알레지온(ALLE) 2026년 3분기 실적 발표 콘퍼런스 콜: 미주 지역 성장에 힘입어 가이던스 상향

핵심 요약

• 3분기 매출은 가격 인상과 판매량 증가에 힘입어 전년 동기 대비 9.6% 증가한 약 12억 달러를 기록했으며, 자체 사업 매출은 7.2% 증가했습니다.
• 조정 EPS는 13% 증가한 2.60달러를 기록했습니다. 조정 영업이익률은 60bp 확대된 24.7%를 나타냈습니다.
• 미주 지역 자체 사업 매출은 비주거용 부문의 10%대 초반 자체 성장과 전자기기 부문의 10%대 초반 성장에 힘입어 9.1% 증가했습니다.
• 알레지온은 2026년 자체 사업 매출 성장률 전망치를 5%~6%로, 조정 EPS 가이던스를 9.05달러~9.10달러로 상향 조정했습니다.
• 경영진은 규격 지정 활동과 데이터센터 수요에 힘입어 미주 지역의 강세가 2027년까지 이어질 것으로 예상하는 반면, 서유럽 시장은 계속 약세를 보일 것으로 전망했습니다.
• 연초 대비 누적 가용 현금흐름은 11.2% 증가한 5억 3,940만 달러를 기록했으며, 순부채는 조정 EBITDA 대비 1.5배 수준입니다.

핵심 재무 실적

3분기 조정 영업이익과 조정 EPS에는 국제비상경제권한법(IEEPA) 관세 환급에 따른 우호적 영향이 제외되었습니다.

사업 및 영업 실적

미주 지역은 여전히 알레지온의 핵심 성장 동력으로 작용했습니다. 비주거용 자체 사업 매출은 가격과 판매량 모두의 성장에 힘입어 10%대 초반의 증가율을 기록했습니다. 경영진은 규격 지정(specification) 활동이 전반적으로 활발하게 이뤄지며 수요 가시성을 지속적으로 뒷받침하고 있다고 밝혔습니다.

데이터센터는 비주거용 사업의 약 5%를 차지하며 가파른 성장세를 이어갔습니다. 알레지온은 도어 및 도어 하드웨어 제품을 공급하고 있으며, 경영진은 이들 제품이 건설 프로젝트 후반부에 설치된다고 설명했습니다. 상업용 오피스 시장도 개선 징후를 보인 반면, 다가구 주택 시장 여건은 지역별로 차이를 보였습니다.

주거용 매출은 주로 가격 인상에 힘입어 5% 안팎의 성장을 기록했으나, 실질적인 판매량은 보합세를 유지했습니다. 경영진은 지속적인 인플레이션과 고금리로 인해 중기적으로 강한 회복세를 기대하긴 어렵지만, 추가적으로 대폭 악화되지는 않을 것으로 예상하고 있습니다.

미주 지역 전자기기 매출은 10%대 초반의 성장률을 나타냈습니다. 경영진은 신규 도입, 기계식 제품에서의 전환, 구형 전자 도어록의 업그레이드에 힘입어 전자기기 부문이 경기 사이클 전반에 걸쳐 10% 미만 중후반의 성장을 이끌 동력이 될 것으로 계속 평가하고 있습니다.

인터내셔널 자체 사업 매출은 우호적인 가격 인상 효과가 판매량 감소로 상쇄되면서 소폭 감소했습니다. 서유럽, 특히 독일의 수요 부진이 주요 제약 요인으로 작용했습니다. 1분기에 발생했던 ERP 관련 문제는 해결되었으며, 영업 및 리드타임은 정상 수준으로 회복되었습니다.

알레지온은 10월 초 약 9,000만 달러 규모의 오벌리 도어 컴퍼니(Overly Door Company) 인수를 완료했습니다. 경영진은 오벌리 인수가 회사 전체 수익성과 유사한 마진율을 유지하면서 미주 지역의 연간 매출을 약 1%포인트 끌어올릴 것으로 예상하고 있습니다. 또한 알레지온은 해당 분기 동안 앰비언트 AI(Ambient.ai)에 4,000만 달러의 후속 투자를 집행하고, 1억 2,000만 달러 규모의 자사주를 매입했으며, 4,600만 달러의 배당금을 지급했습니다.

