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Edited Transcript of ASSA.ST earnings conference call or presentation 17-Jul-19 7:30am GMT

Q2 2019 Assa Abloy AB Earnings Call

Stockholm Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Assa Abloy AB earnings conference call or presentation Wednesday, July 17, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Björn Tibell

ASSA ABLOY AB (publ) - Head of IR

* Erik Pieder

ASSA ABLOY AB (publ) - Executive VP & CFO

* Nico Delvaux

ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division

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Conference Call Participants

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* Alasdair Leslie

Societe Generale Cross Asset Research - Equity Analyst

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Gael de-Bray

Deutsche Bank AG, Research Division - Head of European Capital Goods Research

* Guillermo Peigneux-Lojo

UBS Investment Bank, Research Division - Executive Director and Industrials Analyst

* Lars Wauvert Brorson

Barclays Bank PLC, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Matthew Spurr

Exane BNP Paribas, Research Division - Research Analyst

* Mattias Holmberg

DNB Markets, Research Division - Analyst

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Presentation

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [1]

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Good morning, everyone, and welcome to ASSA ABLOY's half year report presentation. My name is Björn Tibell. I'm heading Investor Relations. And joining me here is our CEO, Nico Delvaux; and our CFO, Erik Pieder.

We will stick to our normal setup today, starting the conference with a short presentation of the report before we open up for your questions and then finally round up around 10:30 local time.

And with that, I would like to hand over to you, Nico, to start the presentation.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [2]

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Thank you. Thank you, Björn. Also good morning from my side. Welcome to our Q2 report, report where we can report good figures with good organic growth in the quarter of 3%. That's a good result definitely if we take into account that we had 2 working days less in the quarter as compared to the same quarter last year.

Strong growth in Americas and in Global Technologies. Good organic growth complemented by an accelerated strong growth through acquisitions of 4%. Also in this quarter, the electromechanical products were the highlight of the quarter, up 20% including currency, up 16% excluding currency.

A strong EBIT growth of 13%. We have a good EBIT margin of 15.9%, 20 base point up compared to the same quarter last year and then a very strong operating cash flow, up 27%.

So sales SEK 23.5 billion, 11% up, 3% organic, 4% acquisition and also 4% positive currency effect. An EBITDA margin of 16.4%, 30 base point up and then EBIT margin, like I said, 15.9%, 20 base points up. An EBIT of SEK 3.7 billion, 13% up, and earnings per share 25% up.

If we then look a little bit in the sales in the different continents, strong North America driven by U.S. with an organic growth of 6%. But on the commercial side, we still see strong market conditions, where, as you know on the residential side, definitely new build we see a decline.

Minus 8% in South America, where market conditions definitely now in 2 bigger markets are not favorable, 2 biggest markets being Mexico and Brazil, where we are perhaps a bit more positive when it comes to Colombia and Chile.

Good performance in Europe, plus 2% organic growth. In Europe, it's a little bit a mixed picture among the different countries. Many countries still with strong market conditions, some -- with some weaker market conditions like, for instance, the U.K., where we have seen market conditions further declining, where there is even a more wait-and-see attitude today than 3 months ago.

Africa, minus 10%, looks like a low figure, but we had a tough comparison because we got a big passport order for HID last year. So if you exclude for that, the picture looks much better.

Asia, plus 2%. We have a good -- China, where we also had positive organic growth for external sales. And then a plus 2% in Oceania, Australia/New Zealand, I'd say a little bit, despite market condition because definitely also the residential business in Australia is down that we were able to compensate that with some good project orders on the commercial side. So overall, like we mentioned, organic growth plus 3%.

If we then look at some market highlights, our investments in Global Solutions continued, I'd say, to show progress. Just one example, we got a nice order in Melbourne for Metro Train Line for our Cliq -- ABLOY Cliq solution.

We also reached an agreement with Marriott for maid destress solution, and that perhaps needs a little bit of explanation. There's now in different states in U.S. where it became now an obligation that all the servants that go into the rooms in the hotels, they need kind of a panic device. So if they are in problems, that they can ask for help. And we have worked out a solution around our BlueVision, our positioning system, so that you have, from our HID card, a kind of panic button. When you push that button, then the system will know in which room you are and then security can be sent out to help you. And this is becoming, like I said, legislation in several markets in -- or several states in the U.S. We see that also being rolled out more on a global scale.

Good progress on the service business side. We had mid-single-digit growth for our service business in Entrance Systems. I think a good figure if we take also here into account that we had 2 working days less and definitely for service business, the working days count. And then we continue to be recognized as a leading innovator, and we show here a couple of examples of awards that we won this quarter.

