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Edited Transcript of ASSA.ST earnings conference call or presentation 6-Feb-20 8:30am GMT

Q4 2019 Assa Abloy AB Earnings Call

Stockholm Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Assa Abloy AB earnings conference call or presentation Thursday, February 6, 2020 at 8:30:00am 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

* Gael de-Bray

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

* Lars Wauvert Brorson

Barclays Bank PLC, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Sébastien Gruter

Redburn (Europe) Limited, Research Division - Research 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 the presentation of ASSAABLOY's Year-End Report 2019. My name is Björn Tibell, and joining me here is our CEO, Nico Delvaux; and our CFO, Erik Pieder. We have set aside about 1 hour for this call. And we will, as usual, start now with a presentation of the report before we open up for your questions. So with that, I would like to hand over to you, Niko.

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

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Thanks, Bjorn, and also good morning from my side. Q4 report for ASSA ABLOY, a quarter with a lower organic growth of 1% with a strong growth in the Americas, but a negative growth in APAC, a lower organic growth complemented with good growth through acquisitions of 3%. A stable EBIT margin, with strong EBIT growth of 8% and a record cash flow of SEK 5.2 billion. And we also booked now the cost for -- the remaining cost of our MFP 7 program. Let's go more in to the details.

Sales of almost SEK 25 billion, 8% up, 1% organic, 3% through acquisitions and then 4% positive currency. An EBIT margin of 16.2% on a stable level and a record EBIT of more than SEK 4 billion, the first time in our history that we are above EUR 4 billion. So EBIT up 8% and earnings per share, up 7% at SEK 2.49. If you look at the full year, I can say that 2019 was another good year for ASSA ABLOY, with sales up 12%, SEK 94 billion, 3% organic growth, which I think is a good performance, taking into account the actual market conditions. 3% growth through acquisitions, so good complement from acquisitions, and 6% positive currency.

An EBIT margin of 15.9%, 10 basis points improvement versus last year. EBIT up 12% at almost SEK 15 billion. Cash flow, very strong, up 27%, and cash flow at SEK 14.4 billion. Earnings per share, SEK 9.22, up 14%. And then we will propose a dividend of SEK 3.85, 10% up to the AGM later this year.

If you look a bit at the sales per region, a strong North America, 4% up on a tough comparison with same quarter last year. Because same quarter last year, North America was up 10%. A very good South America. We have a strong Brazil, where we also got some project sales of HID in Brazil. Then a flat Europe, where definitely market conditions are not very favorable. Our sales were very mixed, where there are some markets with still good, strong momentum, a market like Germany, for instance, East Europe. But then definitely, also markets with lower activity. I would say France on a stable on a lower level. And then definitely, also the U.K. market where market conditions are further going down.

Africa is a smaller continent, but minus 19%, that's mainly because a weaker South Africa, and a difficult comparison for an HID passport project last year in the same quarter. Asia, minus 8%, and that's a -- because of a negative growth in China. But mainly because of strong negative double-digit growth in South Korea, where we really see market conditions going down in an important way. Where we also have to say that, we are not entirely happy with our own performance in South Korea. And then Oceania, Australia, New Zealand, plus 3%, I think, is a very strong performance there, because definitely, market conditions are not on that level.

Some market highlights, we continue to win big projects. I will just mention one, in Argentina, a big order for HID. They got the world's first mobile national ID program. We continue to invest and innovate also in our mechanical core. You see here some examples. And then it's, of course, always good, if you see that your innovation effort also is rewarded and recognized by the market. Also this quarter, we won several awards.

We also had the CES show, the biggest consumer show in Las Vegas at the beginning of the year. Where we launched several new products for our Smart Residential business. You can see the list on the slide. Just to mention one is that cooperation with Samsung, where on the Samsung booth, we revealed a new ultra wideband technology lock for automatic unlocking of doors. We also won 9 product awards on that show, so very happy, very excited about that.

So now 27 quarters in a row with positive organic growth, I believe, a very strong track record. And then the operating margin, slightly below the bandwidth where we want to be, the 16% to 17% bandwidth, but slowly coming back into that range. So if you keep operating margins stable on a high level, and you continue to grow the top line, you, of course, accelerate the operating profit, 8% up in the quarter, 12% up in the year, 61% up over the last 5 years.

Acquisitions, we continue to be very active in this -- on this side, with 3 acquisitions completed in Q4, 12 in the full year. And then we still have the agta record acquisition going on. And we also will close AM Group acquisition later this quarter. AM Group is in Australian industrial door company that has also some activity in the U.K. and in the U.S., SEK 800 million of sales with 425 employees, and that acquisition will be accretive to EPS as of the start.