경영진 가이던스

본 전망치는 향후 자본 배치에 따른 이익을 제외하며, 발행 주식 수를 8,560만 주라 가정합니다.

2027년에 대해 경영진은 주요 최종 시장 수요가 미주 지역 중심의 성장에 힘입어 2026년과 유사할 것으로 예상하고 있습니다. 비주거용 수요는 견조한 규격 지정 추세의 수혜를 입을 것으로 보이며, 주거용 성장은 주로 가격 인상에서 기인할 전망입니다. 해외 시장은 약세를 유지할 것으로 예상됩니다.

또한 경영진은 인플레이션이 지속될 것으로 보고 2월 초 정례 가격 인상을 포함한 추가적인 가격 조치를 계획하고 있습니다. 알레지온은 2027년 마진 확대를 기대하고 있으나, 세부 가이던스는 2월에 발표할 예정입니다.

리스크 및 주요 관전 포인트

• 서유럽, 특히 독일의 경기 둔화와 지속적인 인플레이션이 해외 사업의 판매량과 제품 조합(믹스)에 계속 부담을 주고 있습니다.
• 높은 인플레이션과 고금리로 인해 주거용 부문의 강한 회복 가능성이 제한되고 있습니다.
• 숙련 기술 인력의 부족은 비주거용 시장의 성장 속도를 제약할 수 있습니다.
• 대형 건설 프로젝트는 분기별 매출 변동성을 유발할 수 있으며, 건설 활동은 일반적으로 연중 중간 2개 분기에 더 활발하게 나타납니다.
• 이번 분기 인수합병으로 인해 전사 조정 마진율은 20bp, 미주 지역 마진율은 40bp 각각 감소했습니다.
• 투입 원가 인플레이션이 지속됨에 따라 영업이익을 방어하기 위해서는 적시의 가격 조정과 생산성 향상 조치가 요구됩니다.

애널리스트 Q&A 주요 내용

경영진은 미주 비주거용 부문의 성장이 전반적인 규격 지정 활동에 의해 지속적으로 뒷받침되고 있으며, 데이터센터가 2027년 물량의 견고한 기반을 제공할 것이라고 밝혔습니다. 회사 측은 숙련 인력 제약이 시장 확장을 제한할 수 있으나, 예상되는 성장 환경은 물량 증가와 높아진 가격 수준의 결합이 될 것이라고 설명했습니다.

가격 책정과 관련해 알레지온은 인플레이션에 더 신속하고 선별적으로 대응하게 되었다고 밝혔습니다. 경영진은 2027년까지 가격 인상 이월 효과가 이어질 것으로 기대하지만, 연간 기준 비용 증가에 대응하기 위해 추가적인 가격 인상이 필요할 것이라고 언급했습니다. 회사의 목표는 금액(달러) 기준 지속적인 가격 및 생산성 이익을 확보하고 연간 마진율에 미치는 영향을 대략 중립적으로 유지하는 것입니다.

인공지능(AI)과 관련하여 알레지온은 규격 지정의 속도와 정확성을 향상하기 위해 연간 약 250만 개의 규격 지정 개구부(opening) 데이터를 활용하고 있다고 설명했습니다. 이러한 도구는 이미 사내 및 유통 파트너사 현장에 적용되고 있습니다.

경영진은 슐레이지(Schlage)가 주요 스마트홈 플랫폼 및 에어비앤비(Airbnb)와 연동되어 있다고 말했습니다. 신규 하드웨어 경쟁사들이 진입할 것으로 예상되는 관련 제품 카테고리는 미주 지역 매출의 1%~3% 수준이며, 미주 영업이익에서 차지하는 비중은 이보다 더 적습니다.