Another quarter with positive organic growth, now 25 consecutive quarters with positive organic growth. I believe that's a very good achievement. And in this quarter, like I said, also complemented with accelerated growth through acquisitions.

Operating margins also bending the trend and getting back into that 16% to 17% bandwidth.

So if you grow top line and we improve operating margin, of course, operating profit accelerates, 13% up compared to the same quarter last year, 69% up in the last 5 years.

On the acquisitions, we have a full active pipeline. We did 5 acquisitions so far this year. And as you know, we have ambition to close the agta record acquisition somewhere towards the end of the year. And we also announced that we will buy the Citizen ID business from De La Rue. That is a business of around SEK 460 million and 200 employees, and they are a leading passport manufacturer in the U.K., very complementary to our Citizen ID business. We expect that acquisition to close in Q3. Will be neutral from an EPS point of view when we start, but we had the ambition to bring profit levels here double-digit within the first year.

Then I go in detail a little bit on the different divisions. And starting with EMEA, a good quarter for EMEA with an organic sales growth of 3%. Strong growth in Middle East, Africa, Benelux and Finland but a negative growth inside Europe and the U.K. Like I said, a very mixed picture in EMEA, where market conditions in France remained on a low level. We don't see them further going down. We don't see them improving, stable. But despite that, we could show some growth in France. I think, year-to-date, we are more or less flat in France. And definitely, U.K., where we saw market conditions deteriorating and more wait-and-see attitude around the Brexit.

And we also have seen some slowdown in -- over the last couple of months in Scandinavia, which is, of course, for us a very important market as well top line as bottom line-wise, so we will follow up that situation from very close and take measures if needed.

On the other hand, we still see a lot of strong markets in Europe, markets like Germany, East Europe, domestic market in Spain, Benelux and so on. So it's a really mixed picture.

Operating margin 16% versus 15.9% last year. Good organic growth leverage of 20 base points, really good operational execution. And then negative FX of 40 base points as, of course, the SEK-euro effect in the first place and then accretive acquisitions. So overall, a good quarter for EMEA.

Americas, also a very strong quarter with organic sales growth up 6%. I would say, in the U.S., strong performance overall except for the Perimeter Security business, where especially at the beginning of the quarter, we still suffered a little bit from bad weather conditions but overall very good U.S., good Canada and then a low Latin America, where like I mentioned earlier, we see market conditions going down in Mexico and in Brazil, our 2 biggest markets, but where we are perhaps a little bit more optimistic when it comes to markets like Colombia and Chile.

Very strong operating margin of 20.5% versus 20.1% last year. Good volume leverage of 20 base points, and there we really now -- we were capable of compensating through price increases and operational efficiency gains to compensate for the higher material prices. You remember from previous calls that were saying that we were slowly bridging the gap. That has now happened in Q2. So very good performance for Americas.

Also good performance for Asia Pacific, an organic sales growth of 3%. Very strong growth in India and in Pacific because of Australia. Also a better China, like I said with positive external growth, and then a negative growth in South Korea and in Japan. South Korea, where we really see residential market going down.

Operating margin of 9.3% versus 8.9% last year. Good strong leverage, 60 base points, thanks to Pacific but also thanks to better profit in China.

And you should not read too much yet in that result of China, like I also mentioned earlier quarters, Asia-Pacific because of China will continue to be a little bit bumpy for the coming quarters, so we will have good quarters like this quarter then mixed with not so good quarters like, for instance, Q1. It's still too early to really talk about a trend, but of course, we enjoy the momentum.

Global Technologies. Think good organic sales growth of 5% because they also had a more difficult comparison because they got a big FIFA World Cup order last year in the quarter, so the comparison was a little bit more challenging.

On the HID side, a bit mixed picture with very strong growth for Secure Issuance and Physical Access and then some negative parts for some other business areas. Business areas are more project related. And, of course, if the projects come or don't come in a quarter, then you have a strong growth or we have a negative growth in this quarter. Some of the projects were not there but no drama. We are confident that they will come. Good growth also for Global Solutions in general.

An operating margin of 18.4% versus 19.6% last year, where we had a negative volume leverage of 80 base points, and that's mainly because of investments in R&D as well on the HID side as on the Global Solutions sides, where we have invested a lot in software and in cloud solutions, and that affected the margin. And then also dilution from acquisitions, 70 base points. Remember that it was much higher in Q1. We said that, that would improve, so we kept our promise there. So overall, I think also good performance for Global Technologies.

And then last but not least, Entrance Systems. An organic sales growth of 1%, clearly a little bit of a disappointment for us. Although Entrance Systems is definitely the division that is mostly affected by the 2 working days less, we had hoped to have a little bit more.

