Allegion Q4 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning and welcome to the Allegion Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Josh Pokrzywinski, Vice President of Investor Relations. Please go ahead.

[Josh Pokrzywinski, Vice President of Investor Relations at Allegion]

Thank you, Drew. Good morning, everyone. Thank you for joining us for Allegion's fourth quarter and full year 2023 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 and 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, President and Chief Executive Officer at Allegion]

Thanks, Josh. Good morning, everyone, and thanks for joining us. I'd like to start today by recognizing that 2023 was a year of strong execution by the entire Allegion team. This performance reflects the value we add for our customers, the strength of our distribution partners, as well as the quality of our brands, and the capabilities and expertise of our employees.

Let's walk through some highlights of the quarter in the year. After celebrating our 10th anniversary as a standalone company in December, we closed the year with record revenue, adjusted operating income, and adjusted EPS. Reinforcing the thesis behind our seamless access strategy, electronics demand remains strong. We delivered approximately 20% organic growth in electronics for the year, as supply chains normalized, and that's on top of mid-teens organic growth in the prior year. We sustained a high operating cadence and expanded our industry leading margins in the quarter. And for the full year, our adjusted operating margin performance was 22.1%, up 160 basis points.

Simply stated, the Allegion team delivered on price and productivity, bringing margins back to pre-pandemic levels with room to expand further in 2024 and beyond. Our balance sheet and cash flow generation are strong. We ended the year under two times net debt to EBITDA, which sets up a 2024 return to the balanced capital deployment you've come to expect from Allegion.

When you look at our past decade, this team has delivered solid results and executed well through a variety of macroeconomic backdrops. We've built on the strength of 100-year-old brands, consistently meeting customer needs and meeting our commitments to shareholders. We've operated with excellence, sustained the highest margins in the industry, and are still pioneering safety, better securing people and their property where they live, learn, work and connect. Driven by our vision of enabling seamless access in a safer world, we're proud of this track record, we're proud of what we delivered in 2023, and we're excited about the momentum we're carrying into 2024.

Please go to slide 4 and let's talk about our capital allocation strategy in action. Reflecting on Allegion's first 10 years, we've had a roughly even split between inorganic growth and the return of capital to shareholders through dividends and share repurchases. We remain committed to balanced, consistent capital allocation, and having quickly de-levered from the Access technologies acquisition, our balance sheet supports this strategy. As we move into 2024, we will continue investing for organic growth, prioritizing projects and solution that drive seamless access forward.

One recent example in new product development is Schlage's next generation of innovative electronic locks, the XE360. This is the latest wireless lock family from Schlage, designed with flexibility and interoperability in mind. With solutions for perimeter and interior doors, this series has the security and access features most looked for by multifamily and light commercial properties at attractive price points.

It leads with open architecture, supports the latest credentialed technologies, and integrates with Allegion and our partner systems.

In addition, Schlage's innovative Flex module allows the XE360 series to be easily upgraded in the field, to allow migration from an offline to a network solution, and to adapt to emerging trends in security and connectivity down the road.

Next, Allegion will continue to be a dividend paying stock. You can expect our dividends to grow commensurate with earnings over the long term, and we've just announced our 10th consecutive annual increase.

We also expect to grow through acquisitions, bolt-on acquisitions that fill portfolio gaps in the hardware space and high margin recurring revenue business in the Access solution space will remain priorities. Larger deals like Access Technologies may be more episodic, but we will be disciplined and have demonstrated the ability to quickly delever. Boss Door Controls, which we closed this month, is a classic bolt-on that both complements and expands how we go to market in the U.K. This acquisition bolsters our local business with a strong architectural channel, flexible supply chain and also positions us to increase our spec driven business there in the future.

Lastly, with regards to share repurchases, as we've said, at a minimum we will continue to offset incentive compensation, and as you saw in the 4th-quarter, we will make additional share repurchases as appropriate.

Mike will now walk you through fourth quarter financial results, and I'll be back to discuss our full year 2024 outlook.