자본 배치와 관련해 경영진은 지속적인 자사주 매입과 더불어 기계식, 전자식, 전기기계식 및 보완 소프트웨어 분야에서 규율 있는 볼트온(bolt-on) 인수를 추진하는 전략을 강조했습니다.

실적 발표 전화회의 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Good day, everyone. My name is Shell and I will be your conference operator today. At this time, I would like to welcome you to the Allegion Third Quarter Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Joshua Pokrzywinski, Vice President, Investor Relations.

Joshua Pokrzywinski

Thank you, Shell. Good morning, everyone. Thank you for joining us for Allegion's Third Quarter 2026 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Mike Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call are available on our website at investor.allegion.com. This call will be recorded and archived on our website.

Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details.

Please go to Slide 3, and I'll turn the call over to John.

John Stone

Thanks, Josh. Good morning, everyone, and thanks for joining us. Third quarter results were driven by strong organic growth in the Americas, led by double-digit organic growth in our Non-Residential business. The team's performance reinforces what I hope you've come to believe about Allegion. We're a leader in security and access with premium brands and the highest margins in a great industry.

Our resilient business model has the proven ability to navigate inflation and withstand cyclical forces based on the value we provide to our customers and the large installed base we serve. This model continues to evolve with technology as security and access become electrified and digitized, a trend we expect to benefit market leaders like Allegion for many years to come. All of this allows us to deliver double-digit EPS growth through the cycle as we outlined at our Investor Day in May of last year.

Digging into the quarter, our Americas business is performing very well. With continued momentum in spec writing trends through our demand generation engine, we expect Non-Residential strength to continue into 2027, which we'll comment on later in the presentation. Residential has performed well in 2026 despite consumer headwinds from inflation and interest rates. However, these dynamics also make it difficult to forecast a strong recovery in the medium term. I'm also pleased with another quarter of margin expansion in the Americas. We have managed inflation well thus far in 2026, primarily through agile pricing actions that continued in the third quarter.

In International, we have resolved the ERP challenge we highlighted in Q1 and that business is back to normal operations and lead times. However, as discussed last quarter, macro conditions are difficult across Western Europe, particularly in our largest market, Germany, and we continue to be focused on execution and cost management in our International segment. With respect to our full year, we're raising our reported revenue outlook to 9.5% to 10.5%, and our outlook for organic revenue growth to 5% to 6% based on stronger demand and favorable price in the Americas. We are raising our adjusted earnings per share outlook to $9.05 to $9.10. I'll provide additional details on this later in the call.

Please go to Slide 4, and let's take a look at capital allocation, starting with our organic investments. In September, we launched the Allegion Optimize app in the Americas. Optimize gives installers, end users and our channel partners, one tool to commission, configure, manage and troubleshoot our connected products throughout their life cycle. We're rolling Optimize out initially across electronic door controls and locks, and we expect this app will ultimately manage our full nonresidential connected portfolio globally. Offering a single app to cover management of multiple product categories is a first in our industry. Customers will benefit from faster, easier experiences with our intuitive interface that eliminates the friction of switching between multiple stand-alone apps for connected devices.

Turning to M&A. We completed the acquisition of the Overly Door Company in early October for approximately $90 million. Overly manufactures specialty doors for acoustics, blast, bullet resistance and vault security. Overly's high security solutions serve commercial and institutional customers with strength across U.S. government, education and health care markets.

Similar to our 2024 acquisition of Krieger Specialty Products, this complements our hollow metal portfolio with additional specialty products and regional capability. We expect Overly to add approximately 1 point to Americas revenues on an annualized basis at margins consistent with the overall enterprise.

Recently, we also made a $40 million follow-on investment in Ambient.ai through Allegion Ventures. Ambient continues to prove the transformative potential of purpose-built AI and physical security, helping customers shift their security operations from reactive to proactive. This investment underscores our confidence in their technology, their leadership and our increased collaboration. Allegion paid $46 million in dividends and repurchased $120 million of shares in the quarter. We see attractive valuation in Allegion shares and expect to remain active in share repurchase. As we've said in the past, you can expect Allegion to be balanced, disciplined and consistent with capital deployment oriented to profitable growth and driving long-term returns for shareholders.