Strong growth in Pedestrian Doors and in Residential Doors in Europe but negative growth in High Performance Doors. Positive thing here in Entrance Systems, like I mentioned earlier, is definitely the accelerated growth for service, and that also helped us on maintaining our operating margin and even improving 13.9% versus 13.8% last year. We have a stable volume leverage, which I think is a good result with only 1% organic sales.

And with that, I then give the word to Eric for some more details on the financial side.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [3]

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Thank you, Nico. And also from my side good morning, everybody. As you saw before, we had 11% sales growth in the second quarter, 3% of that comes from the organic growth. And as mentioned by Nico, it's mainly coming from Global Technologies and Americas.

The acquired growth was -- net acquired growth was 4%. And as a guidance then, let's say, for the Q3, we expected to be somewhere between 3% and 4%. The currency was 4% mainly due to the weaker Swedish SEK, and there as guidance, we would say, also 3% for the coming quarter.

The operating profit was up with 13%. This is, of course, last year is adjusted then for the noncomparable items that we have from China. And you also see that the margin is up 30 base points when it's related to EBITDA, 20 base point when it comes to EBIT.

Income before taxes is up 27%, and the net income as well as the earnings per share is up with 25% and earnings per share ended at SEK 2.31.

And I mentioned last time that one of the highlights in the report was the operating cash flow. We continue to have a very strong operating cash flow, almost a little bit more than SEK 3.6 billion, up 27%.

The return on capital employed increased with 2 points, partially -- main reason is, of course, the big write-down that we did last year of goodwill in China but also the improved earnings had a positive effect on the return on capital employed.

If we then go into the bridge analysis, I mentioned before the top line with the 3% organic, the 4% currency and the 4% acquisition. If we then dissect the organic part, we say that 2% is coming from price and 1% is coming from volume. As you drop through, you can see that we have an improvement of 20 base points, main contributor to that is Americas as well as EMEA.

The currency helped us with 10 base points. That's -- the top line is coming from the weaker SEK. The bottom line is coming from the stronger dollar. And if we look on the acquisition part, it's down with 10 base points. Main reason for that is the integration cost that we have in Spence Doors. As a guidance also if you look for Q3, we would say that the currency would impact slightly negative as well as the acquisition.

If we then dissect even more and come down to the cost breakdown, you can see that now for the first time in a couple of quarters, we actually have a positive impact from the direct interior. That comes from, as Nico mentioned before, the price increases that we have been able to do to compensate for the material prices as well as we see that the material prices are going down.

We had a very good performance when it comes to the conversion cost. It's up with 20 base points. Most of that is coming from the operational efficiencies, and we had a very good performance out of the MFP program with SEK 180 million for the quarter.

The SG&A had a negative impact of 30 base points. That is -- as also was mentioned before by Nico, is mainly due to the investments in R&D coming from Global Technologies.

Operating cash flow, as I said, was one of the highlights, SEK 3.6 billion, mainly coming from a strong profit performance. But also, I would say that we see improvements also in our net working capital mainly coming from the inventory. And you can see that the flow -- I mean that the cash conversion is 96% versus EBT, which is -- continues very, very strong.

Then go to the gearing and the net debt. The net debt versus equity went up with 5 points to 70% in -- and it went up with SEK 6.3 million (sic) [SEK 6.3 billion]. Main part of that is related, of course, to the change in IFRS 16, which had an impact of SEK 3.7 billion. We also have currency, which has an impact of about SEK 1.2 billion, and then the rest is coming from higher dividend, taxes and then also acquisitions.

The net debt versus EBITDA is 2.2%, which sort of my conclusion is that we still have a very strong financial position, and we can continue our acquisition strategy, including, of course, the large acquisition that's coming towards the end of the year agta record. Last but not least, the earnings per share went up 19% and ended, as I started with to say, at SEK 2.31.

And with that, I give back to Nico.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [4]

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Thanks, Eric. So just as a summary, a good Q2 with good organic sales growth of 3% mainly thanks to Americas and Global Technologies. Also this quarter, the electromechanical products were the highlight, 20% up including currency, 16% up excluding currency. Strong EBIT growth of 13%. We have an improved EBIT margin and then very strong operating cash flow, up 27%.