If we then go a little bit more in detail into the different divisions, starting with EMEA, inorganic growth of 1%. And with good growth in Scandinavia, Germany and Spain, but a negative growth in Finland, U.K., Middle East, Africa and the Benelux. You might also know that there was a national strike in Finland, where 3 days, our factory was also closed, obviously, that had a negative effect, not only in Finland, but also EMEA, in general because that factory is also an important for -- I would say, export factory for the EMEA division.

Operating margin of 16% with a negative volume leverage of 50 base points. Of course, with only 1% organic growth is difficult to get that operational leverage. We then also had that 3 days strike in Finland, like I mentioned, which had a negative effect on operational efficiencies. And we also continue to invest, and we had higher R&D costs because we accelerated the launch of some new products for EMEA.

30 basis points dilution from FX, and 20 basis points up on acquisitions, that's mainly the shift from the critical infrastructure business from EMEA to Global Technologies. If we look at Opening Solutions Americas, I would say, another very strong quarter, an organic sales growth of 5%, on top of a growth of 14% same quarter last year. So a very difficult comparison. U.S. strong in all fields. And also Canada coming back. Canada had a difficult start in 2019, but then ended second half strongly. I mean, we also saw better momentum in Latin America, especially Brazil showed a good growth in the quarter. We had negative growth for U.S. Smart Residential, that's mainly or exclusively because of the very difficult comparison with our Google Nest business, where we got a very big order, same quarter a year before.

Strong operating margin of 20%, with very good strong volume leverage of 40 basis points, of course, driven by the 5% organic growth, but also because of realized operational efficiencies. And then clearly, the whole material tailwind that we now experience compared to a year ago. FX, 10 basis points up and M&A 40 basis points dilution.

Asia Pacific, an organic sales growth of minus 10% versus a plus 11% last year. So it was a difficult comparison. Good growth in South Asia and Pacific, but negative growth in China. I would say a little bit in line with our new strategy in China, where we are more selective, when it comes to taking orders. We want to take orders that have the right profit margins, and where we also are confident we will get paid in the normal for us payment conditions. But then definitely, a strong double-digit negative growth in South Korea, as I explained earlier, market conditions are very much down in South Korea and also our performance in South Korea could have been better.

And as the digital door locks in the first place did not grow in the U.S., and as EMEA showed also lower growth, we also had a negative intra-group sales, also affecting the figures for Asia Pacific. An operating margin of 8.2%, of course, negative volume leverage with the 10% negative volume growth. And then definitely, also the effect of South Korea, which is the third biggest market for us in APAC, and is also a profitable market for us.

China business plan, I would say, according to plan. We are making progress. We see the first small signs of improvement. But as we mentioned earlier, this is more a long-term project.

Global Technologies, inorganic sales of 2%, I would say, on the lower side, with a good extended access and physical access (inaudible), and also a strong global solutions. But then the other business areas in HID, lower performance and that's the business areas where you leave more of the project business. And as you know, some quarters, those projects come all the stars are aligned, I would say this quarter was a quarter where the stars were not aligned, and we didn't have those bigger projects. An operating margin of 18.3% versus 19.9% last year. We have a very good, strong volume leverage of 140 basis points.

Of course, driven by the mix because we grow faster in global solutions and in physical access, where we have better margins, helped by operational efficiency measures, and clearly, also by the raw material tailwinds.

FX up as of 20 basis points. But then we had a strong dilution in M&A, 320 basis points. And I would say that's mainly because of high closing and integration costs for -- in the first place, De La Rue, U.K. acquisition and Placard and Australian acquisition.

Entrance Systems, a flat development of the organic sales, with strong growth in Pedestrian Doors and in logistics solutions, but negative growth for our Residential Doors. You will see that we have negative growth on equipment and positive growth on service. So happy with the service initiatives that they are also translated now in accelerated growth of our service business. I would say, that's also an important reason why we show good operating margin for Entrance systems, 16.3% versus 15.1% last year because obviously, we make better margins on service than equipment, 130 base points positive volume leverage. We also did several operational efficiency projects in Entrance Systems in the quarter. And then an important other one is that we got a good strong raw material tailwind, and that effect was probably the biggest in Entrance Systems because they also had the toughest comparison with the same quarter a year ago.