Mike will now walk you through the third quarter financial results.

Michael Wagnes

Thanks, John, and good morning, everyone. Thanks for joining today's call.

Please go to Slide #5. Revenue for the third quarter was approximately $1.2 billion, an increase of 9.6% compared to last year. Organic revenue increased 7.2% in the quarter driven by strength in our Americas segment. The enterprise organic revenue increase was driven by both price realization and volume growth.

Q3 adjusted operating margin was 24.7%, up 60 basis points compared to last year. Price and productivity net of inflation and investment was favorable by $15.6 million and was a 50 basis point tailwind to margin rate. Volume leverage was also a tailwind to margin rate in the quarter. This favorability was partially offset by acquisitions, which were a 20 basis point headwind to margins. I'll provide more details on revenue and margins within each of the regions.

Adjusted earnings per share of $2.60 increased $0.30 or 13% versus the prior year. Operating income, inclusive of acquisitions, drove the majority of the year-over-year EPS growth. Additionally, benefits from interest and other and share count were offset by a headwind from tax. Please note, third quarter 2026 adjusted operating income and adjusted earnings per share exclude the favorable impact from IEEPA tariff refunds. You can find additional information regarding this in our press release and 10-Q, which were filed this morning. Finally, year-to-date available cash flow was $539.4 million, up 11.2% from the prior year. I'll provide more details on cash flow and the balance sheet, a little later in the presentation.

Please go to Slide #6. Our Americas segment delivered revenue of $942.4 million, which was up 11.7% on a reported basis and up 9.1% on an organic basis. Our Non-Residential business increased low double digits organically driven by price and volume growth. Demand for our non-res products remains healthy. And as John mentioned earlier, spec activity continues to be strong.

Our Residential business grew mid-single digits in the quarter, driven by price, consistent with year-to-date trends. Electronics revenue for the segment was up low double digits for the quarter and continues to be a long-term growth driver for the business. In addition, acquisitions contributed 2.6% of growth in the quarter.

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

Please go to Slide #7. Our International segment delivered revenue of $230.2 million, which was up 1.8% on a reported basis and down slightly organically as favorable pricing was offset by lower volumes. The volume decline was the result of continued weakness in Western Europe, as John discussed earlier. Acquisitions contributed 2.5% to segment revenue and currency was a headwind in the quarter.

International adjusted operating income of $31.9 million decreased 1.2% versus the prior year. Adjusted operating margin for the quarter decreased 40 basis points. Price and productivity, net of inflation and investment, was a 30 basis point tailwind to margin rate in the quarter. Net acquisitions drove a benefit to margin rates of 20 basis points. These benefits were more than offset by headwinds related to lower volume and unfavorable mix.

Please go to Slide 8, and I'll provide an overview of our cash flow and balance sheet. Year-to-date available cash flow was $539.4 million, an increase of 11.2% versus the prior year. The cash flow increase was primarily driven by higher earnings. For 2026, we still anticipate our ACF conversion will be in the range of 85% to 95% of adjusted net income.

Next, working capital as a percent of revenue was 7.9%, consistent with the prior year. Finally, our balance sheet remains healthy with a net debt to adjusted EBITDA at 1.5x.

I will now hand the call back over to John.

John Stone

Thanks, Mike. Please go to Slide 9. With one quarter remaining in the year, we're raising our organic revenue growth outlook to 5% to 6% and adjusted EPS outlook to $9.05 to $9.10. We are raising our reported revenue outlook to 9.5% to 10.5% based on changes to the organic growth range and acquisitions. You can find more details on our outlook in the appendix.

In the Americas, we're raising our organic growth assumption to 7% to 8%, consistent with year-to-date organic growth in the segment. This is a result of a healthier non-res demand environment and higher price realization. For International, our organic growth outlook remains unchanged at down low single digits as market demand in Europe, particularly Germany, remains weak. For full year 2026, we expect to deliver low double-digit EPS growth, consistent with our long-term earnings framework. As in prior periods, this outlook excludes the benefit of future capital deployment and therefore, assumes a share count of 85.6 million.

