Allegion PLC
NYSE:ALLE
Earnings Call Analysis
Q4-2023 Analysis
Allegion PLC
Allegion, a leader in security products and solutions, showcased resilience in its fourth-quarter and full-year 2023 earnings call by navigating through a mix of market conditions. The management team, led by President and CEO John Stone and CFO Mike Wagnes, indicated the company's commitment to strategic execution and value delivery despite a challenging macroeconomic landscape.
The company's Americas segment achieved a 3.7% increase in both reported and organic revenue, reaching $704.6 million for the fourth quarter. This commendable performance was primarily driven by favorable pricing countering lower volumes. A significant accomplishment was the double-digit organic growth seen in the nonresidential business for the year, despite soft residential markets due to rising interest rates. Of special note is the consistent strength in the Americas electronics sector, which maintained mid-single-digit growth in a challenging quarter.
Efficiency improvements and strategic pricing contributed to an impressive 10.8% rise in adjusted operating income for the Americas, translating to $188.4 million. Additionally, adjusted operating and EBITDA margins showed substantial growth in the quarter, increasing by 170 and 190 basis points, respectively. The team's focused execution enabled margin expansion throughout 2023, culminating in a powerful end to the year.
Allegion's International segment also performed well, overcoming global economic challenges. Although organic revenue declined marginally by 1.3%, reported revenue climbed by 5.9% to $192.8 million, thanks to successful acquisitions like the Plano SaaS business and favorable currency factors. Margin improvement initiatives led to nearly 13% growth in adjusted operating income and higher margins, illustrating the segment's robustness and enhanced resilience.
The company's cash flow capabilities were on full display as year-to-date available cash flow surged almost $121 million due to higher earnings and working capital efficiencies. Notably, Allegion improved its net debt to adjusted EBITDA ratio to 1.9x, a return to customary leverage levels post the Access Technologies acquisition, underscoring a well-managed capital deployment while protecting its investment-grade credit profile.
Looking into 2024, Allegion anticipates total and organic revenue growths in the Americas to be between 1.5% to 3.5%, driven by a stable nonresidential business and expected flat to mildly declining residential markets. Internationally, the revenue is projected to grow 1.5% to 3.5% and remain between -1% to 1% organically. Overall, the company forecasts a total revenue growth of 1.5% to 3.5% with organic revenue growth of 1% to 3%. Allegion also aims to uphold margin expansion with an adjusted EPS outlook in the range of $7 and $7.15, which reflects a growth of approximately 1% to 3% over the previous year.
President and CEO John Stone conveyed his pride in Allegion's 2023 performance and the team's resolve for 2024. The company remains customer-centric, intent on delivering seamless access and safety. Allegion's strategy is surefooted, with a balanced capital deployment framework, ready to embrace a generally stable market and aspire for another landmark year.
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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.
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 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.
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 had 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 and the year. After celebrating our tenth anniversary as a stand-alone 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 2x 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 delevered 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 solutions 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 look for by multifamily and like commercial properties at attractive price points. It leaves with open architecture supports the latest credential 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 tenth 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 solutions 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 fourth 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.
Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #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 Americas nonresidential and Access Technologies businesses, offset by declines in residential and international. Adjusted operating margin and adjusted EBITDA margin increased by 130 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 to $0.01 or approximately 0.6% 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 #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 quarter, bringing the total reported growth of 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 #7. Our Americas 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 Americas nonresidential business was up mid-single digits against the prior year comp that grew in the mid-20s percent.
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. Americas electronics growth remained strong on a multiyear basis with mid-single-digit growth in the quarter on top of the nearly 50% comparison in Q4 2022. Our Americas 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 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 #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 1.9x as we successfully delevered 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.
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 or 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 remained 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 to 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.
[Operator Instructions] The first question comes from Joe O'Dea with Wells Fargo.
Wanted to start on op 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 to 100 bps, I think medium-term target, but also comes off a pretty tough comp where you just did 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 versus how much you still have to go get?
Yes. Thanks for the question, Joe. 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, the biggest driver of price for us is our nonresidential 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.
That's really helpful. And then in terms of nonres and the growth outlook in Americas, can you unpack that a little bit by vertical, then 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.
Yes, Joe. This is John. I appreciate the question. I think as we showed, the institutional verticals, they're less volatile than the commercial leading verticals and have still been flashing some positive data on starts. So we -- and our businesses, as you know, is a little bit heavily tilted to those vertical. 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 snap back there. We do see strength like everybody has been talking about in data centers. That's a highly spec 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 has about 50-50 new construction to aftermarket exposure. The aftermarket is quite stable across all verticals, break-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 nonres. The only other item to mention since we do include Access Technologies and nonres 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.