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

Thanks John, and good morning, everyone. Thank you for joining today's call. Please go to slide number 5. As John shared, Allegion, continued to execute at a high level and delivered another solid quarter. Revenue for the fourth quarter was $897.4 million, an increase of 4.2% compared to 2022. Organic growth of 2.6% was driven by our America's nonresidential and Access Technologies businesses, offset by declines in residential and international. Adjusted operating margin and adjusted EBITDA margin increased by 130 basis points and 120 basis points respectively, in the fourth quarter, driven by price and productivity and excess of inflation and investment.

I am pleased with the margin performance as we have recaptured the margin loss during the supply chain disruptions experienced in late 2021 and early 2022. Our operating model and strong execution have positioned us well for future margin expansion.

Adjusted earnings per share of $1.68 decreased a penny, or approximately six-tenths of a percent versus the prior year. Operational performance drove growth of $0.17 per share with the offset coming from tax driven by the timing of discrete items versus the prior year.

John will cover the outlook later in the presentation. However, I want to note that our tax rate will migrate to between 18% and 19% in 2024, inclusive of the implementation of global minimum tax. We expect Allegion's structural tax rate will be in the high teens over the planning horizon we laid out at our Investor Day in May.

Finally, full year available cash flow for 2023 was $516.4 million, a 30.6% increase versus last year driven by higher earnings and improved working capital performance. I will provide more details on cash flow and balance sheet a little later in the presentation.

Please go to slide number 6. This slide provides an overview of our quarterly and full year revenue. I will review our enterprise results here before turning to our respective regions. Organic growth in the quarter was 2.6% as strong price realization offset pressure on volumes.

Currency and acquisitions drove additional favorability in the corner, bringing the total reported growth to 4.2%. On a full year basis, organic revenue growth was 5.2% overall with Americas at 7.4%. Our international business was down 2.5% for the year. Our full year organic growth was led by electronics and software solutions, which grew globally by approximately 20% in 2023, with both regions in double digits.

Please go to slide number 7. Our America segment continues to deliver strong operating results in the fourth quarter. Revenue of $704.6 million, was up 3.7% on both a reported and organic basis, as favorable pricing offset lower volumes. Our America's nonresidential business was up mid-single digits against a prior year comp that grew in the mid 20%. On a full year basis, this business had double digit organic growth in 2023.

Residential markets are soft, with our business down low single digits in the quarter and for the full year as higher interest rates continue to impact new and existing home sales. Our Access Technologies business delivered organic growth of mid-single digits in Q4.

America's electronics growth remained strong on a multiyear basis with mid-single digit growth in the quarter on top of a nearly 50% comparison in Q4 2022. Our America's adjusted operating income of $188.4 million increased 10.8% versus the prior year period, while adjusted operating margins and adjusted EBITDA margins for the quarter were up 170 and 190 basis points respectively.

The team executed well. We are performing more efficiently, driving price and productivity, and we delivered margin expansion every quarter in 2023.

Please go to slide 8. Our international segment continues to execute well in a challenging macroeconomic environment. Revenue of $192.8 million was up 5.9% on a reported basis and down 1.3% organically. Price realization was more than offset by lower volumes associated with soft end market demand. Currency and acquisitions were a tailwind this quarter, positively impacted reported revenues by 4.4% and 2.8% respectively.

International adjusted operating income of $32.3 million increased nearly 13% versus the prior year period. We also saw improvement in adjusted operating margins and adjusted EBITDA margins of 110 basis points and 100 basis points respectively.

The team delivered margin expansion for Q4 and the full year despite a challenging top line, highlighting the healthier, more resilient business portfolio we have within our international segment. The acquisition growth I mentioned earlier is primarily driven by our Plano business, a tuck-in Software as a Service business, we acquired early 2023, which is accretive to both growth rates and margins.

Please go to slide number 9. As I mentioned earlier, year to date available cash flow came in at $516.4 million, up nearly $121 million versus the prior year. This increase is driven by higher earnings and working capital improvements partially offset by higher capital expenditures. You can look for Allegion to continue to invest in our business and convert earnings to cash.