And with that, I give the word back to Björn, and we will open for Q&A.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [5]

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Yes. Thank you, Nico. (Operator Instructions) But with that, I think we're ready to start and open up for the questions. So please go ahead, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matthew Spurr from Exane BNP Paribas.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [2]

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I had a question around resi growth, smart locks growth in Americas. I think you flagged last quarter quite clearly that it was going to slow down, and it doesn't look like it has. Take the commentary today, you said very strong growth in U.S. Smart Resi. Actually, most of the Americas commentary is pretty similar to last quarter. Do you want to give us some extra color on where you see smart locks going because obviously, it's had a bit of an impact on the growth in Americas over the last few quarters.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [3]

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No. We can confirm indeed that the growth was slower this quarter compared to previous quarters. And as we explained, one of the reason was also the Google Nest business, where for the first time we then compare with an order a year ago, where in previous quarters, it was always compared with 0 the year before, so therefore percent-wise, comparison becomes more difficult. But also in general, as we have seen, good, strong high double-digit growth over the last 4, 5 quarters, the comparison, obviously, always becomes more difficult.

But you've seen that electromechanical products in general went up 20%. You can say that the smart residential products for -- went up even higher. So it's above 20%, but it's lower than previous quarters. We also believe that, that will continue now on a lower rate going forward because the arguments I mentioned earlier, of course, also remain valid for the coming quarters. You have 2 sides. You have 1 more difficult comparison. On the other side, you see continued increased adaptation rate of people that are willing to move from mechanical to electromechanical and digital.

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Operator [4]

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And the next question comes from the line of Alasdair Leslie from Societe Generale.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [5]

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I was just wondering if you could call out the pricing impact for the Americas. And then also, you've lapped -- saw 2% price increases now at the group level. I think that started in Q2 '18 as far as I can see. Maybe some of that's rounding, so I was just wondering if you can help us with the comp, say, on a more granular level, whether, whether you expect the top line impact from pricing to start to fade in Q3? Or do you think that positive momentum can kind of be maintained? And just as a quick add-on, are you planning further price increases in H2? Or do you pause here?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [6]

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Indeed, we announced a 2% price increase for the quarter similar as Q1. Of course, we started with an accelerated price increase some 12, 18 months ago, when material prices started to inflate in a significant way. So going forward, now into Q2, we then start to compare with quarters where we already had a significant price increase. So it's realistic to expect that, that price effect will go down into the second half of the year.

If you see historically, we have always been around that 1% price increase, a bit linked to inflation. Like I said earlier, we are in a market where you can pass through inflation into the market. There is pricing power in the market. And another aspect, I think it's also good news to see that inflation is slowly getting up again in the world in general, I would say. We like inflation because inflation then gives us the possibility to increase prices. But so -- yes, in the second half, you should expect that 2% to go a little bit down.

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Operator [7]

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And the next question comes from the line of Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [8]

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My question is on the profitability development. You earlier state an ambition to get back into the range, maybe a bit unclear exactly when, but I think you mentioned at some point you would like to get back into the range for this year to 16% or more. How do you see that now given where we stand after the first half of the year? And what will be the drivers in the second half to see basically an increased margin improvement compared to what we have seen in the first half in case you still have the ambition to get to the 16%?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [9]

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I can reconfirm that ambition that we told earlier also in the Q1 call. So we definitely had an ambition to come back to that 16% to 17% bandwidth. We saw an improvement now in Q2. As you remember, last year, we had an important dilution from material inflation, 50 base points over the full year, 20 base points in Q4. And we said in Q1 that was a little bit lower. And now for the first time, we have seen that, that became a positive.

We obviously want to keep that momentum going now into the second half of the year, and that should give us some tailwind. And it depends a little bit on how fast we will continue to grow our smart residential door locks because we know that, that is dilutive from a margin perspective.

And then perhaps also the unknown, I would say, is China. It depends a little bit how fast we will grow China because, if we grow tomorrow China in a faster way, and even if we do a good job on EBIT improvement in China, it will, of course, remain dilutive. But overall, I think we have that ambition, like I mentioned, to get back to that 16%. And we are also confident that we are going in the right direction that with, of course, market conditions, material indexes and tariffs as they are today in a stable situation.

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Operator [10]

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And the next question comes from the line of Mattias Holmberg from DNB.

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Mattias Holmberg, DNB Markets, Research Division - Analyst [11]

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(technical difficulty)

have a positive effect of some SEK 180 million or so from the manufacturing footprint program. Could you give us some help on what we can expect here in the second half of the year? Is this a reasonable run rate? Or will that increase further?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [12]

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I think we are happy with the progress we made with MFP in general and with MFP 7, in particular. We have said when we announced the program that we had a payback on that program of around 3 years. We were able to bring some of those efficiency gains forward. So I would say, we have seen a better-than-expected first half of the year. So we should definitely not expect that to continue in the second half of the year because the total savings are what they are. It's just more a timing issue that we were able to bring some of it more forward.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [13]

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(Operator Instructions)

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Operator [14]

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And the next question comes from the line of Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [15]

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Nico, I wanted to come back to your outlook statement where you are mentioning increasing uncertainties, deteriorating leading indicators. Can you maybe provide a bit more color or qualify where you see most of those increased uncertainties, which markets are we talking about or which part of your business that you're kind of growing increasingly cautious, I would say?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [16]

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I can try to do that a little bit geographically. We will start in North America. We still see strong dynamics on the commercial side. We don't see any slowdown there. And as for us, obviously, for the Americas, the most important market. We clearly see a slowdown on the residential side for new builds. I would say that it is less important for Americas division because they are less exposed to residential new build. It's a little bit more challenge for Entrance Systems because they have a residential garage door business in North America, and we follow that, of course.

