricing and inflation, meaning the inflation could be a little sooner, but it's not enough where I would call it to your attention to change it much.

What you tend to find is the cost inflation comes, but it sits on the balance sheet until it gets sold and flush through COGS. So it's not that dissimilar historically. We'll continue to monitor it. And as there's updates throughout the year, we'll just provide you more details.

Operator: Our last question will come from Alexander Virgo with ISI Evercore.

Alexander Virgo: I wondered if you could just dig a little bit more into the ERP impact. Just what was it that surprised you? What was it that went wrong? And I guess, I appreciate your point that you've implemented many of these in the past and not had to talk about them before. So what is it that, that you're taking away from this to ensure it doesn't happen again? And then if I could just follow up on the electronics side of things. Are you happy that you can get what you need from the perspective of chips and supply chain? Do you have enough buffer? Is it just a case of pricing that will end up coming through there?

John Stone: Yes. Good question. So on the ERP, again, it's just a case of a legacy system been in place and highly customized over 25, 30 years, people got very accustomed to it. New workflows just slowed us down in this legacy mechanical business. And people are adjusting to it, people are adapting to it, people are learning and getting better with the new system. Again, as we've turned the chapter into 2Q, I do see our production rates are improving, our demand still supports the outlook, customer orders backlog still support the recovery and our operating performance is giving us confidence that we will recover the Q1 shortfall over the balance of the year.

Then shifting over to electronics on the supply chain, certainly with the conflict in the Middle East, we've been watching component supply chains very carefully. Haven't yet seen any major disruption, and I do feel, as a company, we're better positioned with respect to electronic supply chain than we were back in the pandemic time frame.

Operator: Our next question will come from David MacGregor with Longbow Research.

David S. MacGregor: I just want to go back to the mix question and it was asked earlier. Just in the Americas business, how much of the margin pressures are, you think, resulting from the introduction of more value-oriented products like the Performance Series and the Von Duprin 70 and those products?

Michael Wagnes: I don't think it's that, David. It's really the mix. This isn't a case where someone is trading down. This is the mix between the various businesses that we have. And so it's not a case where you're trading from a high price point to a mid-price point offering. It's more of the mix between the various product lines that we offer.

David S. MacGregor: So you're not seeing any change in terms of how these jobs are being spec'd in terms of more value orientation?

Michael Wagnes: No, no. I would not say that's the case at all.

David S. MacGregor: Okay. All right. And just a follow-up, I guess, on the residential business, are you confident that you held market share in that business this quarter? And I guess, what are the strategic options available to you to maybe affect a stronger position versus some of the secular trends?

John Stone: Yes. I think, David, on the resi side, for a while now we've been dealing with just a relatively soft end market. We've still seen electronics growth in resi. I think that has been a positive for us and continue to introduce new products in the electronics segment. As you've heard from, I think a lot of companies new build is very soft, aftermarket is probably just treading water. And so overall, the market remains a little bit soft. I think in terms of our share, all the indicators that we watch on, on point-of-sale and other things would indicate, yes, our market share is definitely holding up.

Operator: At this time, I see no callers in the queue. So I'll now hand back to the CEO, John Stone, for closing remarks.

John Stone: Well, thank you all very much for the Q&A and attending the call today. We look forward to connecting with you on our Q2 earnings call in July. Be safe, be healthy.

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