Next, working capital as a percent of revenue improved versus the prior year, driven by higher inventory turns as supply chains normalized.

Finally, our net debt to adjusted EBITDA is down to 1.9 times as we successfully de-levered following the Access Technologies acquisition. We are now back to historical leverage levels, which demonstrates our proven track record of effectively deploying capital while maintaining both our leverage profile and our investment grade credit rating. Our business continues to generate strong cash flow, and our balance sheet continues to be in a healthy position.

I will now hand the call back over to John for our 2024 outlook.

[John Stone, President and Chief Executive Officer at Allegion]

Thanks Mike. Please go to slide 10, and before we get to guidance, I want to spend a moment on what we see as a couple of key drivers for 2024, including macroeconomic inputs that inform our outlook. We're expecting more modest inflation in 2024, enabling normal levels of margin expansion from net price and productivity. We report these to you as aggregate price, productivity, inflation and investments shown in the left hand chart.

Since the beginning of 2019, we've averaged approximately 60 basis points of margin contribution annually from net price and productivity. This has been a hallmark of the business over time, and it's a key driver of our 2024 outlook. We're expecting a stable, nonresidential environment underpinned by healthy institutional markets. You can see Dodge Starts for institutional have shown steady growth in the past few years, contrasting the higher volatility in commercial leaning verticals.

As you all know, Allegion is a late cycle business and starts can lead our business by a year more. We're not expecting many market tailwinds, however, we believe the visibility and stability of late cycle institutional verticals, as well as our large installed base will allow us to deliver organic growth.

Please go to slide 11 and let's walk through the outlook for 2024. We expect total and organic revenue growth in the Americas to be 1.5% to 3.5%. This is led by our nonresidential business forecast to grow low to mid-single digits organically. Please note the nonresidential business is inclusive of Access Technologies starting this year.

The residential business is expected to be flat to down slightly on an organic basis. Overall, for the Americas, we are expecting more normal seasonality with tough comps in the first quarter.

For Allegion International, we expect total revenue to be up 1.5% to 3.5% and minus 1% to up 1% on an organic basis. Inorganic growth includes the recently announced acquisition of Boss Door Controls.

While mechanical markets remain sluggish in international, I'm pleased with how the team executed to close out the year. We have a high-quality portfolio and continue to see good growth potential in our international electronics and software solutions businesses.

All in for the company, we are projecting total revenue growth of 1.5% to 3.5% with organic revenue growth of 1% to 3%. We expect to drive margin expansion consistent with our historical framework. We're confident in the execution playbook we have for 2024 given cost actions taken in '23 and a more modest inflation environment.

Based on our strong operating momentum, prior cost actions and more normalized inflation, we are projecting an adjusted EPS outlook in the range of $7 and $7.15. This represents growth of approximately 1% to 3% over the prior year period, inclusive of a $0.37 headwind from tax.

Lastly, we expect our outlook on available cash flow to be in the range of $540 million to $570 million. While we are committed to balanced and consistent capital deployment, this guidance does not include future capital deployment beyond the recent acquisition of Boss Door Controls.

Please go to slide 12. Bottom line, I am very proud of the entire Allegion team's 2023 performance and grateful for the strong distribution partners and loyal customers we have. As we look ahead to 2024, we will continue to build on the Allegion legacy and deliver new value and access.

Our team is focused on relentless execution of our strategy and balanced capital deployment against what we expect to be a stable market backdrop. We remain committed to putting our customers first and delivering our vision of enabling seamless access in a safer world.

I look forward to updating you more in the future as we work to achieve another record year for Allegion and propel our company into its next decade of growth.

With that, let's turn to Q&A.

Questions and Answers

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joe O'Dea with Wells Fargo. Please go ahead.

[Joe O'Dea, Analyst at Wells Fargo & Company]

Hi, good morning. Wanted to start on up margin in '24. It looks like year-over-year margin expansion, maybe in the 60-bps kind of range. So, it would fit within the 50 bps to 100 bps, I think medium term target, but also comes off a pretty tough comp where you just did up 160, and so I think maybe a little bit better than anticipated. Can you just talk about the drivers of that year-over-year expansion that's embedded in terms of price, productivity, inflation, sort of how much of that is driven by it, and then also how much is already kind of in there in terms of carryover price, price that you've announced, cost actions that you've taken.