We also want to remind you that Q4 had one working day less as compared to the same quarter a year ago. And obviously, there, again, that has the biggest effect on the Entrance Systems business. Then we also announced our new organizational setup for Entrance Systems, where we have created now 4 business segments under division, and the business segment would have a kind of highest operational responsibility within that division. We will have a Pedestrian business segment, an Industrial business segment, a Residential business segment, and then we also moved the Perimeter Security business from the Americas into Entrance Systems, and that will then be the 4th business segment in the division. We also appointed a new leader for the division. Christopher Norby, he is an internal candidate, so very happy that we found good internal talent that can bring now Entrance System up to the next level in its development.

And with that, I give the word to Erik for some more details on the financials.

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

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Thank you, Nico. Good morning, everybody. If we look on the numbers, the organic growth was 1%, with strong growth in Americas, good growth in Global Technologies. And also as mentioned by Nico before, we had one working day less, which also, of course, has an impact. The acquired growth was 3%. If we then do a forecast for Q1, we would say that the acquired growth would be about 2%, but it will have a significant impact on our margin, not as low as what we had in Q4. The weaker SEK helped us in a way so that we got currency help of about 4%. What we see as a forecast then for Q1 is 1%, with a slight dilution on the margin. We had -- if we go down and look on EBIT, we had a record EBIT, we have never been above SEK 4 billion in a quarter before. And if we look in percentage, we were up with 8%.

The EBITDA margin is up with 10 basis points. The EBIT margin is the same as what it was last year. The net income and the income before tax are up with 7%. The earnings per share ended at SEK 2.49, also an increase with 7%. Cash flow was once, again very strong. We were up 6% versus the same quarter last year. And I think it's a record, and it's very encouraging to see that if we look for the full year, we're up by 27% on the cash flow. Return on capital employed went down with 1%, mainly related to the IFRS 16 impact and also the higher capital employed that we got through the acquisitions.

If we then go over to the bridge, the mix of the organic growth part is 1% is related to price and the volume was flat. As mentioned before, this was mainly driven by Americas and Global Technologies. You see that we have a very good flow through, which helped the result with 60 basis points. There we have a strong contribution then from the Americas. And also, as mentioned by Nico before from Entrance Systems.

I would say that -- and also Global Technologies performed well, whereas then the performance in EMEA and APAC was on the weaker side. The currency had a slight negative impact of 10 basis points. And if we look on the acquisitions, as also mentioned before, we had about SEK 60 million in acquisition and integration cost, which comes from the De La Rau acquisition, the Placard acquisition, but also, we had a slight additional cost also coming from agta record. If we then go down to the -- if we then go to the cost breakdown, you can see that we had a very good evolution if you look on the direct material and 90 basis points. It's driven by the, let's say, tailwind that we have on the raw material. It's driven by mix. We see good evolution if you look in the door group in Americas, in the Perimeter Security, and also, as was mentioned here before, also in Entrance Systems. Conversion cost, it was almost flat, but it went down with 10 basis points.

One -- the reasons is that with the low organic growth has an impact, and then also we had higher investments within IT. And the SG&A, which has been, I think, what we've had all along that we have increased our investments within R&D and also within sales, it has a negative impact of 30 basis points. And if you take the total there, if you exclude the acquisitions in the quarter, we were up with 50 basis points versus the same period last year, 16.7%, but we have a dilutive effect on the acquisitions, which sort of brought us down to be at the same level as was -- what we were a year ago.

A couple of words on the manufacturing footprint program, the MFP 7, as we have informed before, we booked in Q4, an additional provision of SEK 312 million. So the total program is about SEK 1.5 billion. And the -- for the whole program, the annual saving is about SEK 800 million. If we look -- and that we have also said before is that we have had very good traction in the program during the year with an annual saving of about SEK 700 million. We have closed 5 factories and more than 1,300 people have left the group. If you look in total, what we have left as provision from the MFP 5, 6 and 7, it's close to SEK 780 million.

As I said, we've had good traction. We are looking for -- we are looking to see what we can do more. So we will in due time come back with additional initiatives.

Cash flow, I mentioned before, very pleased with the performance of the cash flow. If we look on the year. We are up with 27%, in the quarter, we were up with 6%. It's driven by that we have a good earnings, but also that we have good efficiencies when it comes to working capital, especially if we look into the inventory, where we've seen good traction.

If you look on the cash conversion cycle, Q4 is always the strongest quarter that we have, but we had a cash conversion cycle of 138%, of course, which is very strong. And if we look 12 months, the cash flow is higher than what the EBITDA is, which, of course, it's encouraging, but I don't think that will sort of remain for a long term.