Please go to Slide 10. We'll provide our full 2027 outlook in February. But in the meantime, consistent with our usual practice, we'll share some high-level perspectives on the year ahead. We expect demand in our major end markets to be similar to current year with growth led by strength in the Americas. Spec writing trends support optimism on nonresidential markets over the next several years, particularly in the context of our late cycle business model.

Residential markets continue to face headwinds from inflation and high interest rates but multiple years of low activity supports a stable demand outlook in 2027 with growth driven primarily by price. International markets are expected to remain soft, driven by weak economic activity and persistent inflation. We expect to remain in an inflationary environment and will continue to drive pricing to protect operating profit dollars.

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

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

With that, we'll take your questions.

Operator

[Operator Instructions]

Our first question comes from Joseph O'Dea from Vertical Research.

질의응답

Joseph O'Dea

John, can you just talk a little bit more and unpack some of the strength that you're seeing in Americas Non-Res, the organic this quarter kind of equal parts volume, enterprise and so in particular, volume that's in that mid-single-digit type of territory. If you could talk a little bit about the end market strength there, where the spec writing activity is seeing signs of strength? And any degree to which you think you're winning in the market and some of this is share related?

John Stone

Yes, Joe, I appreciate the question. And certainly, as you know, Americas Non-Res is the largest business segment of the company and really our most important and up high single digits this year, a combination of volume and price. Our spec activity continues to be strong, as we've said the past few quarters, and that strength continues to be broad-based. Certainly, growth in data center forms a good base for 2027 volume growth as we look forward, but we do expect other verticals to contribute there as well.

And as we mentioned in the prepared remarks, we see an inflationary environment continuing, and you should expect price to remain elevated as a result. We do feel that I think trade labor -- skilled trade labor can be a bit of a governor on year-on-year market growth. But again, as we said in kind of looking forward into 2027, that kind of high single-digit environment with a combination of price and volume, what we feel is quite well supported by our spec activity.

With respect to where are we winning, I think our team wins every time we step on the field. We've got great brands. We've got a great field marketing and sales force. We've got great distribution partners. And I think, tough to say with share, as we've answered many times in the past, we sell through distribution. So pinning down market share numbers in this space is kind of hard.

Joseph O'Dea

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

John Stone

It's a timely question. And yes, we saw the news media headlines as well as you did. So I would say, first off, Allegion through our Schlage brand has been an innovation leader there and electronic and connected locking in the residential space. For the past 7 years, Schlage is America's most trusted lock brand. We've got a great brand reputation, great product portfolio. We're integrated with all the major smart home devices and providers. We're integrated with Airbnb as we've talked about on previous calls as well.

But if you wind the clock back, it'd be, maybe 8 or 9 years ago, we were the first WiFi connected deadbolt that integrated with Apple HomeKit. That innovation has not slowed down. And I'd say with regards to new entrants into the space, that happens from time to time. I would say the product category that these companies have indicated, they might be introducing a lock into, represents a low single-digit percentage of Americas revenue and an even smaller portion of Americas operating profit just to size it for you. But we feel confident in the Schlage brand and Schlage portfolio. And I think our performance this year and a rather soft demand environment speaks for itself.

Operator

Our next question comes from Rafe Jadrosich from Bank of America.

Rafe Jadrosich

Just starting on the pricing in Americas, on a year-over-year basis, it did not sort of maintain a similar level in 3Q versus 2Q, but you are lapping a lot tougher of a comp. Was there incremental pricing that was announced in 3Q? And then how do we think about that going forward?

Michael Wagnes

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

I think the key thing to think about our business is we're always going to drive that pricing and productivity to try to cover that inflation and investment. And we -- as you've seen over the last couple of years, we've been able to do that driving positive dollars. And then as you think of the current year, think of it as that PPII neutral on a margin rate for the full year and some positive dollars. So there's going to be pricing actions, but it's not going to be the one time in the beginning of the year that you might have known Allegion to do in, let's say, 2014 through 2019. It's been a more consistent adaptable environment to the changing inflationary pressures we face.