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

You're correct in that if you look at margin expansion, a big driver of that is the price productivity in excess of inflation and investments. As you look at our top line guide, pricing is going to be a driver of growth. If you think about midpoint, it's going to be the biggest driver of growth. As a result, you will get margin expansion when you think about the '24 year. And in addition, when you think about the actions we've taken, biggest driver of price for us, you know, is our non-residential business in the Americas. Those pricing actions have already been announced and in the marketplace. And then from cost actions, we've taken some cost actions in the fourth quarter of '23. As a result, we're positioned nicely. You should see an acceleration of productivity in 2024. So, when you think about our margin outlook, the actions have been taken, and we're positioned well in order to achieve that outlook.

[Joe O'Dea, Analyst at Wells Fargo & Company]

That's really helpful. And then in terms of non-res and the growth outlook in Americas, can you unpack that a little bit by vertical, and talk about sort of electronics versus mechanical, but then institutional versus commercial? I think a lot of focus on sort of office and headwinds out there. But what you see on kind of new versus renovation, just trying to understand some of the moving pieces within that growth in non-res.

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, Joe, this is John. I appreciate the question. I think as we showed the institutional verticals, they're less volatile than the commercial leaning verticals, and have still been flashing some positive data on starts. And our businesses, as you know, is a little bit heavily tilted to those verticals. So, we feel good about that space. It's stable. The commercial, that's a wide basket of end users. So, it's everything from data centers to retail to office to multifamily. We put that in the commercial bucket as well. And certainly, commercial office on the new construction side is soft and has been for quite some time. We think that will continue.

Multifamily has been slowing as well, so we're not counting on a dramatic snapback there. We do see strength like everybody's been talking about in data centers. That's a highly specked application of our high-end electronic products. And I'd say on balance you add all that up, the puts and the takes, and complement that with again, if you think of Allegion as about 50:50 new construction to aftermarket exposure, the aftermarket is quite stable across all verticals, brake fix, repair and maintenance, even some tenant turnover here in commercial office. So, the aftermarket is still, I think, pretty stable and underpins the overall portfolio.

That's what leads us to come up to low to mid-single digits for growth in non-res. The only other item to mention since we do include Access Technologies in non-res for this year and going forward is big retail chains with store renovations and things like that. Also makes for a rather stable outlook on the access tech, the automatic doors business. That's kind of how we would see the whole basket.

[Joe O'Dea, Analyst at Wells Fargo & Company]

I appreciate the details. Thanks.

[Operator]

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

[Vivek Srivastava, Analyst at The Goldman Sachs Group]

Hi, this is Vivek Srivastava on for Joe. Thanks for the question. My first question is just on the cadence of organic growth. It just looks like in first quarter '23 you had a big backlog burn, so that will be a tougher comp. Is it fair to say you probably have slightly negative organic growth in first quarter and then it ramps up to maybe closer to mid-single digit level in the second half?

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

Yeah. Thanks for the question. Clearly, Q1 is going to be our most challenging comp when you think about the '24 year. We don't give quarterly guidance, but if you recall, we burned through that backlog, Q1 of '23. So, when you think about our cadence for topline, '23 was not a normal year, right? When we think about '24, I think there's more normal seasonality. So, we're a little more back half loaded than first half loaded from a top line. Don't want to get individual quarter forecastings. As you know, we don't give quarterly guidance, but just remember, little more back half than first half from a top line as a company, and that we do have that really challenging comp in the first quarter when you model year over year.

[Vivek Srivastava, Analyst at The Goldman Sachs Group]

Thanks. That's helpful. And then just a follow up on the international segment margins. It was impressive to see that in fourth quarter, despite negative organic growth, you expanded over 100 basis points of margin. Could you talk about what drove that strong margin expansion in 4th-quarter, and then just expectations in that segment for margins in 2024?