The gearing and the net debt. Debt versus equity is 56%, which is the same level as last year. This, I think, you should also keep in mind that we have the impact on IFRS 16, which was SEK 3.7 billion. And then also in the quarter, we had an unfavorable decision on the tax case in Finland, which also had an impact of about SEK 700 million, no impact on, let's say, on the result, it's purely a cash flow impact. But we're at the same level as what we were a year ago. The net debt-versus-EBITDA is down with 10 basis points, which means that we have a very solid financial performance, and we can continue our acquisition strategy with this kind of balance sheet.

Last one for me, the earnings per share went up with 14% and ended at 9.22% for the full year. And with that, I hand back to Nico for the concluding comments.

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

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Thank you, Erik. So we can conclude Q4 the quarter with lower organic growth of 1%, complemented with good growth through acquisitions of 3%. And a strong EBIT growth, basically a record EBIT quarter, also a record cash flow quarter. And then for the full year, a good, strong 2019 with good organic growth of 3%, complemented with growth through acquisitions of 3%. A strong EBIT growth of 12% and a record cash flow of SEK 14.4 billion. And like we mentioned, we proposed a dividend of SEK 3.85 per share through the AGM. I already talked about the new President for Entrance Systems. We also have a new President for HID. You know that our previous President of HID became the CEO of Sandvik, very happy, very proud of that. And also for HID, we could find a good, strong internal candidate, his name is Bjorn Lidefelt, and he will also then -- now work together with the HID team now on bringing HID up to the next level in its development.

And with that, I give the word back to Bjorn for questions and hopefully answers. Bjorn?

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

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Thank you, Nico.

(Operator Instructions)

So with that, operator, it means that we are ready to open up for the Q&A session. Please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

So our first question is of the line of Andrea Willi at JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [2]

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My question is on the price cost and the raw materials sourcing contribution, which was very strong in Q4. What should we expect here for 2020, has the level of benefit here peaked in Q4? And maybe how that looks like then for 2020? And also, what was the contribution of price to your organic growth in Q4?

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

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Yes. So our contribution of price in Q4 was 1%. So the organic growth of 1% was 1% price, 0% volume. It's true that we had indeed a good tailwind from the material cost. You obviously will remember the very high material inflation, I would say, 18 months ago -- to almost 2 years ago, which had an important negative effect a year ago. So in this quarter, indeed, we had an easy comparison, you could say, where we compared Q4 this year with Q4 a year ago, with very high material inflation.

Material prices have now leveled out on a more -- on a lower and more stable level. And so we have now indeed a good plus price versus cost. You might remember that in 2019, the first 2 quarters, we we're still talking about headwinds. And then somewhere around the middle of the year, we then would say, broke the line, and we became positive. That means that we should still see a positive tailwind, definitely in the first half of 2020. Of course, under the conditions that material prices and material indexes stay where they are today. From a comparison point of view, Q4 was definitely the toughest one. But again, Q1 and Q2, we should still see positive momentum there.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [4]

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And my follow-up on terms of the M&A dilution you mentioned before, if the deal is close, the announced deal is close as expected. What would you expect the full year dilution to be on margins from the deal so far?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [5]

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You talk then also about closing agta record in particular? Or the ones that we have already closed?

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [6]

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Yes, it's just if AM group and agta record close as expected, but you wouldn't make any further acquisitions, just basically as it is now. What will be the dilution on 2020 margins from the M&A side? Just to help us model that.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [7]

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I would say if you take of all the other acquisitions, it will -- the dilution is very similar like we have seen historically. Obviously, the agta Record acquisition is a bigger one, almost EUR 400 million. So it'll depend a little bit, of course, on when we will be able to close it. And then also how the PPA calculation will look. So in other words, how much we will amortize of as intangible. So how much will be goodwill? But we calculate for the first year that the agta record acquisition will be dilutive around 40 to 50, 60 basis points.

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Operator [8]

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Our next question is a design of Lars Brorson at Barclays.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [9]

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A I had a follow-up on raw materials where I'll come back to. But maybe just my first question on your sort of organic growth outlook or the implied organic growth outlook for 2020? You talk about the -- in your report, acquisitions driving growth in 2020. Maybe you can remind us what you're penciling in for growth contribution from M&A in 2020? Assuming, again, that agta completes. And I'm just trying to reconcile that comment with what I see as pretty strong leading indicators in some of your key construction markets, not the least the U.S. So maybe you could help us frame how you think about 2020 at this point?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [10]

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Yes, let me perhaps answer the question in an indirect way and talk a little bit about market conditions. If we start with the Americas division, we continue to see very good, strong momentum on the commercial side in North America, I would say, even despite some of the KPIs indicating in the wrong direction. All our internal KPIs like quotations, spec business, went up still positive. We also see the positive momentum in Canada continuing. If you then look at Latin America, they are more positive, perhaps definitely above Brazil than 6 months ago. But we are perhaps a little bit more negative for Mexico because of the whole political situation also in Mexico. I would say, for the Americas, the biggest challenge is that they have a very high comparable mainly in Q1 and still a little bit in Q2. But market conditions as far as we can judge remain strong.