Rafe Jadrosich

Okay. That's helpful. So it does sound like there's been some incremental pricing which is why you're not slowing kind of on the 2-year. Can you just talk about your visibility on the level of inflation you're expecting into next year, maybe compared to this year? What are you expecting in terms of input costs? And then like how much price you would need to offset that?

Michael Wagnes

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

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

Operator

Our next question comes from Alexander Virgo from Evercore ISI.

Alexander Virgo

I wondered if you could just talk a little bit to the sort of implied slowdown in the guide in Q4. Just sort of thinking about, is that something that's just a reflection of prudence given the comps get easier? And then just to clarify on the pricing and the carryover into the first half, I suppose, of next year. Any chance you can give us a sense of how much that might end up being?

John Stone

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

Taking one quarter and extrapolating that forward is not the best idea. There's going to be some lumpiness because of project size. There's going to be some lumpiness because we're construction facing. And in the Americas, the middle 2 quarters are always going to have a little bit more construction activity than the 2 tails.

I'm going to ask Mike to step in and speak to the pricing part of the question.

Michael Wagnes

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

Operator

Our next question comes from Tim Wojs from Baird.

Timothy Wojs

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

Michael Wagnes

Yes. Tim, if you think about our business over the last, I'd say, 1.5 years, we've gotten better at reacting to inflationary pressures. So you don't see that significant lag that you might have seen in 2021. Some of the challenges we encountered in '21, we've learned from. And as you've seen over the last 1.5 years, we are quicker. I don't expect to see periods of time where there's big headwinds because we're late in taking those pricing actions.

Look for us to take pricing to combat inflationary pressures and driving that PPII. We talk about neutral on a dollar basis. If you think about quarters, then over the course of the year, it tends to be neutral on a rate as you saw this year, but we're committing to at least driving that neutrality on a dollar basis.

Joshua Pokrzywinski

Positive.

Michael Wagnes

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

Timothy Wojs

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

John Stone

Yes, it's a good question, Tim. And I think we're making some really well thought out and exciting investments internally on leverage of AI tools, and that's across every function in the business. And when you think about what does an AI model of any flavor, LLM or otherwise, need to really do a good job for you, it needs a very large and robust data set.

And when we're specifying 2.5 million openings in any given year, we've got an exceptionally large data set to train models on and use those models for efficiency, just like you're saying. That's happening right now. It's happening in conjunction with channel partners. So our responsiveness in terms of initial spec or change orders is definitely increasing for the benefit of the customer. So I think we're in the pole position really to make the best use of AI in a spec writing environment from an accuracy and a speed standpoint. And it's really built upon this enormous data set that we've built up over time, and we'll continue to build.

Operator

Our next question comes from Aanvi Patodia from Goldman Sachs.

Aanvi Patodia

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

John Stone

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

Aanvi Patodia

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

John Stone

Yes, it's a good question. And I'd say we are active in the data center space. I think our specification writers, our end-user consultants have done a great job in terms of getting Allegion a leading position in terms of doors and door hardware with the large data center builders.

As we mentioned in second quarter, data centers were approaching 5% of our Non-Res business. I'd say it's there now, growing rapidly and has been a source of volume growth this year, and we look for that to continue. I would -- just keep in mind, whatever you believe about data center construction and build-out, doors and door hardware are some of the last things to go into the building on the construction project. We are late cycle on each project. So we do feel good about the trends there and about our market position with respect to our core products.

Operator

[Operator Instructions]

Our next question is from David MacGregor from Longbow Research.

David S. MacGregor

Congratulations on a great quarter, John. I wanted to -- and I appreciate the early sort of preliminary thoughts on 2027. I guess I wanted to ask about your acquisition program. 2025 was obviously a more M&A active year than 2026. And I'm just wondering how much of that slower pace in '26 related to the need to make progress on integrating the 25 transactions versus maybe valuations or funnel development issues. But how are you thinking about 2027? Could it be a more active year? And what would need to change to make it a more active year?