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, super pleased about our international business. When you think about the margin performance, if you look at our 10-year history, that business is breakeven when we spun out a decade ago. Now we're driving good, healthy margin expansion. It's a much healthier portfolio. When you think about the electronics and software businesses, we've been talking about the last few years, stronger businesses from a margin perspective and top line. So really doing some good work to drive productivity in the region. Pricing excellence, Tim, he took the excellence we had in the Americas and brought that to international as well. So, a lot of things favorable for International as we think about the business for '23 and more importantly, moving forward.

[Vivek Srivastava, Analyst at The Goldman Sachs Group]

Great, thanks.

[Operator]

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

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Hey, thank you. Good morning, everyone. Just coming back to just the seasonality comment. I know you don't want to get into quarters, but are you comfortable with us kind of assuming kind of the pre-COVID period, call it 2014 to 2019, is what you mean by normal seasonality as we look into Q1?

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, Jeff, if you look at halves, I like to talk about it in halves. I think that '14 to '19 is kind of a normal seasonality when you look at the half years, and we expect to be more in line with that, a little more back half weighted than first half.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Okay, great. Can you just give us a little more color on Boss? The size, the profitability, what impact, if any, it has on international margins?

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, Jeff, if you think about that business, organic, I'm sorry, inorganic growth for International, you would assume about half of that inorganic growth we've highlighted in the outlook is coming from the Boss Door acquisition, the other half coming from currency. So, you can see it's a smaller acquisition, it's not a massive size. So, from a price, knowing the top line, you have an idea that it's not a huge acquisition, but it's a nice complement to our business. We're really strong at writing specifications in North America. This is bringing that spec writing capability to a large country in Europe like the U.K.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Great. And then, hey, John, early in your opening remarks, you mentioned this new Schlage electronic product. Can you just maybe provide a little bit more color overall on what you're expecting for electronics growth in 2024? Is there a measurable impact on your investment levels to drive that, etc.

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, it's a good question, Jeff. And I think if listening to the prepared remarks in 2022, strong electronics growth, 2023, around 20% electronics growth. So, I mean over the long haul, long term, like we said at Investor Day back in May last year, think of our electronics performance as high single, low double digit growth driver for Allegion. We definitely given backlog burn and things in 2023, we'll have some tough electronics comps here and there, but demand is still strong. The secular trend still remains. This migration to electronic access control for better security and better convenience is still moving and underway. We're still investing there.

XE360 is just one that was very timely to highlight for us given the flexibility and interoperability that that brings to the market, and also just to highlight the ease of upgrade of that in the field. We're also pretty excited about that. I mean, the flexibility that's going to offer the end users is quite interesting and quite attractive for us. I think as we move through 2024, you can continue to see, I think, an emphasis from us on things like product vitality. You're going to see a steady stream of new product launches just like this. And we look forward to highlighting those for you.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Great, thank you.

[Operator]

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

[Julian Mitchell, Analyst at Barclays]

Hi, good morning. Maybe just the first question, you talked about some of the color by end market vertical earlier and maybe one I guess wanted a bit more color on was the education vertical. I think it's one of your largest. So maybe any sense of kind of scale of how much of your business is education today and how do you see the outlook there? There have been some good tailwinds depending on product types from the education stimulus three years ago. We're maybe 70% the way through that spend now. So how do you see that kind of tailing off and what does it mean for your education vertical growth rates from here?

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, I think, Julian, when you look at our America's business, we would say we're in the range around 45% of that business would be institutional, institutional, of course, would be education, also healthcare. Some government institution is in there. Education K through 12 and higher Ed have been quite stable. I think when you see the things that Allegion invests, human capital as well as product investments in terms of helping drive safer schools, it's one, it's a really important mission. We're very active in the partner alliance for Safe Schools, advocate for proper standards, make sure people are aware and educated on proper standards, and then yes, that is a substantial portion of our business. But 45% of Americas is institutional. It's a stable vertical. I think you can look around the country, you can see some big bond referendums lately. Those can lead sales by a year or two years or more in some cases in any given year. Certain portions of school budgets, of course, go to safety and security. And we want to make sure people understand proper standards and advocate for that.