If we go to EMEA, obviously, it's a very mixed picture today. And there is markets with still good momentum, then there is definitely markets that are not favorable. The biggest challenge is clearly the U.K. Hopefully and confidently, soon when it becomes clearer, how the Brexit will happen, people start to regain confidence, and we will start to see a market going up again, but that's definitely not the case yet today.

I would say, generally, in EMEA, you see a little bit markets that slow down, if you take for instance, Scandinavia, obviously,3, 4 years ago with the construction boom, we were growing double digits. In 2018, we were growing around 5%. We still see good positive growth in Scandinavia, but on a lower level. And that's a little bit a general trend in EMEA. If you see for the full year, in EMEA, we grew 2% organically. I think that's a good performance if you take into account the given market conditions. Then if we go to APAC, let's see, what will happen with the Coronavirus, obviously it has today, an important negative effect on China. Let's see, if it will only be China or if it will have effect also more global. For us, China is -- important for the 2 other divisions from a supply chain perspective. If factories open again as planned next week, we believe the negative effect will be limited in the rest of the world. If delays would further extend, then, of course, we have to see.

But like I said, in China, we are happy with our new strategy that we are implementing. Stability, profitability and growth. And stability means that we walk away from some less attractive orders. They want to get orders with the right margins and with the right payment conditions. Which has a little bit of negative effect on top line, but a positive effect on the bottom line. First, APAC, the big challenge is South Korea, where market conditions are clearly, significantly down, but we don't see any improvement on the near term. And where we also believe we as a company have to do better.

If we then go to Global Technologies. As I mentioned, in the quarter, we have had these quarters, where I said that all stars are aligned. I think this quarter, clearly, the stars were not aligned. So I'm confident that in Global Technology, the underlying market conditions are there to go back to higher growth levels than we experienced in Q4.

And then Entrance Systems. Entrance Systems is just a little bit of translation of what you have seen also with other companies reporting in the industrial Manufacturing segment. Okay, they were negatively affected by one working day less and a 0% growth is clearly a too low level for us. We are now implementing the new organization. We are confident that, that will help to build also for the future. But obviously, that will take some time. Until then, we are more linked to the actual market condition. And that's mainly manufacturing indexes related, I would say.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [11]

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Sorry, Nico, can I -- that's helpful. Can I just be clear on your M&A assumption for 2020, assuming agta completes, I presume, Q1 this year. I've got that sort of penciling in all of that, including completed M&A through '19 to frame M&A to deliver something to the tune of 7% top line in 2020. Is that ballpark where you are?

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

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Again, it depends when we will close agta record, but it will be around 6% -- 5%, 6% -- around 5%, 6%. Bjorn tells me.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [13]

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My follow-up would just be briefly on Entrance Systems and the margin there to Andreas's earlier question on raw material. I mean, I appreciate you're getting a 90 basis point uplift from direct material at the group level. We're not used to talking about significant raw material impact in Entrance Systems. You're obviously calling it out. I wonder whether you could help us understand the dynamics within Entrance Systems. And whether there was more of a one-off effect from raw materials in the quarter? Or whether you also see to be a sustained tailwind in 2020?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [14]

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In Entrance Systems, there was, of course, also a little bit of a mix effect where some segments with higher material costs improve more than others. But I would say that the story in Entrance Systems is very similar to the story we told for the Americas and for the group in general.

We have seen material indexes going up, and was it almost 2 years ago, we started to see the negative effect around 18 months ago. And depending on the inventory levels, you see it in one division a little bit earlier than in another one. And Q4 was definitely the toughest or the easiest comparison, in particular for Entrance Systems. So again, for Entrance Systems, you will continue to see good tailwind for material indexes versus pricing going into Q1, Q2. But obviously, it will not be on the same level as we had in Q4.