The next question comes from Joe Ritchie with Goldman Sachs.
This is Vivek Srivastava on for Joe. 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 a slightly negative organic growth in first quarter and then it ramps up to maybe closer to mid-single-digit level in the second half?
Yes. 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 top line, '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 forecasting. As you know, we don't give quarterly guidance. But just remember, little more back half than first half from the top line as a company and that we do have that really challenging comp in the first quarter when you model year-over-year.
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 fourth quarter and then just expectations in that segment for margins in 2024?
Yes, 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 that electronics and software businesses, we've been talking about the last few years, strong -- 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.
The next question comes from Jeff Sprague with Vertical Research Partners.
Just coming back to just the seasonality comment. I know you don't comment 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?
Yes. Jeff, if you look at halves, I'd 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.
Okay. Great. Could you just give us a little more color on Boss, the size, the profitability, what impact, if any, it has on international margins?
Yes. 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 could see it's a pretty -- it's a smaller acquisition. It's not a massive size.
So from a price now on 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.
Great. And then, John, earlier 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, et cetera?
Yes, it's a good question, Jeff. And I think if you listen 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've 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 you -- 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.
The next question comes from Julian Mitchell with Barclays.
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 3 years ago or maybe 70% of 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?
Yes. I think, Julian, when you look at our Americas business, we would say we're in the range around 45% of that business would be institutional. Institutional, of course, would be education, also health care, some government institution is in there. Education, K-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 2 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, the 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. I think in that low to mid-single-digit growth driver.
That's helpful. And just my second one would be following up on the operating margin outlook. So I 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 the -- essentially the margin expansion guide for 2024 simplistically? And then we assume that things like mix and volume sort of netting off against each other? I just wanted to check that that's the right assumption. And any color you could give on the corporate cost outlook for the year.
Yes. 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 when 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. They can move around a little but it's not something that drives significant changes in our margin profile for a full year.
The next question comes from Brett Linzey with Mizuho.
I 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?
Yes. So as you know, Brett, we don't give subsegment 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.
Yes. And then maybe just shifting to the available cash flow. I think implicitly in that 90% ZIP code, but you did have some working capital draw down last year. Is that the right type of conversion you're thinking about? And then I guess what kind of leverage you back up to that kind of 95% to 100% historical range you guys have generated in the past?
Yes. So you got to look at it 1 or 2 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.
The next question comes from Tim Wojs with Baird.
Maybe just first one, just on investments. I know you guys don't disclose the number anymore in the 10-Qs and the 10-Ks. But I was just kind of curious how you 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 a kind of a normal year or if there are some discrete investments around some of the software development and new products and things you want to call out?
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.
Okay. Okay. So no changes there. Okay. And then, Mike, you said that if the market was kind of better than you thought you'd be able to participate in some upside. But 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?
As you know, Tim, we're a made-to-order business predominantly. We -- 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 backlog is not what it was 2 years ago when we were talking about extended backlogs and dissatisfied customers, right? It's about serving our customers, and I think we're doing a much better job today than a couple of years ago.
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?
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, we'll be able to participate. But for right now, we see the strongest markets being the institutional and the nonres side, as we laid out in the prepared remarks.
The next question comes from Andrew Obin with Bank of America.
Can we just go back to International because I looked at my model, and it's quite fascinating, right? If you look at 2018, just year-over-year comps I think revenues have declined with the exception of 1 year very, very consistently, yet the margins are materially higher when they were back then 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, dragging volumes in '23, and I thought that was mix, helpful to the mix in international. 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, really well there. Just give us a little bit of color there over the long term.
Yes. 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 absence 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 then performing really, really well.
As 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 on portfolio, quality overall is better and execution by the team has been outstanding.
I'll take that answer. 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 in North American resi?
So 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.
If I could just squeeze one more in, sorry. Pricing has been very solid, particularly on a 2-year stack. Would you say that 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?
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 dynamics. So you have to look at it on a multiyear 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.
The next question comes from Chris Snyder with UBS.
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. So when -- and I know, I guess, Americas nonres has stayed organic positive, but the growth has decelerated a lot here over the last 2 to 3 quarters. But starts only really came down maybe 2 quarters ago. So when we see that deceleration or softening in the non-res Americas growth rate, is it fair to assume that 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.
Yes. It's a fair set of questions there. 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 the 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 rearview 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. And 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.
I appreciate that. And maybe just a follow-up on Americas margins, up about 200 basis points this year in the absence of volume growth. So it's 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 Americas margins until maybe the cycle gives you enough to start driving positive volume growth at some point in the coming quarters?
Yes, Chris. Clearly, there was 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.
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.
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 continue 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.