Julian Mitchell: Understood. Thank you.
Operator: The next question comes from Brett Linzey with Mizuho. Please go ahead.
Brett Linzey: Hey. Good morning, all.
John Stone: Hi, Brett.
Mike Wagnes: Hi, Brett.
Brett Linzey: 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?
Mike Wagnes: Yeah. 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.
Brett Linzey: Yeah. No. Thanks for that. 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?
Mike Wagnes: Yeah. So you got to look at it one or 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: All right. Appreciate the detail.
Operator: The next question comes from Tim Wojs with Baird. Please go ahead.
Tim Wojs: Hi, guys. Good morning. Maybe just, first one, just on investments. I know you guys don’t disclose the number anymore in the 10-Qs and the 10-K. 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?
Mike Wagnes: 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: 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, 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: 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 two 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.
Tim Wojs: 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: 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 SLA (ph) brand, we’ll 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: Okay. Very good. Thanks, guys. Appreciate it.
Operator: The next question comes from Andrew Obin with Bank of America. Please go ahead.
Andrew Obin: Hi, guys. Good morning.
Mike Wagnes: Hi, Andrew.
Andrew Obin: 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 one 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. 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, really well there. Just give us a little bit of color there over the long term. Thank you.
John Stone: 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 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.
Andrew Obin: 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 in North American resi?
John Stone: 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.
Andrew Obin: And if I could just squeeze one more in, sorry. Pricing has been very solid, particularly on a two 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. Thank you.
John Stone: 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.
Andrew Obin: Okay. Thanks so much.
John Stone: Thanks, Andrew.
Operator: The next question comes from Chris Snyder with UBS. Please go ahead.
Chris Snyder: 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. So when — and I know, I guess, Americas non-res has stated 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 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. Thank you.
John Stone: 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 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.
Chris Snyder: 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? Thank you.