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Operator [15]

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We now go to the line of Andre Kukhnin at Credit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [16]

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My main question is on the Entrance Systems division and the changes that you've made there in terms of setup and management. Could you maybe talk us through what it enables this division to do over the next 3 years? And just more specifically, which are the subsegments that Mogens will continue to run? And will Christopher be running any of the pieces directly? Or will there be other heads there?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [17]

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Yes. So if you look at Entrance Systems, at the history of -- Entrance Systems started around 15 years ago when we acquired Besam, I think EUR 150 million business at that time. And then, especially over the last 10 years, we have been very, very active in acquiring the one company after the other. And every time when we bought a company, we added up to reporting into the Entrance Systems division. You could say that the division became slowly a little bit a bottleneck for future growth. And so in order to be prepared for future scale and make the organization scalable. And also in order to realize more synergies among the different companies that we acquired, we have now decided to create a new layer below the divisions and above business areas.

If I take, for instance, the Industrial business segment. So all business areas that were before reporting directly into the division related to industrial businesses are now grouped together and report into that industrial business segment. You could say that the business segment is the highest operational responsibility. It's where all the action will happen. We have a very slim divisional management setup. And then the reason to do that is to see how we can get more synergies when it comes to R&D, between the different companies that we acquired in a direct and in the indirect channel. And -- or we can also get more synergies in operations is there consolidation possibilities between direct/indirect channel between the different brands when it comes to factories and supply chain. And then I would say the third one is just to have focus. I mean, if you're only focused on industrial customers, then okay, you will get better results. Same is true for pedestrian. Where we have the direct and indirect business of ASSA ABLOY for pedestrian business of sliding doors, revolving doors, swinging doors, and where we will then also will add the agta record business when it comes in.

The third business segment is residential. So residential garage doors, and our component business Flexiforce. And the fourth business segment, as I mentioned earlier, is our Perimeter Security business, our fencing business, which was up till 2019 in our Americas division. So they make a fences for residential applications, but mainly for high-end security applications. And we have moved that business segment also into Entrance Systems with the aim to see if there is a way that we can scale that also internationally. And as a start, we have said that Christopher will be heading the Pedestrian Business segment and the Perimeter Security business segment.

Then obviously, Perimeter Security, Christopher will very fast appoint the new leader. In -- on the Pedestrian side, we want to see all -- also a little bit, which talent we get in when agta record is then part of the group. And Mogens, as a start, will head the other 2 business segments, so the Industrial business segment and the Residential business segment. The reason why we also do that this, we said, this is a new organizational setup that is something for the next 5 to 10 years. We want to also have there a leader, we will -- who will be there for the next 5 to 10 years. And obviously, Mogens has -- will be happily retired in 5 years from now, that's one of the reason why sit on this -- put a new leader and have Mogens running the business segments.

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

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Got it, got it. And my follow-up on -- is on Elmech. Could you let us know how much it grew in Q4? And looking at 2020 what kind of growth do you anticipate kind of any ballpark figures? And is there anything to say on how the comps are allowed for 2020 as we go through the quarters?

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

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I didn't get the question, but which growth?

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Unidentified Company Representative, [20]

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Elmech.

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

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Elmech. Okay.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [22]

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Sorry Electrical Mechanical locks.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [23]

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I think you can also see it in the report, you can see it even per division in the report. But what was the figure, 10? So the -- on group level, the figure was 10%. So we continue to see stronger growth on the electromechanical side than on the mechanical side. We forecast that to continue to be the case also going into 2020, also because we continuously see a faster adaptation rate of people willing to move from mechanical to electromechanical and digital, and that not only on the residential side, but definitely also on the commercial side. And I think it's very similar in the different divisions, where you see a little bit deviation is on the smart resi side, where in the U.S., of course, we have the -- still also in our Q1, and to a certain extent, Q2, the difficult comparison for Google Nest, which deviates a little bit. And then in APAC, of course, we have the market situation in South Korea, where South Korea is obviously a very important market for us for digital door locks for smart resi.

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Operator [24]

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We now go to the line of Sebastien Gruter at Redburn Partners.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [25]

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The first question is on the guidance. You talked a lot about the acquisitions on growth and margin. And it implies some cautious outlook on the organic performance for full year '20. I would like to -- if you can give us a bit more color or maybe I read too much in this comment? That's my first question.

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [26]

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Yes. Yes, I think I would just say, more or less that question when I talked about the different markets. I think it was a question from Lars before. I would give you the same answer. I could go again over the different divisions and the different regions and talk about the market conditions. I think the message that we wrote in the comments was mainly to emphasize that we will have that 5% to 6% growth through acquisitions, which is obviously higher than it was this year and last year. So it's more to emphasize that rather than to be very conservative on organic growth, if that is what you would read through it.