If we then go to South America or Latin America, clearly, we don't see good market dynamics in the 2 main markets, Mexico and Brazil, also because of the changes in political situation and so on. On -- but on the contrary, we are a bit more optimistic on Chile, Colombia and definitely also on Peru. So I would say, South America is a little bit a mixed picture.

If we then go to Europe, also they are a mixed picture. Some markets continue to be very strong, markets like Germany or [dock] in general, East Europe, Spain domestic market, like I mentioned, Benelux. Then we see France, which is, I would say, stabilized on a low level. We don't see France further going down, but it's not a market to be very excited about neither.

And then new U.K. Definitely, we see U.K. market conditions further declining, where people are really even more wait-and-see today than 3 months ago.

And then, like I mentioned, Scandinavia, where we have seen the last couple of months a little bit of a slowdown, so we will follow that from very close and see if it's just a 1- or 2-month thing, or if it is more a systematic thing because Scandinavia obviously is an important market for us.

Then if you go to Asia, the bigger market Korea, still okay on the commercial side, definitely on the residential side down. And the same is true for Australia, still looking on the commercial side, down on the residential side. And then, of course, the bigger emerging market China and India. The market is there. It's just up to us to make sure that we grasp that market.

So I'm not very pessimistic, but I'm perhaps a little bit more cautious than I was 3 months ago because of some new developments in the market.

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Operator [17]

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And the next question comes from the line of Andre Kukhnin from Credit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [18]

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I just wanted to follow up first on Elmech growth. Did you say that, within the 20% overall growth, resi was faster or slower?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [19]

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Yes. It was still faster. Yes. It was faster, but it was slower than previous quarters, percent-wise.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [20]

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Very clear. So if I may ask -- main question was for me about this kind of growth versus margin dynamics for Elmech. We have had the margin improvement in Americas and Asia Pac, and that was mainly expected to happen with slowdown in Elmech. Now that's come through without really that much of a slowdown in Elmech. Is this just simply other components on the bridge like net price and savings? Or is there a positive margin dynamic within Elmech as well?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [21]

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It's a bit different Americas versus APAC. It's true that smart residential continues to be dilutive. And we talk about percentages. But in this aspect, of course, you should look at absolute business that we do with Smart Residential, and that, obviously, is still up and therefore still dilutive. I think in Americas, it's thanks to a very good job that we have done on the operational side by increasing prices and compensating for material inflation and also by realizing different operational efficiencies. So that's the main reason for the better EBIT in the Americas.

If you go to APAC, it's thanks probably to a mix because we had good growth in Australia and Australia with better margins. But we also had a good quarter when it comes to EBIT in China. You know that we say that we make very low single-digit margins in China in general. This quarter, this was a little bit better, and that is mainly because we start now with our new strategy with our new management team in place. We're also a bit more selective on which orders we take, and we look also better at do those orders really contribute and create value. And that, of course, is something where we have an ambition to continue to improve that margin in China over the coming quarter and over the coming years.

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Operator [22]

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And the next question comes from the line of Daniela Costa from Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [23]

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I just have one small question left. I want to ask you about the ROCE in Europe and the drop, whether that's just simply mechanical? I think you were doing some reallocation of sales between divisions or otherwise. What is the reason for it?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [24]

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The main reason in Europe is, of course, that we did several acquisitions at the end of last year. Of course, when you do the acquisitions, the capital comes in immediately, and you see the sales also only coming over the next 12 months. I would say that's the main reason for EMEA.

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [25]

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They also have a bit of an impact of this -- of the IFRS 16 as well. They have a bigger impact on that than some of the other ones.