And if you recall again, one of the products we highlighted at our Investor Day, these indication locks that just provide a visual indication of the lock status, critically important. We've got a great portfolio there and that's continuing to drive value into that vertical. So, I think stable would be the outlook that we would see, kind of consistent with the Dodge Starts chart that we showed you thinking that low to mid single digit growth driver.

[Julian Mitchell, Analyst at Barclays]

That's helpful. Thank you, John. And just my second one would be following up on the operating margin outlook. So, just wanted to check is the right way to think about it that you referenced that kind of 60 bps average on slide 10 from price productivity, inflation investment net. Is that really sort of essentially the margin expansion guide for 2024 simplistically? And then we assume that things like mix and volume are sort of netting off against each other. I just wanted to check that's the right assumption. And any color you could give on the corporate cost outlook for the year.

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

Yeah, so as you know, Julian, we don't guide margins per se. However, we do give top line, bottom line, other estimates so you can back into a margin rate. I think Joe kind of talked to margin rates earlier in the call as well. From a business perspective, you can see corporate being flattish for us year-over-year. With that element you can kind of back into the respective region margin rates. And the big driver to the expansion, like I mentioned earlier, is that price productivity in excess of investments and inflation.

Lastly, you asked about mix. Historically, mix is not a huge mover of margin rates for us. It can move around a little, but it's not something that drives significant changes in our margin profile for a full year.

[Julian Mitchell, Analyst at Barclays]

Understood. Thank you.

[Operator]

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

[Brett Linzey, Analyst at Mizuho]

Hey, good morning, all. Wanted to come back just to price volume. Mike, I think you said a good portion of organic growth was price generation. I guess, is it safe to assume the volumes are assumed flat to maybe negative for the year, and then any context on the non-res versus resi volume outlook for this year as well?

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

Yeah. So, as you know, Bret, we don't give segment outlooks of volume and pricing, especially on the pricing dynamic. Don't want to share that. In general, think of us as at that midpoint, this is a price driven outlook from actions that have already been announced in the marketplace, and then as markets, if markets are better than we think, we're going to be able to participate in that upside if there is market upside from a volume perspective, and then I think that answers your question. There might have been another element. If there is, just remind me.

[Brett Linzey, Analyst at Mizuho]

Yeah, no, thanks for that. They may be just shifting to the available cash flow, I think implicitly in that 90% zip code, but you did have some working capital drawdown last year. Is that the right type of conversion you're thinking about? And then, I guess, what kind of levers you back up to that kind of 95 to 100 historical range you guys have generated in the past?

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

Yeah. So, you got to look at it one of two ways. Either on an adjusted basis of net income, adjusted net income, or on the reported. On an adjusted basis, we're at that 90%, which is roughly historical, even a little better than historical. From a business, we have improved working capital in 2023, expect that to continue in '24. Really focused on the inventory front, where we're going to drive increased turns and be more efficient as we manage our inventory. But from a conversion perspective, roughly in line with historical performance.

[Brett Linzey, Analyst at Mizuho]

All right, appreciate the detail.

[Operator]

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

[Tim Wojs, Analyst at Robert W. Baird]

Hey, guys. Good morning. Maybe just first one just on investments. I know you guys don't disclose the number anymore in the 10-Q's and the 10-K's, but I was just kind of curious how you'd kind of frame go forward investments in terms of the incremental dollars you'd spend in any given year, if 2024 would be kind of assumed as kind of a normal year, or if there are some discrete investments around some of the software development and new products and things you'd want to call out.

[John Stone, President and Chief Executive Officer at Allegion]

Tim, look for us to always continually invest in our portfolio and our business to drive organic growth, especially in software and electronics. That is something we've been talking about driving growth and investing in our business for a decade and expect that to continue.

[Tim Wojs, Analyst at Robert W. Baird]

Okay, okay, so no changes there, okay. And then, Mike, you said, know, if the market was kind of better than you thought, you'd be able to participate in some upside, I guess. How would you frame your backlog, kind of heading into '24 versus maybe a normal year? And if there was upside, where do you think the most likely source of that would come from?