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Sébastien Gruter, Redburn (Europe) Limited, Research Division - Research Analyst [27]

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Okay, no that's clear. And the follow-up question I have is, I mean, in the U.S., you had very strong growth in the commercial segment as your peers as well. And I guess, one of the driver of that is the educational segment, where we see some emergency funding in the last 18 months to increase security in schools after the shootings in '17 and early '18. Are you able to scale this impact for us? To understand the risk when these fundings are gone? And what is the outlook for that segment in 2020?

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

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No, I think, we gave that as an example, a couple of times, but I would say it's not more significant than any other vertical. We have in the U.S., a vertical approach, where we have dedicated teams for difficult -- for the different verticals like schooling, universities, K-12, like government and so on. And I would say that if you look different verticals, there is not so much difference. We see solid momentum, a good positive market dynamics for the different segment. And yes, it can vary a bit quarter by quarter. But again, there is no 1 vertical that is dominant, where we wouldn't have a problem if that vertical were to go down. And K-12 or universities is definitely one of those.

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Operator [29]

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We are now over the line of Lucie Carrier at Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [30]

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The first one is actually a follow-up on the second question from Andreas earlier, on the M&A dilution for 2020. Just if you kind of clarify and maybe come to what I would call more group number or a global number. You've spoken about agta to be dilutive 40 to 60 basis points in year 1, and the other M&As to have the usual kind of dilution, which historically has been around 20 bps. Your comment on agta, was that on a group level on just -- on Entrance system? And can you just maybe then clarify the overall group number dilution that you're expecting, please?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [31]

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No, I mean, the answer that Nico -- was that -- was on group. Of course, it is pending for 2020 when we will close the agta acquisition. But what we have said before is that on a year basis, the dilution would be something from agta only specific between 40 and 60 basis points. And...

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

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On top of that, you...

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [33]

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Yes, and then, I mean, you said also that if you look on -- we don't foresee, let's say, for 2020, we will have, let's say, the normal impact that we would get from -- that we have had through the years than for the other acquisitions.

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

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So we look in ballpark maybe between something like 50 to 80 basis points, if we add agta and the other acquisition?

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Erik Pieder, ASSA ABLOY AB (publ) - Executive VP & CFO [35]

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Yes, I think you would come somewhere in that range, yes. But as I said, it's also pending on when the agta acquisition will close during the year as well.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [36]

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Sure, of course, understood. My second question was actually also a follow-up on South Korea. I appreciate the challenge in the market. You're also mentioning that you're maybe not very happy with your own performance. And one thing I was trying to understand is about 10 years or so ago, we've had a massive kind of momentum into electromechanical locks in South Korea.

And at the time, there was also maybe the expectation that the life cycle of the product was about 10 years. So we should be now hitting the sweet spot in terms of upgrading all of that installed base. Can you maybe explain, as a result, the performance that we've been seeing now in South Korea for a while and maybe your own comments about your own performance?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [37]

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Yes. It's, of course, not like that, that 10 years ago, suddenly, the South Korea market was flooded by digital door locks. That was, of course, a gradual thing. So today, South Korea is definitely the market, which is -- which has the highest penetration when it comes to digital door locks for residential applications, definitely above 90%. But that has been built up gradually. So also the replacement market then came in gradually. And I would say that the replacement market today is a more mature market, it's not that we now expect certainly to boost again because we start a new cycle on replacement that has been incredible.

I think the -- when I say about our performance and create more internal, the way we were organized. We have made some changes now in our organizational setup, consolidating also some of the organizations we have in Korea, and we believe that new setup is better fit to make sure that we get our fair part of the market in South Korea. Today, with declining market conditions, but definitely also tomorrow when market conditions will be better again.

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Operator [38]

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We now go to the line of Gael de-Bray at Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [39]

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My first question is about the reorganization in Entrance Systems. I think the rationale behind it is pretty clear. But I'm actually more curious about the timing here. Since all these changes are being implemented at a time when -- well, the M&A activity will certainly pick up significantly in the next few months with 2 of the group's largest acquisitions in history about to close shortly, and the transfer of Perimeter Security from the Americas division. So these are a lot of changes. And I was wondering if the guidance takes into account maybe potential disruptive effects from all of this?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [40]

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Of course, it is 2 bigger acquisitions, it's true. They will fall in 2 different business segments, one in the Pedestrian and one in the Industrial. Yes, it's 2 bigger ones. But as you know, we have been quite active when it comes to acquisitions also in previous years. So I guess, there is never a good moment or always a good moment to do this. We felt this was the right moment in time and that we had to do this at this moment in time to really prepare ourselves for the future, and make sure that our organization was fit for future profitable growth.