John Stone

That's a really good question, David. And I would say, first off, if you look at 2025, just from a deal count perspective, we would say that was, let's just say, very high. And M&A of any sort is rather episodic in its timing. It's not something that I think anyone can do on this perfectly linear basis. So I don't think '25 as a deal count is any kind of benchmark or goal or any of that.

What we're after on acquisitions, is what we talked about at our 2025 Investor Day. Looking to complement and continue to build out our mechanical portfolio like we just did with the acquisition of Overly Door Company. Very excited about that one. Add electronics, add electromechanical acquisitions and complementary software for those faster growth verticals in our segment. And I think the point on the pace is really while we are oriented towards profitable growth, we do see acquisitions continuing to be a part of our growth story for the future. We're going to be very disciplined on what we buy strategically and what we buy from a valuation perspective.

So those acquisitions that come in, they're going to drive good value for our shareholders and not just growth for growth's sake. So I think that's going to throttle the pace of deal flow more so than anything else, just being disciplined around our strategy and around what we pay.

David S. MacGregor

Just secondly, and for the cash flow model here, I'm just wondering how higher freight and logistics costs influence how you think about your inventory levels going forward?

Michael Wagnes

Yes, David, obviously, if you think about cash conversion, we've thrown out that 85% to 95% cash conversion. I wouldn't expect to see any change to that percentage based on something like freight. That's a pretty big range for us. With inventory, we'll always be smart to make sure that we have the necessary parts to ship product.

So -- but if there's inflationary pressure, which there is, it will impact inventory on the balance sheet, right, because inventory costs more. The key thing for us, and as I think about it, are we driving the necessary pricing, which I talked about earlier in the call? So I would say if you think about the framework, 85% to 95% ACF conversion, I think that's a decent framework to think of us long term at. And then inventory levels, I think they won't move enough to where it impacts that framework we provided.

Operator

Our next question is from Brandon Knutson from Morgan Stanley.

Brandon Knutson

I wanted to start out on electronics. So you've seen strong growth there after the year started mid-single digits, accelerating on a 2-year stack essentially as you go throughout the year. Are you seeing an acceleration in electronics adoption? And are there any actions that you're taking currently to drive that acceleration that we're seeing this year?

John Stone

Yes. I think we're always striving for growth in electronics, and that comes from everything you can think of from demand generation engine with our specs, introducing new products. We have introduced a new family of connected locks in the commercial space. I'm very proud of that. Very excited about the launch. It's going well. So steady stream of new products driving organic growth, excellence in our demand generation engine and our end-user consulting.

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

Brandon Knutson

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

John Stone

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

Operator

Our next question is from Julian Mitchell from JPMorgan.

Julian Mitchell

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

John Stone

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

Elsewhere, as we've mentioned, past couple of quarters, and you can see it in the news as well, recent JLL reports have even said commercial office demand has 5 straight quarters of growth, kind of coming back from the dead after the pandemic and the work-from-home dynamics. You see that in major metro areas, New York and San Fran, really leading the way. So some tower work has come back that hasn't been there in a while. Multifamily is some places contracting, other places growing.

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

Julian Mitchell

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

Michael Wagnes

Yes, Julian, if you think about for this year, 2026, we would expect to see flat to slightly up margins for the full year. Obviously, that means Q4 has that step-up, as you just mentioned. Part of that is comp related. If you think about, especially in the Americas last year, that rate was a little lower. So we have some favorability.

As you think about next year, we expect to see margin expansion. The magnitude of that is similar to my comments earlier. When we get to February, we'll give an outlook. A couple of things we did put on the slide though, as you think about next year. Expect us to drive that PPII, right, to combat the inflationary pressure. And then in the Americas, that core incrementals that we highlighted at our Investor Day, think of next year within the parameters of that framework we laid out. So you have an idea.

As to the amount of margin expansion next year, we'll come back in February, and we'll give you that when we give you EPS. But at least we wanted to provide you some framework for you to think about next year as part of this earnings call.

Operator

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

John Stone

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

Operator

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