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Operator [26]

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And the next question comes from the line of Matthew Spurr from Exane BNP.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [27]

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It was a bit of a niche question actually on the De La Rue acquisition. Just because -- if you read the newspapers here in the U.K., I thought amongst all the Brexit noise that we get that De La Rue had lost the U.K. passport business. And if I just have a quick look now, it looks like it's a 10-year contract, GBP 400 million, so GBP 40 million a year, which -- especially all the sales that you're saying you're acquiring. So I'm not quite sure what you're acquiring with that business. Could you just give us a little bit more color there?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [28]

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Yes. I would say that with De La Rue, we buy in the first place customers and customer relations and contracts with customers, a relation that we then can use to further upsell and further increase our customer share as well on, let's call it, the classical hardware sides, the paper side as well as on the digital side with e-passport opportunities and so on. So it's in the first place a channel to a market and then also good operation capabilities.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [29]

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Okay. That sales you've disclosed, is that -- will that drop to 0 when the current contract runs out and you have to grow from there.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [30]

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No. That's, of course, not the case. I think it's just one of the projects and one of the businesses they have.

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Operator [31]

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And we have a follow-up question from the line of Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [32]

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I was hoping we could come back to the performance in Entrance System because it seems to be kind of consistently under-growing industrial production, operating leverage very limited. I'm just trying to understand what is the outlook from here, especially if we see some deacceleration in U.S. IP and -- especially for a business that was supposed to be one of the growth drivers of ASSA and see margin expansion. It doesn't really seem to kind of materialize. So what do we need here to kind of, I would say, reverse the trend?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [33]

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Why do we have the low organic growth on the first place? There's a couple of items. Like I mentioned, residential new build in U.S. and our garage door business in U.S., which is affected negatively by market conditions. We also have seen a slowdown on everything what is logistics, distribution centers, which is important for High Performance Doors and our loading docks. I think -- I would say that's the 2 main negative drivers.

On the positive side, of course, we have the service business, where we see clear acceleration of the service business. I forgot to one -- to mention one other negative item is on the High Performance Doors, where the important part of that business also goes to Automotive in Europe. And -- okay, we all know what situation is with the Automotive business in general.

We are addressing that by accelerating also new product development, new product development that will give us a possibility to take more of the available cake. That's what we are doing. We also are investing in different markets, where we feel that there is still better penetration possibilities and therefore more business for us to grasp. But it's true that on the organic side, it has been slower for several quarters, and we have compensated, of course, through acquisitions, where the agta record acquisition now will be an important one. But I think it's good to see that, despite the lower organic growth, we managed to keep bottom line margin under control.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [34]

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Nico, can I ask maybe, is it -- are you able to kind of quantify how much organic growth that business actually needs to properly start seeing some momentum on the margin? I mean -- because 1% apparently is kind of not enough, so are we talking 3%, minimum organic growth 5%? I mean, what's the threshold here to kind of see momentum on the business?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [35]

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We're in stable condition. So if we are not in contingency mode, that 3% is a good ballpark figure, like the 3% is a good ballpark figure in general for the group. We've always said that we need around that 2%, 3% organic growth to compensate for general inflation. And in that aspect, of course, if you look at this quarter, we have only 1% organic growth. Keeping neutral operating leverage is, I think, a very good performance. In order that to happen, of course, the stars have to be aligned a little bit, which was the case in Q2. So we should not expect neutral leverage all the time if only 1% organic growth. It has to be a little bit more.

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Operator [36]

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And the next question comes from the line of Guillermo Peigneux from UBS.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [37]

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Guillermo Peigneux from UBS. My question is on the savings. You mentioned SEK 200 million savings. I wanted to ask what should you be achieving in terms of run rate towards the year-end and probably -- and expectations on 2020? And adjacent to that, I know that you mentioned that the impact on the pricing should fade afterwards the second half, which is fair, but I'm more interested in the relationship between pricing and raw materials. When is the relationship between those 2 stopping to improve, so to say? I guess, question is at what point your relationship between pricing and raw materials become neutral at this point?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [38]

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I will start with the second part. Like we mentioned in the call, we have seen now positive pricing versus material inflation for the first time since many quarters now in Q2. And -- okay, we are confident giving indexes where they are today and giving import tariffs where they are today that we should be able to further improve even that positive in the second half of the year, and that should give us a good tailwind.

When it comes to the MFP program, like I mentioned earlier, we have seen some of the savings coming earlier. We mentioned at the beginning, when we launched the MFP 7 program, about how much money we talk about, what payback we talk in the 3 years. So you can calculate how much saving we will make over the program or we can say that some of the savings came earlier. Therefore, some of the savings will be lower in our -- in the second half of the program. So don't expect those savings from the MFP program to further increase in the second half of the year. That will not happen. And Erik, you want to add something?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [39]

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No. That's true. But besides the MFP, we're also doing another operational savings. And since we have seen that the MFP savings is coming faster than, let's say, was the plan, we are also, of course, looking into other opportunities as well in order then to see what we can sort of get from operational efficiency.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [40]

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And maybe, could you comment a little bit on the prospects for collaboration with Google or Amazon or any other brands when it comes to Europe, I guess, on launches or marketing efforts that you're putting with potential distribution channels?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [41]

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Yes. If you take Amazon, there is, I guess, 2 type of businesses. There is their in-house delivery, which is in the first place a program they have in the U.S. today. And then there is traditional online sales. And of course, we like our colleagues -- competitors in the market, we try to sell our products online to Amazon in the markets where Amazon is, and we will continue doing that effort. And as the Amazon channel becomes more important, it also becomes a more important channel for us.