Then it's true that if you make changes, there's always some uncertainty. There's always some disturbance shorter term. But long term, clearly, this is the right thing to do.

But obviously, also helped is that we, again, fill that position with an internal candidate. There's also Mogens is still on board in a very positive way. So people see this as the right -- positive changes we make is clearly supported in a good way by the organization. So I'm confident that in the transition phase, if there is already negative effects that they will be limited and that we will very soon start to see the positive effects of the reason why we do this change.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [41]

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Okay. Understood. And then the follow-up I have is on the exit rate of only 1% organic growth in Q4. Did you say if there was an inflection, either positive or negative in the first few weeks of January?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [42]

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Yes, of course, you have, in January, the Coronavirus that everybody's...

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [43]

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Before the outbreak, yes.

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

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Yes, I think before the outbreak, it was New Year and then everybody was celebrating. So I mean, it's a little bit too short to comment on 1 week or 2 weeks. I think we should look a little bit more in general in markets -- on market conditions. And again, there -- I would go back to the answer I gave earlier when I gave the overview of the market conditions in the different divisions and in the different geographies.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [45]

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Okay. Operator, I think we'll have time for one more question.

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Operator [46]

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Okay. Well, the final question for today then is from the line of Alasdair Leslie at Societe Generale.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [47]

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So my understanding was that you're rolling out a new IT platform for August smart locks that could pave the way for more of its locks to be delivered into new markets. Just wondering if you could talk a bit more about that? The timing behind, any potential launches? Which markets are going to be targeted? And I guess also whether this could spearhead a sort of more ambitious strategy to accelerate smart lock growth in residential markets outside of the U.S.?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [48]

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Yes. So if you see -- why have we a strong position in digital door locks for residential applications. I would say it's mainly, thanks to 2 acquisitions. One acquisition is the acquisition of iRevo in Korea that we did many years ago, and that really gave us the know-how and the platform on the mechanical side.

I mean, iRevo was the inventor of the digital door lock. And then the other acquisition was clear, the acquisition of August. That gave us also the best software platform on which we can run those digital door locks. And then we have indeed decided last year to start and use the August software platform not only for the August locks, but for all our digital door locks for dense applications worldwide. So the Yale range that we sell in the rest of the world uses now the same August technology just branded Yale.

And in that way, we believe we combine the best of both worlds, on the software side and on the hardware side. It will clearly enhance customer experience. And that, combined together with all the new product launches that we will -- have announced, and that will come into the market later this year, especially in EMEA, but also in APAC, and to a certain extent, also in the U.S. and in Americas in general, definitely will help us to further strengthen our position in this fast-growing market.

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Alasdair Leslie, Societe Generale Cross Asset Research - Equity Analyst [49]

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I suppose, I just wonder, should we expect any kind of sort of associated cost headwinds perhaps materializing in 2020 from new product launches? It seems like you're sort of now already post integration of Yale and August to kind of more aggressively push into international markets in terms of residential smart locks?

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Nico Delvaux, ASSA ABLOY AB (publ) - President, CEO & Head of Global Technologies Division [50]

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Not -- no, I would say, not significant, particular for smart resi, also not for the IT platform. It's true that you see that R&D costs in general have -- are closing today on a higher level than they were closing, I would say, 2 years ago, perhaps 30, 40 basis points higher growth rate than 18 months ago, and we expect that level to stay because we really want to invest in R&D to go faster with new products that will boost on one side of organic growth again and to also will give us a competitive situation on the cost side.

When it comes to IT, it's more general because I was also comment that IT costs were -- had increased. It's more general IT spending, it's also related to further improving our IT network against all -- or 4 sides of security, I would say. And that's also something that obviously, we will go on. We will continue to invest in our IT platform in general. And the August software is just a small part of the total picture.

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Björn Tibell, ASSA ABLOY AB (publ) - Head of IR [51]

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Thank you, Alasdair. Well, I think it's time to round up the conference. But before doing that, I would like to note that we, last week, circulated information about our next Capital Markets Day that will take place on the 13th of May in London. Registration is now open on our website under investors.

So on that note, I would like to thank you for your interest in ASSA ABLOY and participation today. And we look forward to speaking and meeting with many of you in the coming weeks, thank you.