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

As you know, Tim, we're a made to order business predominantly. If you think about '21 backlogs in '21 early '22, they got really extended because of our inability to ship efficiently. We're now back to that normal lead time book and ship business. So, I would say it's a normal lead time for customers and our ability to serve them. And so, backlogs is not what it was two years ago when we were talking about extended backlogs and dissatisfied customers. It's about serving our customers, and I think we're doing a much better job today than a couple of years ago.

[Tim Wojs, Analyst at Robert W. Baird]

Okay. And I guess if there's any source of upside, I mean, as you look at the business, where do you think that most likely come from?

[Mike Wagnes, Senior Vice President and Chief Financial Officer at Allegion]

We talked about it as a company where our outlook is we see the stability in the institutional markets. Residential we see as soft, right. If residential is better than we think, hey, we have a great brand, that Schlage brand, will be able to participate. But for right now, we see the strongest markets being the institutional and the non res side, as we laid out in the prepared remarks.

[Tim Wojs, Analyst at Robert W. Baird]

Okay. Okay. Very good. Thanks, guys. Appreciate it.

[Operator]

The next question comes from Andrew Obin with Bank of America. Please go ahead.

[Andrew Obin, Analyst at Bank of America]

Yes, good morning. Can we just go back to International? Because I looked at my model and it's quite fascinating. If you look at 2018, just year-over-year comps, I think revenues have declined with the exception of one year very consistently, yet the margins are materially higher when they were back down, sort of underscoring what you've said. So, can you just give us a little bit more color, because I think in the 10-K, you've also highlighted that portable securities, I think Dragon volumes in '23, and I thought that was mix helpful to the mix in international. Just can you just give us a little bit more color? Is it Europe? Is it Asia? Is it Australia and New Zealand? Is it Interflex? Because under the surface, something is going really well there. Just give us a little bit color there over the long term. Thank you.

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, Andrew, really appreciate the question and the chance to highlight what we feel is just outstanding performance by the Allegion international team. I think the soft points, certainly China is still soft, particularly on the residential side of the market. That's all over the headlines, and we felt that too. Our exposure there is rather muted. I would say we took some portfolio actions over time to just raise the overall portfolio quality of our international business. Our teams are executing very well on productivity in International despite rather soft mechanical volume markets. And then our electronics business, the SimonsVoss and the Interflex team have really come together extremely well. They're driving growth, they're driving margin expansion, finding new customers and performing really well. That's one of the things that make us so excited about the Boss Door Control acquisition. And while Mike indicated it is rather small, it's strategically significant for us because it does help us get into more of that architect channel, more spec driven business in the U.K. and excited about that potential from a strategic standpoint there.

So, I think the international team has been performing very well. Portfolio quality overall is better and execution by the team has been outstanding.

[Andrew Obin, Analyst at Bank of America]

I'll take that answer. Thanks a lot. And just to follow up on North American residential, when do you think just the volumes to bottom out? Is it a '24 event or is this sort of something beyond the scope of '24 volumes, North American resi?

[John Stone, President and Chief Executive Officer at Allegion]

Probably tough to call. I've seen others eager to call a bottom. I think our outlook contemplates a flat to slightly down end market, and that's what we see today. If there are any meaningful changes in interest rate environments, that might be a spark that starts up secondary home sales. But I'd say, we're going to remain cautious on our outlook for the residential segment in Americas.

[Andrew Obin, Analyst at Bank of America]

And if I could just squeeze one more in, sorry. Pricing has been very solid, particular in a two-year stack. Would you say the pricing has been stickier than you would have expected earlier in the year? If we would go back 12 months ago, would you say the pricing is stickier than you would have expected or about where you thought it would come out? Thank you.