When it comes to Google Nest, yes, we have developed that unique lock for Google Nest on an exclusive base together with them and for them, and that's a lock that is only or mainly, I would say, today for the North American market. And that's the only business we have with them today.

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Operator [42]

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And the next question comes from the line of Lars Brorson from Barclays.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [43]

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Nico, I just wanted to follow up on the earlier question on Entrance Systems in services, in particular. I was curious as to where growth is sitting at this point, I guess around mid-single-digit, which would mean the OE business flat for you to deliver 1% growth for the division overall. But could you talk a little bit about how that growth in service is accelerating? You've been targeting high single digit. That's pre agta. Presumably, there's further uplift as you start to deliver some revenue synergies in 2020 but talk a little bit about the growth outlook for services, please.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [44]

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Yes. So historically, our service growth has been low single digit. And then indeed, we have said that we have the ambition to grow our service business high single digit for the coming years. And this quarter, you're right, we were mid-single-digit but mid-single-digit with 2 working days less in the quarter. And that, of course, matters in a service business because it's 2 days less service technician hours that you can bill. You could -- if you don't -- would compensate for those 2 days, you would see it's closer to high single digit in the quarter. So -- yes, it's going nicely in the direction where we want to be.

We are investing in service technicians. We are investing in service salespeople. And we are confident that, over time, we will get to that ambition of high single-digit growth. And indeed, service is around 28% of our total business for Entrance Systems. So if we grow there mid-single digit, you can indeed calculate how much growth we had then on the equipment side, and that was low.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [45]

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If I could do a quick follow-up, please, on the price cost, which now is turning positive in Americas. Can you -- are you able to give us some quantification of the margin tailwind to Americas in the second half as you see it now from a price cost endpoint?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [46]

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Yes. Again, market conditions change day after day. So let's say that it will be -- that we continue to be positive. We mentioned in 2018 that, over the full year, it was 50 base points negative for the Americas. We mentioned that, in Q1, it was 10 base points -- around 10 base points negative. We say now that, in Q2, it's positive. We are confident, again, with market conditions where they are and in niches where they are, that is we continue to be positive in the second half of the year but difficult to give an exact figure.

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Operator [47]

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And the next question comes from the line of Gael de-Bray from Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [48]

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I joined the call very late, so I'm sorry if you commented already about this before. The first question is about the market conditions in France and Scandinavia. I think you mentioned good growth in France and stable sales in Scandinavia in the quarter. So I guess, the question is how do you reconcile this relatively healthy performance with the weaker indicators there in those 2 geographies in terms of building permits, housing starts and so on?

And then I have a more general question about the group's volume growth potential. You grew 1% in terms of volumes in Q2. I think that's not really better than the underlying construction markets despite the supportive shift to electromechanical products. So how do you explain that you're not really growing faster than the market itself? Is it a question of selectivity, cannibalization effects, maybe you being too pushy on prices or something else?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [49]

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We will start with France. We have said that -- in previous calls that market conditions were not very good in France. I said this call that market conditions in France are stable on a low level. It's true that we had low single-digit growth in France this quarter. But if you look at the full year, we are more or less flat in France. It's always difficult to jump to conclusions on 1 quarter. So if you take the full year, it's more or less flat. I would say that, that reflects more or less also perhaps the market conditions in France.

When it comes to Scandinavia, we have experienced, as you know, very good solid mid-single-digit growth in 2018 and over recent quarters. That was lower in Q2 because -- yes, definitely because of the working days but also because we saw some slowdown in the recent couple of months in Scandinavia. Too early to say in Scandinavia if that's a trend or if it's just 1 or 2 months less activity. But clearly, Scandinavia, we'll follow from very close because that's an important market for us.

When it comes to volume growth and making your link with construction indexes, yes, you can do that to a certain extent. You must know, of course, that 2/3 of our business is replacement market, only 1/3 is new build. And -- okay, in that new build, you have, of course, residential and you have commercial. 75% of our business is commercial, 25% is residential. If you look at all those indexes and all those dynamics, they are very, very different, very different between residential and commercial, very different continent by continent.

I think if you look over the last 10 years, I think we grew 9% mix of acquisitions and organic. If you look in 2018, our organic growth was 5%, yes, a mix of price and volume. This quarter, it was a bit lower, but like I explained it, it's also linked to the 2 working days less in the quarter.

You should not jump too fast to conclusions just on 1 quarter. I think when you talk about these things, you should have a longer perspective in mind. And in that aspect, we reconfirm our strategic objective of growing 5% plus 5% to 10% of our business cycle.

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Operator [50]

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And we have a follow-up question from the line of Andre Kukhnin from Credit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [51]

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I wanted to ask about acquisitions more broadly. Is your attitude changing at all towards -- so appetite for M&A changing at all, given that you have been quite active, closed a couple sizable deals and across the spectrum? And also, at the same time, your outlook is getting less certain. If you could talk about that.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [52]

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I would say no real changes. If you look at our balance sheet, we definitely still have the ammunition to shoot if we want to shoot. So it's really a matter of filling the pipeline and having enough meat on the plate, and that's what I call the divisions are doing every day. And then when the right acquisitions come across at the right price, at the right multiples, then we will go for them. If they don't come across, then, of course, we cannot go for them. So that we have been active in recent quarters. We still have a good pipeline. Let's see how many of those in the pipeline we can also then translate into real deals.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [53]

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And if I could just ask one more on pricing for Elmech. The nonres part seems to be holding up from the -- some checking that we have done. But on resi, I think the falling sort of prices that you see on websites like Amazon, there seem to be some decline on asking prices compared to maybe the original levels that were posted there when we just kicked off. And also, there does seem to be sort of a number of alternatives out there from kind of unknown -- or at least unknown-to-us brands. So I wanted to ask kind of a broad question. Do you see pricing in resi electromechanical as deflationary? And do you see that as normal given adoption rates or not? And do you worry about that sort of competition ramping up?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [54]

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Of course, there is -- in a way, competition is good because it keeps us and the other people sharp. And of course, there's other smart people in our market that can also make good products. And there's different price classes in that market also in the Smart Residential market because there's obviously people that have different needs.

We don't see that price erosion. We don't see too much of a difference between Smart Resi and the rest of electromechanical. Perhaps if you look at those prices you mentioned on Internet, you must, of course, make a distinction between campaigns. People like Amazon, for instance, they do a couple of times a year campaigns, and then, of course, you have different prices than during the rest of the -- but if you make exclusion for those campaigns in your comparison, you will see that prices are not going down. They are okay.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [55]

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I think we have time for one more question.

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Operator [56]

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And we have a follow-up question from the line of Alasdair Leslie from Societe Generale.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [57]

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So just a quick question. It really looks like Walmart is going to soon launch home delivery service such as Amazon Key. I was just wondering whether you were in the running for a role there? How much in the relationship you have on the logistics side and whether this previously puts you in a strong position?

And then as a sort of follow-up, should we expect you to kind of start and broaden the number of channel partners in residential to drive the kind of next leg of smart lock growth? Some of your U.S. payers are partnering with homebuilders. Just wondering whether you see that as an opportunity as well? And how much interest maybe now do you see from new partners today maybe than say a year ago?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [58]

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If -- also on -- in-home Delivery in general, of course, there is a lot of initiatives going on. Not only Walmart. A lot of other companies are doing similar tests not only in the U.S., also in Europe, also in the rest of the world. With many of them, we have partnered to do those pilot tests.

I'm going to say it's a little bit similar story when we started with digital door locks. I think it takes off much slower than I would have expected. I think the adaptation rate is really slow. So we have a lot of, yes, projects going on but not too much concrete business yet when it comes to in-home delivery. That being said, I'm sure that it will come. It's just a matter of time. It's just a matter of adaptation.

Second part on your question on digital smart locks. Clearly, we see an increase of the adaptation rate quarter after quarter. And obviously, our ambition is to put as many as we can digital smart door locks in the market, not only in the U.S. but also in other parts of the world. And we use for that different channels. Clearly, we use the Amazon online channel. We have our partnership with Google Nest. But we also have our own -- sales through our own website on August and on Yale. We also use a DIY channel. We also use the locksmith channel. And if you look at the different channels, I would generalize even in the world in general, not only in the U.S., you see very strong double-digit growth in the different channels. We don't really have an opinion on a channel. We will see which one will become stronger, which will not be so strong. It's important for us to be present in the different channels and also have relation with the best partners in the different channels. And that's what we work on every day.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [59]

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Thank you very much. I think this was the last question that we have time for. So I guess, would you like to round up, Nico?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [60]

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Yes -- no. I can say that, yes, we had a good Q2. We had a good first half of the year. And then, I guess, I want to thank all of you for good cooperation the first 6 months. I wish you also a good summer and a good summer break and then see you in the second half of the year. Thank you.