[John Stone, President and Chief Executive Officer at Allegion]

I would say this, Andrew, as you know, we price for value. We had significant inflation over a multiple year period. Our industry puts in price increases so it tends to lag a little some of the inflation dynamic. So, you have to look at it on a multi-year basis. But in general, we price for value as a business and as an industry, and so pricing tends to be sticky. It's in list prices, and so from a dynamic, just don't forget you have to look at the massive inflation we saw over a multiple year period, and think of the pricing in that context.

[Andrew Obin, Analyst at Bank of America]

Okay, thanks so much.

[Operator]

The next question comes from Chris Snyder with UBS. Please go ahead.

[Chris Snyder, Analyst at UBS Group]

Thank you. John, I believe in the prepared remarks you talked about how Allegion is a very late cycle business and starts can lead the company by more than 12 months. And I know, I guess America's non-res has stayed organic positive, but the growth has decelerated a lot here over the last two to three quarters. But starts only really came down maybe two quarters ago. So, when we see that deceleration or softening in the non-res America's growth know, is it fair to assume that's really just been the channel destock, and any sort of cycle pressure that could come from those starts is still on the horizon? Just any way to help think about that. Thank you.

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, it's a fair set of questions there. And I think the channel destock, that was, in our opinion, a rather unique and temporary phenomenon that just happened because of all the supply chain disruptions and lead times got extended and backlogs got extended and ordering patterns were disrupted. I think you saw that manifest itself in late 2022 through about mid '23. We feel like most of that is in the rear view for the industry. In fact, published lead times from Allegion from our couple of key large competitors are largely back in line with what you would expect, book and ship business like Mike was saying earlier. So, I think the vertical mix has been rather volatile. The institutional segment is stable, but the commercial vertical mix has been a bit volatile, right, with office being soft, multifamily was very strong. Multifamily has been softer a little bit. Data centers have been extremely robust. Warehouses have now been very weak. So, you have to kind of disaggregate to see the drivers and then reaggregate to see the total outlook that we're contemplating here for 2024, where we would still say low to mid single digit growth for the non-res part of our business.

[Chris Snyder, Analyst at UBS Group]

Appreciate that. Maybe just to follow up on America's margins up about 200 basis points this year in the absence of volume growth, really supportive. And I understand that price cost is recovering and productivity is getting better. But I guess my question is, is it getting increasingly difficult or is there a point where you guys kind of run up on a glass ceiling there in America's margins until maybe the cycle gives you enough to start driving positive volume growth at some point in the coming quarters. Thank you.

[John Stone, President and Chief Executive Officer at Allegion]

Yeah, Chris, clearly there were some catch up this year. As I mentioned earlier, the inflation was before the pricing a few questions ago. When we think about this business, though, I think it's important to understand we had some challenges operationally over the last few years as well that started to get better in '23, and for '24, we should be more efficient and more productive as well. So, it's not just the pricing element. You will see in '24 an acceleration of productivity, which should give us some tailwinds for margins. But if you think long term, clearly long term you have to have some volume growth to drive margin expansion. But for the '24 year, you will see us operate more efficiently and accelerate productivity to help drive that margin expansion.

[Operator]

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to John Stone, President and CEO for any closing remarks.

[John Stone, President and Chief Executive Officer at Allegion]

So, thanks everyone for a great Q&A. I think when you look back on 2024 a year from now, we expect you'll see an organization that delivered on margins and continued to show proof points on organic growth and capital allocation along with continuing to drive forward our strategy on seamless access.

I think you'll see we're making the right investments to reinforce our strategy and reward our shareholders through balanced and consistent capital allocation. Thank you very much. Be safe, be healthy.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Josh Pokrzywinski, Vice President of Investor Relations
• John Stone, President and Chief Executive Officer
• Mike Wagnes, Senior Vice President and Chief Financial Officer

Analysts

• Joe O'Dea, Wells Fargo & Company
• Vivek Srivastava, The Goldman Sachs Group, Inc.
• Jeffrey Sprague, Vertical Research Partners
• Julian Mitchell, Barclays PLC
• Brett Linzey, Mizuho
• Tim Wojs, Robert W. Baird
• Andrew Obin, Bank of America Co.
• Chris Snyder, UBS Group AG